| **UNITED STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| **SECURITIES AND EXCHANGE  COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| **Washington,  D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the fiscal year ended**                                    December  31, 2008                                          **                                                                                                                                                      |
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| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the transition period from                                                    to                                                        |
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| Commission file  number:  **000-24523**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| ***                              CNB  Corporation                              ***                                                                                                                                                                                                                                                                                                                                                                                                              |
| (Exact name of registrant as  specified in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| **                                          South  Carolina                                  **                                                                                                                                                                                                                                                                                                                 | **                      57-0792402                    ** |
|    (State or  other jurisdiction of incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (I.R.S. Employer Identification  No.)   |
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| **1400 Third Avenue, P.O. Box  320, Conway, South Carolina**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **                             29528                      ** |
|                    (Address  of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (Zip  Code)                   |
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| (Registrant's telephone number,  including area code):  **(843) 248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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| Securities registered pursuant  to section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| **None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| Securities registered pursuant  to Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| **Common Stock, $10.00 par value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (Title of class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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|     Indicate  by check mark if the registrant is a well-known seasoned issuer, as defined  in Rule 405 of the Securities Act. [  ] Yes [**X**] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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|     Indicate  by check mark if the registrant is not required to file reports pursuant to Section  13 or Section 15(d) of the Act. [  ] Yes [**X**] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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|     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. [**X**] Yes [  ] No.                                                                                                                                                                                                                                                                                                                                                                                   |
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|      Indicate by check mark if  disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not  contained herein, and will not be contained, to the best of registrant's  knowledge, in definitive proxy or information statements incorporated by  reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]                                                                                                                                                                                                                                                                                                                                                                                                                |
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|      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  definitions of "large accelerated filer," "accelerated  filer," and "smaller reporting company" in Rule 12b-2 of the  Exchange Act. (Check one):             Large  accelerated filer  [  ]      Accelerated filer [**X**]      Non-accelerated  filer [  ]      Smaller Reporting  Company [  ]                                                                                    |
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|      Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  [  ] Yes [**X**  ]  No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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|     As of June 30, 2008 the last business  day of the registrant's most recently completed second fiscal quarter, the  aggregate market value of the Common Stock held by nonaffiliates (based upon  the price at which stock was last sold prior to such date) was approximately  $103,771,657.  As of March 1, 2009, there were 828,692 shares of  Common Stock of CNB Corporation outstanding.                                                                                                                                                                                                                                                                                                                                                                             |
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| Documents  incorporated by reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Portions  of the Company's Proxy Statement to be used in connection with the Annual Meeting  of Stockholders to be held May 12, 2009 are incorporated by reference in Part  III of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **CNB  CORPORATION AND SUBSIDIARY  2008 ANNUAL REPORT ON FORM 10-K ** |
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| **TABLE OF  CONTENTS**                                                     |
|                                                                            |  | ** ** |
|                                                                            | **PART I** | ** ** |
|                                                                            |  | **Page** |
| **ITEM 1   **                                                         | **Business** | 1-21 |
| **ITEM 1A   **                                                        | **Risk Factors** | 22-25 |
| **ITEM 1B   **                                                        | **Unresolved Staff Comments** | 25 |
| **ITEM 2   **                                                         | **Properties** | 26 |
| **ITEM 3   **                                                         | **Legal Proceedings** | 26 |
| **ITEM 4   **                                                         | **Submission of Matters to a Vote of Security Holders** | 26 |
| ** **                                                                 | ** ** |   |
| ** **                                                                 | ** ** |   |
| ** **                                                                 | **PART II** |   |
| ** **                                                                 | ** ** |   |
| **ITEM 5   **                                                         | **Market for the Registrant's Common Equity, Related  Stock Holder  Matters and Issuer Purchases of  Equity Securities** | 27 |
| **ITEM 6   **                                                         | **Selected Financial Data** | 28 |
| **ITEM 7   **                                                         | **Management's Discussion and Analysis of Financial  Condition and Results  of Operations** | 28-34 |
| **ITEM 7A   **                                                        | **Quantitative and Qualitative Disclosures About Market  Risk** | 34 |
| **ITEM 8   **                                                         | **Financial Statements and Supplementary Data** | 35-68 |
| **ITEM 9**                                                                 | **Changes in and Disagreements with Accountants on  Accounting and  Financial Disclosure   ** | 69 |
| **ITEM 9A   **                                                        | **Controls and Procedures** | 69 |
| **ITEM 9B   **                                                        | **Other Information** | 69 |

**PART III**

| **ITEM 10   ** | **Directors, Executive  Officers, and Corporate Governance**                                        | 70     |
|---------------------|-----------------------------------------------------------------------------------------------------|--------|
| **ITEM 11   ** | **Executive Compensation**                                                                          | 70     |
| **ITEM 12   ** | **Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters** | 70     |
| **ITEM 13**         | **Certain Relationships and Related Transactions, and  Director Independence   **              | 70     |
| **ITEM 14   ** | **Principal Accountant Fees and Services**                                                          | 70     |
| ** **          | **PART IV**                                                                                         |   |
| ** **          | ** **                                                                                          |   |
| **ITEM 15**         | **Exhibits and Financial Statement Schedules**                                                      | 71     |
| **Signatures**      | 72                                                                                                  |

 

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**CAUTIONARYNOTICE WITH RESPECT TOFORWARD LOOKING STATEMENTS**

             Thisreport contains "forward-looking statements" within the meaning ofthe securities laws.  The Private Securities Litigation Reform Act of1995 provides a safe harbor for forward-looking statements.  In orderto comply with the terms of the safe harbor, the Company notes that a varietyof factors could cause the Company's actual results and experience to differmaterially from the anticipated results or other expectations expressed in theCompany's forwarding-looking statements.

             Allstatements that are not historical facts are statements that could be"forward-looking statements." You can identify these forward-lookingstatements through the use of words such as "may," "will,""should," "could," "would," "expect,""anticipate," "assume," "indicate,""contemplate," "seek," "plan,""predict," "target," "potential,""believe," "intend," "estimate," "project," "continue," or other similar words.  Forward-lookingstatements include, but are not limited to, statements regarding the Company'sfuture business prospects, revenues, working capital, liquidity, capital needs,interest costs, income, business operations and proposed services.

             Theseforward-looking statements are based on current expectations, estimates andprojections about the banking industry and the economy, management's beliefs,and assumptions made by management.  Such information includes,without limitation, discussions as to estimates, expectations, beliefs, plans,strategies, and objectives concerning future financial and operatingperformance.  These statements are not guarantees of futureperformance and are subject to risks, uncertainties and assumptions that aredifficult to predict. Therefore, actual results may differ materially fromthose expressed or forecasted in such forward-lookingstatements.  The risks and uncertainties include, but are not limitedto:

| ● | future economic and business  conditions;                                                                                                                                                                                                                                                                                                  |
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| ● | lack of sustained growth in the  economies of the Company's market areas;                                                                                                                                                                                                                                                                  |
| ● | government monetary and fiscal  policies;                                                                                                                                                                                                                                                                                                  |
| ● | the effects of changes in  interest rates on the levels, composition and costs of deposits, loan demand,  and the values of loan collateral, securities, and interest sensitive assets  and liabilities;                                                                                                                                   |
| ● | the effects of competition from  a wide variety of local, regional, national and other providers of financial,  investment, and insurance services, as well as competitors that offer banking  products and services by mail, telephone, computer and/or the Internet;                                                                     |
| ● | credit risks;                                                                                                                                                                                                                                                                                                                              |
| ● | higher than anticipated levels  of defaults on loans;                                                                                                                                                                                                                                                                                      |
| ● | perceptions by depositors about  the safety of their deposits;                                                                                                                                                                                                                                                                             |
| ● | ability to weather the current  economic downturn;                                                                                                                                                                                                                                                                                         |
| ● | loss of consumer or investor  confidence;                                                                                                                                                                                                                                                                                                  |
| ● | the failure of assumptions underlying  the establishment of the allowance for loan losses and other estimates,  including the value of collateral securing loans;                                                                                                                                                                          |
| ● | the risks of opening new  offices, including, without limitation, the  related costs and time  of building customer relationships and  integrating operations as  part of these endeavors and the failure to  achieve expected gains,  revenue growth and/or expense savings from  such endeavors; |
| ● | increases in deposit insurance  premiums;                                                                                                                                                                                                                                                                                                  |
| ● | changes in laws and regulations,  including tax, banking and securities laws and regulations;                                                                                                                                                                                                                                              |
| ● | changes in accounting policies,  rules and practices;                                                                                                                                                                                                                                                                                      |
| ● | changes in technology or  products may be more difficult or costly, or less effective, than  anticipated;                                                                                                                                                                                                                                  |
| ● | the effects of war or other  conflicts, acts of terrorism or other  catastrophic events that may  affect general economic conditions and  economic confidence; and                                                                                                                                                     |
| ● | other factors and information  described in this report and in any of the other reports that we file with  the Securities and Exchange Commission under the Securities Exchange Act of  1934.                                                                                                                                              |

Allforward-looking statements are expressly qualified in their entirety by thiscautionary notice.  The Company has no obligation, and does notundertake, to update, revise or correct any of the forward-looking statementsafter the date of this report.  The Company has expressed itsexpectations, beliefs and projections in good faith and believes they have areasonable basis.  However, there is no assurance that theseexpectations, beliefs or projections will result or be achieved oraccomplished.

****

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**PART IITEM 1.  BUSINESSDESCRIPTION OF CNB CORPORATION**

CNB Corporation (the "Company") is a South Carolinabusiness corporation organized in 1985 for the purpose of becoming a bankholding company for The Conway National Bank (the "Bank") under theBank Holding Company Act.  The Company's only business is ownershipof the Bank.  The activities of the Company are subject to thesupervision of the Federal Reserve, and the Company may engage directly orthrough subsidiary corporations in those activities closely related to bankingwhich are specifically permitted under the Bank Holding Company Act.  See"Supervision and Regulation."  Although the Company, afterobtaining the requisite approval of the Federal Reserve and any otherappropriate regulatory agency, may seek to enter businesses closely related tobanking or to acquire existing businesses already engaged in such activities,the Company has not engaged in, and has no present intent to engage in, suchother permissible activities.

**DESCRIPTION OF THE SUBSIDIARY**

The Bank is an independent community bank engaged in the general commercialbanking business in Horry County and the "Waccamaw Neck" portion ofGeorgetown County, South Carolina. The Bank was organized in1903.  The Bank's Main Office consists of an Operations andAdministration Center along with an adjacent branch office known as the Conway BankingOffice.  The Bank also operates thirteen other branch officesthroughout Horry County and the "Waccamaw Neck" area of GeorgetownCounty.    The Bank employs approximately 261full-time-equivalent employees at its Main Office and fourteen branch offices.

The Bank performs the full range of normal commercial banking functions. Someof the major services provided include checking accounts, NOW accounts, moneymarket deposit accounts, IRA accounts, Health Savings Accounts, savings andtime deposits of various types and loans to individuals for personal use, homemortgages, home improvement, automobiles, real estate, agricultural purposesand business needs.   Commercial lending operations include varioustypes of credit for business, industry, and agriculture.   Inaddition, the Bank offers safe deposit boxes, wire transfer services, 24-hourautomated teller machines on the STAR Network, internet banking, bank by phone,direct deposits, a MasterCard/Visa program, cash management services, andcommercial lockbox services. The Bank offers discount brokerage servicesthrough a correspondent relationship.  Additionally, the Bankprovides long-term mortgage loans through its secondary mortgage departmentwhich acts in an agency only capacity for various investors.  TheBank does not provide trust services; does not sell annuities; does not sellmutual funds; and does not sell insurance.

The majority of the Bank's customers are individuals and small to medium-sizedbusinesses headquartered within the Bank's service area.  The Bankhas no material concentration of deposits from any single customer or group ofcustomers. At December 31, 2008 the Bank had five concentrations of creditto single industries (See Note 1 to the consolidated financial statements,contained elsewhere in this report).  There are no material seasonalfactors that would have any adverse effect on the Bank nor does the Bank relyon foreign sources of funds or income.

Further information about the Bank's business is set forth below under"Supplementary Financial Data, Guide 3 Statistical Disclosure by BankHolding Companies" and in Item 7, "Management's Discussion andAnalysis of Financial Condition and Results of Operations."

**COMPETITION**

The Bank actively competes with other institutions in Horry County and the"Waccamaw Neck" region of Georgetown County in providing customerswith deposit, credit and other financial services.  The principalcompetitors of the Bank include local offices of five regional banks, fivestate-wide banks, thirteen locally owned banks in Horry and Georgetown Countiesand various other financial and thrift institutions.  At June 30,2008, the Bank ranked second in Horry County and tenth in Georgetown County indeposits among its competitors. The Bank also competes with credit unions,money market funds, brokerage houses, insurance companies, mortgage companies,leasing companies, consumer finance companies and other financial institutions.Significant competitive factors include interest rates on loans and deposits,prices and fees for services, office location, customer service, communityreputation, and continuity of personnel.

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**SUPERVISION AND REGULATION**

**General**

The Company and the Bank are subject to an extensive array of state and federalbanking laws and regulations which impose specific requirements andrestrictions on, and provide for general regulatory oversight with respect to,virtually all aspects of the Company's and the Bank's operations.  TheCompany and the Bank are also affected by government monetary policy and byregulatory measures affecting the banking industry in general.  Theactions of the Federal Reserve System affect the money supply and, in general,the Bank's lending abilities in increasing or decreasing the cost andavailability of funds to the Bank.  Additionally, the Federal ReserveSystem regulates the availability of bank credit in order to combat recessionand curb inflationary pressures in the economy by open market operations inUnited States government securities, changes in the discount rate on memberbank borrowings, and changes in the reserve requirements against bank deposits.

The Company is also subject to limited regulation and supervision by the SouthCarolina State Board of Financial Institutions (the "StateBoard").  A South Carolina bank holding company may be requiredto provide the State Board with information with respect to the financialcondition, operations, management and inter-company relationships of theholding company and its subsidiaries.  The State Board also mayrequire such other information as is necessary to keep itself informed aboutwhether the provisions of South Carolina law and the regulations and ordersissued thereunder by the State Board have been complied with, and the StateBoard may examine any bank holding company and its subsidiaries. Furthermore,pursuant to applicable law and regulations, the Company must receive approvalof, or give notice to (as applicable) the State Board prior to engaging in theacquisition of banking or non-banking institutions or assets.

**Obligations of Holding Company to its Subsidiary Banks**

A number of obligations and restrictions are imposed on bank holding companiesand their depository institution subsidiaries by Federal law and regulatorypolicies that are designed to reduce potential loss exposure to the depositorsof such depository institutions and to the FDIC insurance funds in the eventthe depository institution is in danger of becoming insolvent or isinsolvent.  For example, under the policy of the Federal Reserve, abank holding company is required to serve as a source of financial strength toits subsidiary depository institutions and to commit resources to support suchinstitutions in circumstances where it might not do so absent suchpolicy.  In addition, the "cross-guarantee" provisions ofthe Federal Deposit Insurance Act, as amended ("FDIA"), requireinsured depository institutions under common control to reimburse the FDIC forany loss suffered or reasonably anticipated by the FDIC as a result of thedefault of a commonly controlled insured depository institution or for anyassistance provided by the FDIC to a commonly controlled insured depositoryinstitution in danger of default.  The FDIC may decline to enforcethe cross-guarantee provisions if it determines that a waiver is in its bestinterest.  The FDIC's claim for damages is superior to claims ofstockholders of the insured depository institution or its holding company butis subordinate to claims of depositors, secured creditors and holders ofsubordinated debt (other than affiliates) of the commonly controlled insureddepository institutions.

The FDIA also provides that amounts received from the liquidation or otherresolution of any insured depository institution by any receiver must bedistributed (after payment of secured claims) to pay the deposit liabilities ofthe institution prior to payment of any other general or unsecured seniorliability, subordinated liability, general creditor orstockholder.  This provision gives depositors a preference overgeneral and subordinated creditors and stockholders in the event a receiver isappointed to distribute the assets of the bank.

Any capital loans by a bank holding company to any of its subsidiary banks aresubordinate in right of payment to deposits and to certain other indebtednessof such subsidiary bank. In the event of a bank holding company's bankruptcy,any commitment by the bank holding company to a federal bank regulatory agencyto maintain the capital of a subsidiary bank will be assumed by the bankruptcytrustee and entitled to a priority of payment.

Under the National Bank Act, if the capital stock of a national bank isimpaired by losses or otherwise, the OCC is authorized to require payment ofthe deficiency by assessment upon the bank's shareholders, pro rata, and to theextent necessary, if any such assessment is not paid by any shareholder afterthree months notice, to sell the stock of such shareholder to make good thedeficiency.

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**Capital Adequacy Guidelines for Bank Holding Companies and Banks**

The various federal bank regulators, including the Federal Reserve and theFDIC, have adopted risk-based and leverage capital adequacy guidelinesassessing bank holding company and bank capital adequacy.  Thesestandards define what qualifies as capital and establish minimum capitalstandards in relation to assets and off-balance-sheet exposures, as adjustedfor credit risks. The capital guidelines and the Company's capital position aresummarized in Note 16 to the Financial Statements, contained elsewhere in thisreport.  The Bank is considered well capitalized.

Failure to meet capital guidelines could subject the Bank to a variety ofenforcement remedies, ranging from, for example, a prohibition on the taking ofbrokered deposits to the termination of deposit insurance by the FDIC or theappointment of a receiver for the Bank.

The risk-based capital standards of both the Federal Reserve and the FDICexplicitly identify concentrations of credit risk and the risk arising fromnon-traditional activities, as well as an institution's ability to manage theserisks, as important factors to be taken into account by the agencies inassessing an institution's overall capital adequacy.  The capitalguidelines also provide that an institution's exposure to a decline in theeconomic value of its capital due to changes in interest rates be considered bythe agencies as a factor in evaluating a bank's capital adequacy.  TheFederal Reserve also has issued additional capital guidelines for bank holdingcompanies that engage in certain trading activities.

**Payment of Dividends**

The Company is a legal entity separate and distinct from theBank.  Most of the revenues of the Company result from dividends paidto the Company by the Bank.  There are statutory and regulatoryrequirements applicable to the payment of dividends by subsidiary banks as wellas by the Company to its shareholders.

Each national banking association is required by federal law to obtain theprior approval of the OCC for the payment of dividends if the total of alldividends declared by the board of directors of such bank in any year willexceed the total of (i) such bank's net profits (as defined and interpreted byregulation) for that year plus (ii) the retained net profits (as defined andinterpreted by regulation) for the preceding two years, less any requiredtransfers to surplus.  In addition, national banks can only paydividends to the extent that retained net profits (including the portiontransferred to capital in excess of par value of stock) exceed bad debts (asdefined by regulation).

The payment of dividends by the Company and the Bank may also be affected orlimited by other factors, such as the requirements to maintain adequate capitalabove regulatory guidelines.  In addition, if, in the opinion of theapplicable regulatory authority, a bank under its jurisdiction is engaged in oris about to engage in an unsafe or unsound practice (which, depending on thefinancial condition of the Bank, could include the payment of dividends), suchauthority may require, after notice and hearing, that such bank cease anddesist from such practice.  The OCC has indicated that payingdividends that deplete a national bank's capital base to an inadequate levelwould be an unsafe and unsound banking practice.  The FederalReserve, the OCC and the FDIC have issued policy statements, which provide thatbank holding companies and insured banks should generally only pay dividendsout of current operating earnings.

**Certain Transactions by the Company with its Affiliates**

Federal law regulates transactions among the Company and its affiliates,including the amount of the Bank's loans to or investments in nonbankaffiliates and the amount of advances to third parties collateralized bysecurities of an affiliate.  Further, a bank holding company and itsaffiliates are prohibited from engaging in certain tie-in arrangements inconnection with any extension of credit, lease or sale of property orfurnishing of services.

**FDIC Insurance Assessments**

The FDIC merged the Bank Insurance Fund and the Savings Association InsuranceFund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 inaccordance with the Federal Deposit Insurance Reform Act of2005.  The FDIC maintains the DIF by assessing depositoryinstitutions an insurance premium.  The amount each institution isassessed is based upon statutory factors that include the balance of insureddeposits as well as the degree of risk the institution poses to the insurancefund.  The FDIC uses a risk-based premium system that assesses higherrates on those institutions that pose greater risks to theDIF.  Under the rule adopted by the FDIC in November 2006, asof  January 1, 2007, the FDIC began placing each institution in oneof four risk categories using a two-step process based first on capital ratios(the capital group assignment) and then on other relevant information (thesupervisory group assignment).  As of  January 1, 2007,rates ranged between 5 and 43 cents per $100 in assessabledeposits.  Asa result of the actual and predicted impact on the DIF of bank failures in 2008and 2009, the FDIC has altered its methodology for computing assessments,beginning with assessments due in September 2009 based on assessable depositsat June 30, 2009.  Under the new methodology, assessments will rangebetween 7 and 77.5 cents per $100 in assessable deposits.  The FDIChas also proposed to make an additional "emergency assessment" of 20 centsper $100 of assessable deposits held on June 30, 2009, which may be payable inSeptember 2009.

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**Regulation of the Bank**

The Bank is also subject to regulation and examination by theOCC.  In addition, the Bank is subject to various other state andfederal laws and regulations, including state usury laws, laws relating tofiduciaries, consumer credit laws and laws relating to branchbanking.  The Bank's loan operations are subject to certain federalconsumer credit laws and regulations promulgated thereunder, including, but notlimited to:  the federal Truth-In-Lending Act, governing disclosuresof credit terms to consumer borrowers; the Home Mortgage Disclosure Act,requiring financial institutions to provide certain information concerningtheir mortgage lending; the Equal Credit Opportunity Act and the Fair HousingAct, prohibiting discrimination on the basis of certain prohibited factors inextending credit; and the Fair Debt Collection Act, governing the manner inwhich consumer debts may be collected by collection agencies.  Thedeposit operations of the Bank are subject to the Truth in Savings Act,requiring certain disclosures about rates paid on savings accounts; theExpedited Funds Availability Act, which deals with disclosure of theavailability of funds deposited in accounts and the collection and return ofchecks by banks; the Right to Financial Privacy Act, which imposes a duty tomaintain certain confidentiality of consumer financial records; and theElectronic Funds Transfer Act and regulations promulgated thereunder, whichgovern automatic deposits to and withdrawals from deposit accounts andcustomers' rights and liabilities arising from the use of automated tellermachines and other electronic banking services.  The Bank is alsosubject to the requirements of the Community Reinvestment Act (the"CRA") which imposes on financial institutions an affirmative andongoing obligation to meet the credit needs of their local communities, includinglow and moderate-income neighborhoods, consistent with the safe and soundoperation of those institutions. Each financial institution's actualperformance in meeting community credit needs is evaluated as part of theexamination process, and also is considered in evaluating mergers, acquisitionsand applications to open a branch or facility.  The Bank is alsosubject to provisions of the Gramm-Leach-Bliley Act of 1999 (See the sectionbelow of the same title); the Fair Credit Reporting Act, governing the use andprovision of information to credit reporting agencies; the Bank Secrecy Act,dealing with, among other things, the reporting of certain currencytransactions; and the USA Patriot Act, dealing with, among other things,requiring the establishment of anti-money laundering programs, includingstandards for verifying customer information at account opening.

**Other Safety and Soundness Regulations**

Prompt Corrective Action.  The federal bankingagencies have broad powers under current federal law to take prompt correctiveaction to resolve problems of insured depository institutions.  Theextent of these powers depends upon whether the institutions in question are"well capitalized," "adequately capitalized," "undercapitalized,""significantly undercapitalized" or "criticallyundercapitalized."

A bank that is "undercapitalized" becomes subject to provisions ofthe Federal Deposit Insurance Act: restricting payment of capital distributionsand management fees; requiring the OCC to monitor the condition of the bank;requiring submission by the bank of a capital restoration plan; restricting thegrowth of the bank's assets; and requiring prior approval of certain expansionproposals.  A bank that is "significantly undercapitalized"is also subject to restrictions on compensation paid to senior management ofthe bank, and a bank that is "critically undercapitalized" is furthersubject to restrictions on the activities of the bank and restrictions onpayments of subordinated debt of the bank, and will ordinarily be placed inreceivership.  The purpose of these provisions is to require bankswith less than adequate capital to act quickly to restore their capital and tohave the OCC move promptly to take over banks that are unwilling or unable to takesuch steps.

Brokered Deposits.  Under current FDIC regulations,"well-capitalized" banks may accept brokered deposits withoutrestriction, "adequately capitalized" banks may accept brokereddeposits with a waiver from the FDIC (subject to certain restrictions on paymentsof rates), while "undercapitalized" banks may not accept brokereddeposits.  The regulations provide that the definitions of "wellcapitalized", "adequately capitalized" and"undercapitalized" are the same as the definitions adopted by theagencies to implement the prompt corrective action provisions described in theprevious paragraph.

**Interstate Banking**

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994("Riegle-Neal"), the Company and any other adequately capitalizedbank holding company located in South Carolina can acquire a bank located inany other state, and a bank holding company located outside South Carolina canacquire any South Carolina-based bank, in either case subject to certaindeposit percentage and other restrictions.  Riegle-Neal also providesthat, in any state that has not previously elected to prohibit out-of-statebanks from operating interstate branches within its territory, adequatelycapitalized and managed bank holding companies can consolidate theirmulti-state bank operations into a single bank subsidiary and branch interstatethrough acquisitions.  De novo branching by an out-of-state bank ispermitted only if it is expressly permitted by the laws of the hoststate.  The authority of a bank to establish and operate brancheswithin a state will continue to be subject to applicable state branchinglaws.  South Carolina law was amended, effective July 1, 1996, topermit such interstate branching but not de novo branching by an out-of-statebank. 

The Riegle-Neal Act, together with legislation adopted in South Carolina, hasresulted in a number of South Carolina banks being acquired by largeout-of-state bank holding companies.  Size gives the larger bankscertain advantages in competing for business from largercustomers.  These advantages include higher lending limits and theability to offer services in other areas of South Carolina and theregion.  As a result, the Bank does not generally attempt to competefor the banking relationships of large corporations, but concentrates itsefforts on small to medium-sized businesses and on individuals.  TheCompany believes the Bank has competed effectively in this market segment byoffering quality, personal service.

4

----

**Gramm-Leach-Bliley Act of 1999**

The Gramm-Leach-Bliley Act of 1999, which makes it easier for affiliationsbetween banks, securities firms and insurance companies to take place, becameeffective in March 2000.  The Act and its implementing regulationsremove Depression-era barriers that had separated banks and securities firms,and seek to protect the privacy of consumers' financialinformation.  The Act and its implementing regulations set forth aconsumer's entitlement to disclosure of the Bank's use and further disclosureof nonpublic personal financial information obtained by the Bank from theconsumer.  The regulations also govern the consumer's right toopt-out of further disclosure of nonpublic personal financial information andrequire the Bank to provide initial and annual privacy notices.  TheBank is also required to develop a comprehensive plan for the safeguarding ofcustomer information which encompasses all aspects of the Bank's technologicalenvironment, business practices, and Bank facilities.

Under provisions of the legislation and regulations adopted by the appropriateregulators, banks, securities firms and insurance companies are able tostructure new affiliations through a holding company structure or through afinancial subsidiary. The legislation created a new type of bank holdingcompany called a "financial holding company" which has powers muchmore extensive than those of standard holding companies.  Theseexpanded powers include authority to engage in "financialactivities," which are activities that are (1) financial in nature; (2)incidental to activities that are financial in nature; or (3) complementary toa financial activity and that do not impose a safety and soundnessrisk.  Significantly, the permitted financial activities forfinancial holding companies include authority to engage in merchant banking andinsurance activities, including insurance portfolio investing.  Abank holding company can qualify as a financial holding company and expand theservices it offers only if all of its subsidiary depository institutions arewell-managed, well-capitalized and have received a rating of"satisfactory" on their last Community Reinvestment Act examination.

The legislation also created another new type of entity called a"financial subsidiary."  A financial subsidiary may be usedby a national bank or a group of national banks to engage in many of the sameactivities permitted for a financial holding company, though several of theseactivities, including real estate development or investment, insurance orannuity underwriting, insurance portfolio investing and merchant banking, arereserved for financial holding companies.  A bank's investment in afinancial subsidiary affects the way in which the bank calculates itsregulatory capital, and the assets and liabilities of financial subsidiariesmay not be consolidated with those of the bank.  The bank must alsobe certain that its risk management procedures are adequate to protect it fromfinancial and operational risks created both by itself and by any financialsubsidiary.  Further, the bank must establish policies to maintainthe separate corporate identities of the bank and its financial subsidiary andto prevent each from becoming liable for the obligations of the other.

The Act also establishes the concept of "functional supervision,"meaning that similar activities should be regulated by the sameregulator.  Accordingly, the Act spells out the regulatory authorityof the bank regulatory agencies, the Securities and Exchange Commission andstate insurance regulators so that each type of activity is supervised by aregulator with corresponding expertise.  The Federal Reserve isintended to be an umbrella supervisor with the authority to require a bankholding company or financial holding company or any subsidiary of either tofile reports as to its financial condition, risk management systems,transactions with depository institution subsidiaries and affiliates, andcompliance with any federal law that it has authority to enforce.

Although the Act reaffirms that states are the regulators for insuranceactivities of all persons, including federally-chartered banks, the Actprohibits states from preventing depository institutions and their affiliatesfrom conducting insurance activities.

The Act and the regulations adopted pursuant to the Act create newopportunities for the Company to offer expanded services to customers in thefuture, though the Company has not yet determined what the nature of theexpanded services might be or when the Company might find it feasible to offerthem.  The Act has increased competition from larger financialinstitutions that have historically been more capable than the Company oftaking advantage of the opportunity to provide a broader range of services.However, the Company continues to believe that its commitment to providing highquality, personalized service to customers will permit it to remain competitivein its market area.

**Sarbanes-Oxley Act of 2002**

The Sarbanes-Oxley Act was signed into law on July 30, 2002, and mandatedextensive reforms and requirements for public companies.  The SEC hasadopted extensive regulations pursuant to the requirements of theSarbanes-Oxley Act.  The Sarbanes-Oxley Act and the SEC'simplementing regulations have increased the Company's cost of doing business,particularly its fees for internal and external audit services and legalservices, and the law and regulations are expected to continue to doso.  However, the Company has not been affected by Sarbanes-Oxley andthe SEC regulations in ways that are materially different or more onerous thanthose of other public companies of similar size and in similar business.

**Government Response to 2008 Financial Crisis**

During the fourth quarter of 2008 and continuing into the first quarter of 2009the FDIC, the Federal Reserve, the Department of the Treasury and Congress tooka number of actions designed to alleviate or correct mounting problems in thefinancial services industry.  A number of these initiatives weredirectly applicable to community banks.

5

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**GovernmentResponse to 2008 Financial Crisis - *Continued***

Congress enacted the Emergency Economic Stabilization Act of 2008 which, amongother things, temporarily increased the maximum amount of FDIC depositinsurance from $100,000 to $250,000 and created a Troubled Assets ReliefProgram ("TARP") administered by Treasury.  In October, 2008,Treasury announced a Capital Purchase Program ("CPP") under TARP to increasethe capital of healthy banks.  Under the CPP, Treasury would purchasepreferred stock with warrants from qualified banks and bank holding companiesin an amount up to 3% of the seller's risk-weighed assets as of September 30,2008.  Institutions wishing to participate in the CPP were requiredto file an application with their principal federal regulators.  TheCompany elected not to participate in the CPP because of (i) the cost of thepreferred stock, (ii) the open-ended administrative burdens associated with thepreferred stock including having to agree to allow Treasury to unilaterallyamend the stock purchase agreement to comply with subsequent changes inapplicable federal statutes, (iii) the fact that the Company and the Bank werealready well capitalized under regulatory guidelines and expected to continueto be so, and (iv) management's belief that other sources of capital were, andwould continue to be, available should additional capital be needed.

FDIC also implemented in October, 2008 a Temporary Liquidity Guarantee Programpursuant to which it undertook to provide deposit insurance in an unlimitedamount for non-interest bearing transaction accounts and a debt guaranteecomponent to fully guarantee senior, unsecured debt issued by banks or bankholding companies.  Coverage of both components was automatic untilDecember 5, 2008 at which time covered institutions could opt out of one orboth of the components.  Institutions not opting out would be chargedfees for their participation in the components.  The Company and Bankopted out of the debt guarantee component.

An unfortunate consequence of the difficulties that have beset the bankingindustry in the last year has been a large increase in bank failures which hasled to substantial claims being made against the FDIC's Deposit InsuranceFund.  In order to increase the amount in the Deposit Insurance Fundto reflect the increased risk of additional bank failures and insurance claims,FDIC has raised its assessments on banks for 2009 and has also proposed aone-time special assessment of 20 cents per $100 of assessable deposits to bepaid in September, 2009 based on deposits at June 30, 2009.  Therealso appears to be a possibility that the assessment will be reduced ifCongress authorizes the FDIC to borrow sufficient funds.  Assumingthat the special assessment is imposed, as proposed and without reduction, theadditional cost to the Bank in 2009 would be approximately $1,375,000.

**Legislative Proposals**

Legislation which could significantly affect the business of banking isintroduced in Congress from time to time.  For example, numerous bills arepending in Congress and the South Carolina Legislature to provide various formsof relief to homeowners from foreclosure of mortgages as a result of publicitysurrounding economic problems resulting from subprime mortgage lending and theeconomic adjustments in national real estate markets.  Broaderproblems in the financial sector of the economy which became apparent in 2008have led to numerous calls for legislative restructuring of the regulation ofthe sector.  The Company cannotpredict the future course of such legislative proposals or their impact on theCompany should they be adopted.
| **Available information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The Company  electronically files with the Securities and Exchange Commission  ("SEC") its annual reports on Form 10-K, its quarterly reports on  Form 10-Q, its periodic reports on Form 8-K, amendments to those reports  filed or furnished pursuant to Section 13(a) of the Securities Exchange Act  of 1934 (the "1934 Act"), and proxy materials pursuant to Section  14 of the 1934 Act. The SEC maintains a site on the Internet, www.sec.gov,  that contains reports, proxy and information statements, and other  information regarding issuers that file electronically with the SEC. The  Company also makes its filings available, free of charge, through The Conway  National Bank's Web site, www.conwaynationalbank.com, as soon as  reasonably practical after the electronic filing of such material with the  SEC.  The Company's 2008 Annual Report to shareholders and proxy  materials will be available free of charge, from The Conway National Bank's  website, www.conwaynationalbank.com, upon mailing of these materials  to shareholders and the filing of the proxy materials with the SEC. |

** SUPPLEMENTARY FINANCIAL DATAGUIDE 3.   STATISTICAL DISCLOSURE BY BANKHOLDING COMPANIES**

Thefollowing tables present additional statistical information about CNBCorporation and its operations and financial condition and should be read inconjunction with the consolidated financial statements and related notesthereto contained elsewhere in this report.

**DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY;INTEREST RATES AND INTEREST DIFFERENTIAL**

The tables on the following 3 pages present selected financialdata and an analysis of average balance sheets, average yield and the interestearned on earning assets, and the average rate paid and the interest expense oninterest-bearing liabilities for the years ended December 31, 2008, 2007, 2006.

6

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|                                                                                                    |
|---------------------------------------------------------------------------------------------------------|
| **CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)**         |
|                                                                                                    |
|                                                                                                    |
|                                                                                                         | **Twelve Months Ended 12/31/08** | ** ** |
|                                                                                                         | ** ** | **Interest** | **Avg. Ann.** | ** ** | ** ** | ** ** |
|                                                                                                         | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                         | **Balance** | **Expense** | **     Rate   ** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    Earning  assets:                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Loans,  net of unearned income (1)                                  | $587,931 | $  40,431      | 6.88% | ** ** | ** ** | ** ** |  |
|       Securities:                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         Taxable                                                 | 173,483 | 8,027      | 4.63    | ** ** | ** ** | ** ** |  |
|         Tax-exempt                                              | 27,146 | 1,636 (2) | 6.03    | ** ** | ** ** | ** ** |  |
|       Federal  funds sold and securities purchased under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to resell                                    |     24,439 |          581      | 2.38    | ** ** | ** ** | ** ** |  |
|           Total  earning assets                       | $812,999 | $  50,675      | 6.23    | ** ** | ** ** | ** ** |  |
|     Other  assets                                                                   |     47,613 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  assets                               | $860,612 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Liabilities  and stockholder equity**                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Interest-bearing  liabilities:                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Interest-bearing  deposits                                          | $586,569 | $  16,539      | 2.82    | ** ** | ** ** | ** ** |  |
|       Federal  funds purchased and securities sold under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to repurchase                                | 58,843 | 1,420      | 2.41    | ** ** | ** ** | ** ** |  |
|       Other  short-term borrowings                                        |       8,289 |          262      | 3.16    | ** ** | ** ** | ** ** |  |
|           Total  interest-bearing liabilities         | $653,701 | $  18,221      | 2.79    | ** ** | ** ** | ** ** |  |
|     Noninterest-bearing  deposits                                                   | 115,724 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Other  liabilities                                                              | 7,049 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Stockholders'  equity                                                           |     84,138 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  liabilities and stockholders' equity | $860,612 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Net  interest income and yield as a percent of total                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|        earning  assets                                               | $812,999 | $  32,454      | 3.99% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Ratios:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| Return  on average total assets                                                                         | ** ** | ** ** | 1.04% | ** ** | ** ** | ** ** |  |
| Return  on average stockholders' equity                                                                 | ** ** | ** ** | 10.65    | ** ** | ** ** | ** ** |  |
| Cash  dividends declared as a percent of net income                                                     | ** ** | ** ** | 48.64    | ** ** | ** ** | ** ** |  |
| Average  stockholders' equity as a percent of:                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|   Average  total assets                                                                       | ** ** | ** ** | 9.78    | ** ** | ** ** | ** ** |  |
|   Average  total deposits                                                                     | ** ** | ** ** | 11.98    | ** ** | ** ** | ** ** |  |
|   Average  loans                                                                              | ** ** | ** ** | 14.31    | ** ** | ** ** | ** ** |  |
| Average  earning assets as a percent of                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    average  total assets                                                                 | ** ** | ** ** | 94.47% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
| (1)                                                                                                     | The  Company had no out-of-period adjustments or foreign  activities.  Loan fees of $612 are included in the above interest  income.  Loans on a non-accrual basis for the recognition of  interest income totaling $2,990 as of December 31, 2008 are included in loans  for purposes of this analysis. |  |
|                                                                                                    |  |  |
| (2)                                                                                                     | Tax-exempt  income is presented on a tax-equivalent basis using a 34% tax  rate.  The amount shown includes a tax-equivalent adjustment of  $556. |  |
|                                                                                                         |  |  |  |  |  |  |  |  |  |  |  |

7

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|                                                                                                    |
|---------------------------------------------------------------------------------------------------------|
| **CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)**         |
|                                                                                                    |
|                                                                                                    |
|                                                                                                         | **Twelve Months Ended 12/31/07** | ** ** |
|                                                                                                         | ** ** | **Interest** | **Avg. Ann.** | ** ** | ** ** | ** ** |
|                                                                                                         | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                         | **Balance** | **Expense** | **     Rate   ** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    Earning  assets:                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Loans,  net of unearned income (1)                                  | $563,864 | $  43,878      | 7.78% | ** ** | ** ** | ** ** |  |
|       Securities:                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         Taxable                                                 | 175,664 | 7,440      | 4.24    | ** ** | ** ** | ** ** |  |
|         Tax-exempt                                              | 21,972 | 1,365 (2) | 6.21    | ** ** | ** ** | ** ** |  |
|       Federal  funds sold and securities purchased under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to resell                                    |     30,246 |       1,536      | 5.08    | ** ** | ** ** | ** ** |  |
|           Total  earning assets                       | $791,746 | $  54,219      | 6.85    | ** ** | ** ** | ** ** |  |
|     Other  assets                                                                   |     55,855 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  assets                               | $847,601 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Liabilities  and stockholder equity**                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Interest-bearing  liabilities:                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Interest-bearing  deposits                                          | $556,397 | $  19,976      | 3.59    | ** ** | ** ** | ** ** |  |
|       Federal  funds purchased and securities sold under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to repurchase                                | 68,276 | 2,800      | 4.10    | ** ** | ** ** | ** ** |  |
|       Other  short-term borrowings                                        |       1,748 |            82      | 4.69    | ** ** | ** ** | ** ** |  |
|           Total  interest-bearing liabilities         | $626,421 | $  22,858      | 3.65    | ** ** | ** ** | ** ** |  |
|     Noninterest-bearing  deposits                                                   | 132,765 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Other  liabilities                                                              | 6,973 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Stockholders'  equity                                                           |     81,442 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  liabilities and stockholders' equity | $847,601 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Net  interest income and yield as a percent of total                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|        earning  assets                                               | $791,746 | $  31,361      | 3.96% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Ratios:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| Return  on average total assets                                                                         | ** ** | ** ** | 1.15% | ** ** | ** ** | ** ** |  |
| Return  on average stockholders' equity                                                                 | ** ** | ** ** | 11.93    | ** ** | ** ** | ** ** |  |
| Cash  dividends declared as a percent of net income                                                     | ** ** | ** ** | 46.03    | ** ** | ** ** | ** ** |  |
| Average  stockholders' equity as a percent of:                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|   Average  total assets                                                                       | ** ** | ** ** | 9.61    | ** ** | ** ** | ** ** |  |
|   Average  total deposits                                                                     | ** ** | ** ** | 11.82    | ** ** | ** ** | ** ** |  |
|   Average  loans                                                                              | ** ** | ** ** | 14.44    | ** ** | ** ** | ** ** |  |
| Average  earning assets as a percent of                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    average  total assets                                                                 | ** ** | ** ** | 93.41% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
| (1)                                                                                                     | The  Company had no out-of-period adjustments or foreign  activities.  Loan fees of $600 are included in the above interest  income.  Loans on a non-accrual basis for the recognition of  interest income totaling $861 as of December 31, 2007 are included in loans  for purposes of this analysis. |  |
|                                                                                                    |  |  |
| (2)                                                                                                     | Tax-exempt  income is presented on a tax-equivalent basis using a 34% tax  rate.  The amount shown includes a tax-equivalent adjustment of  $464. |  |
|                                                                                                    |
|                                                                                                         |  |  |  |  |  |  |  |  |  |  |  |

8

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|                                                                                                    |
|---------------------------------------------------------------------------------------------------------|
| **CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)**         |
|                                                                                                    |
|                                                                                                    |
|                                                                                                         | **Twelve Months Ended 12/31/06** | ** ** |
|                                                                                                         | ** ** | **Interest** | **Avg. Ann.** | ** ** | ** ** | ** ** |
|                                                                                                         | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                         | **Balance** | **Expense** | **   Rate  ** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    Earning  assets:                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Loans,  net of unearned income (1)                                  | $545,451 | $  41,340      | 7.58% | ** ** | ** ** | ** ** |  |
|       Securities:                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         Taxable                                                 | 160,220 | 5,934      | 3.70    | ** ** | ** ** | ** ** |  |
|         Tax-exempt                                              | 19,252 | 1,215 (2) | 6.31    | ** ** | ** ** | ** ** |  |
|       Federal  funds sold and securities purchased under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to resell                                    |     27,148 |       1,335      | 4.92    | ** ** | ** ** | ** ** |  |
|           Total  earning assets                       | $752,071 | $  49,824      | 6.62    | ** ** | ** ** | ** ** |  |
|     Other  assets                                                                   |     61,051 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  assets                               | $813,122 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Liabilities  and stockholder equity**                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Interest-bearing  liabilities:                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|       Interest-bearing  deposits                                          | $533,441 | $  16,229      | 3.04    | ** ** | ** ** | ** ** |  |
|       Federal  funds purchased and securities sold under                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|         agreement  to repurchase                                | 47,245 | 1,611      | 3.41    | ** ** | ** ** | ** ** |  |
|       Other  short-term borrowings                                        |       9,679 |          556      | 5.74    | ** ** | ** ** | ** ** |  |
|           Total  interest-bearing liabilities         | $590,365 | $  18,396      | 3.12    | ** ** | ** ** | ** ** |  |
|     Noninterest-bearing  deposits                                                   | 143,325 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Other  liabilities                                                              | 4,234 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Stockholders'  equity                                                           |     75,198 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|           Total  liabilities and stockholders' equity | $813,122 | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|     Net  interest income and yield as a percent of total                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|        earning  assets                                               | $752,071 | $  31,428      | 4.18% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| **Ratios:**                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
| Return  on average total assets                                                                         | ** ** | ** ** | 1.24% | ** ** | ** ** | ** ** |  |
| Return  on average stockholders' equity                                                                 | ** ** | ** ** | 13.36    | ** ** | ** ** | ** ** |  |
| Cash  dividends declared as a percent of net income                                                     | ** ** | ** ** | 41.04    | ** ** | ** ** | ** ** |  |
| Average  stockholders' equity as a percent of:                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|   Average  total assets                                                                       | ** ** | ** ** | 9.25    | ** ** | ** ** | ** ** |  |
|   Average  total deposits                                                                     | ** ** | ** ** | 11.11    | ** ** | ** ** | ** ** |  |
|   Average  loans                                                                              | ** ** | ** ** | 13.79    | ** ** | ** ** | ** ** |  |
| Average  earning assets as a percent of                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  |
|    average  total assets                                                                 | ** ** | ** ** | 92.49% | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
|                                                                                                         | ** ** | ** ** |   | ** ** | ** ** | ** ** |  |
| (1)                                                                                                     | The  Company had no out-of-period adjustments or foreign  activities.  Loan fees of $743 are included in the above interest  income.  Loans on a non-accrual basis for the recognition of  interest income totaling $897 as of December 31, 2006 are included in loans  for purposes of this analysis. |  |
|                                                                                                    |  |  |
| (2)                                                                                                     | Tax-exempt  income is presented on a tax-equivalent basis using a 34% tax  rate.  The amount shown includes a tax-equivalent adjustment of  $413. |  |
|                                                                                                    |
|                                                                                                         |  |  |  |  |  |  |  |  |  |  |  |

9

----

The table "Rate/Volume Variance Analysis" provides a summary ofchanges in net interest income resulting from changes in rate and changes involume.  The changes due to rate are the difference between thecurrent and prior year's rates multiplied by the prior year's volume.  Thechanges due to volume are the difference between the current and prior year'svolume multiplied by rates earned or paid in the currentyear.  Rate/Volume Variance has been allocated to change due tovolume.
| **CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2008 and 2007   (Dollars in Thousands)** |                                                                                            |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
|                                                                                                                                                 |                                                                                            |
|                                                                                                                                                 | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                 | **Average**                                                                                | **Average** | ** ** | ** ** | **Interest** | **Interest** | ** ** | **Change** | **Change** | ** ** |
|                                                                                                                                                 | **Volume**                                                                                 | **Volume** | **Yield/Rate** | **Yield/Rate** | **Earned/Paid** | **Earned/Paid** | ** ** | **Due to** | **Due to** | ** ** |
|                                                                                                                                                 | **2008**                                                                                   | **2007** | **2008** | **2007** | **2008** | **2007** | **Variance** | **Rate** | **Volume** | ** ** |
| **Earning   Assets:**                                                                                                                                |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Loans   , Net of unearned Income (1)**                                                                                                             | $587,931                                                                                   | $563,864 | 6.88% | 7.78% | $40,431 | $ 43,878 | $  (3,447) | $ (5,102) | $ 1,655  |   |
| **  Investment   securities:**                                                                                                             |                                                                                       |   |   |   |   |   |   |   |   |   |
| **    Taxable**                                                                                                                  | 173,483                                                                                    | 175,664 | 4.63% | 4.24% | 8,027 | 7,440 | 587  | 688  | (101) |   |
| **    Tax-exempt   (2)**                                                                                                         | 27,146                                                                                     | 21,972 | 6.03% | 6.21% | 1,636 | 1,365 | 271  | (41) | 312  |   |
| **  Federal   funds sold and Securities**                                                                                                  |                                                                                       |   |   |   |   |   |   |   |   |   |
| **    purchased   under agreement to resell**                                                                                    |     24,439                                                             |    30,246 | 2.38% | 5.08% |        581 |      1,536 |        (955) |       (817) |     (138) |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Total   Earning Assets**                                                                                                                           | $812,999                                                                                   | $791,746 | 6.23% | 6.85% | $50,675 | $ 54,219 | $ (3,544 ) | $ (5,272) | $ 1,728  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Interest-bearing   Liabilities:**                                                                                                                  |                                                                                       |   |   |   |   |   |   |   |   |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  Interest-bearing   deposits**                                                                                                          | $586,569                                                                                   | $556,397 | 2.82% | 3.59% | $16,539 | $ 19,976 | $ (3,437) | $ (4,288) | $    851  |   |
| **  Federal   funds purchased and securities**                                                                                             |                                                                                       |   |   |   |   |   |  |   |   |   |
| **    sold   under agreement to repurchase**                                                                                     | 58,843                                                                                     | 68,276 | 2.41% | 4.10% | 1,420 | 2,800 | (1,380) | (1,152) | (228) |   |
| **  Other   short-term borrowings**                                                                                                        |       8,289                                                  |       1,748 | 3.16% | 4.69% |        262 |           82 |         180  |         (27) |       207  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Total   Interest-bearing Liabilities**                                                                                                             |   653,701                                                                        |   626,421 | 2.79% | 3.65% |   18,221 |    22,858 |    (4,637) |    (5,467) |       830  |   |
| **Interest-free  Funds   Supporting**                                                                                                      |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  Earning   Assets**                                                                                                                     | 159,298                                                                                    | 165,325 |   |   |   |   |   |   |   |   |
| ** **                                                                                                                                           |                 |                 |            |            |               |                |                 |                 |                |   |
| **Total   Funds Supporting Earning Assets**                                                                                                          | $812,999                                                                                   | $791,746 | 2.24% | 2.89% | $18,221 | $ 22,858 | $ (4,637) | $ (5,467) | $     830  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Interest   Rate Spread**                                                                                                                           |                                                                                       |   | 3.44% | 3.20% |   |   |   |   |   |   |
| **Impact   of Noninterest-bearing Funds**                                                                                                            |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  on   Net Yield on Earning Assets**                                                                                                     |                                                                                       |   |   .55% |   .76% |               |                |   |   |   |   |
| **Net   Yield on Earning Assets**                                                                                                                    |                                                                                       |   | 3.99% | 3.96% | $32,454 | $ 31,361 |   |   |   |   |
|                                                                                                                                                      |                                                                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1)  Includes non-accruing loans which do not have a material effecton the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate.

10

----

| **CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2007 and 2006   (Dollars in Thousands)** |                                                                                            |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
|                                                                                                                                                 |                                                                                            |
|                                                                                                                                                 | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                 | **Average**                                                                                | **Average** | ** ** | ** ** | **Interest** | **Interest** | ** ** | **Change** | **Change** | ** ** |
|                                                                                                                                                 | **Volume**                                                                                 | **Volume** | **Yield/Rate** | **Yield/Rate** | **Earned/Paid** | **Earned/Paid** | ** ** | **Due to** | **Due to** | ** ** |
|                                                                                                                                                 | **2007**                                                                                   | **2006** | **2007** | **2006** | **2007** | **2006** | **Variance** | **Rate** | **Volume** | ** ** |
| **Earning   Assets:**                                                                                                                                |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Loans   , Net of unearned Income (1)**                                                                                                             | $563,864                                                                                   | $545,451 | 7.78% | 7.58% | $43,878 | $ 41,340 | $    2,538  | $ 1,105  | $ 1,433  |   |
| **  Investment   securities:**                                                                                                             |                                                                                       |   |   |   |   |   |   |   |   |   |
| **    Taxable**                                                                                                                  | 175,664                                                                                    | 160,220 | 4.24% | 3.70% | 7,440 | 5,934 | 1,506  | 852  | 654  |   |
| **    Tax-exempt   (2)**                                                                                                         | 21,972                                                                                     | 19,252 | 6.21% | 6.31% | 1,365 | 1,215 | 150  | (19) | 169  |   |
| **  Federal   funds sold and Securities**                                                                                                  |                                                                                       |   |   |   |   |   |   |   |   |   |
| **    purchased   under agreement to resell**                                                                                    |     30,246                                                             |    27,148 | 5.08% | 4.92% |     1,536 |      1,335 |          201  |         44   |        157  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Total   Earning Assets**                                                                                                                           | $791,746                                                                                   | $752,071 | 6.85% | 6.62% | $54,219 | $ 49,824 | $    4,395  | $  1,982  | $ 2,413  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Interest-bearing   Liabilities:**                                                                                                                  |                                                                                       |   |   |   |   |   |   |   |   |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  Interest-bearing   deposits**                                                                                                          | $556,397                                                                                   | $533,441 | 3.59% | 3.04% | $19,976 | $ 16,229 | $    3,747  | $  2,923  | $    824  |   |
| **  Federal   funds purchased and securities**                                                                                             |                                                                                       |   |   |   |   |   |  |   |   |   |
| **    sold   under agreement to repurchase**                                                                                     | 68,276                                                                                     | 47,245 | 4.10% | 3.41% | 2,800 | 1,611 | 1,189  | 327  | 862   |   |
| **  Other   short-term borrowings**                                                                                                        |       1,748                                                  |       9,679 | 4.69% | 5.74% |          82 |         556 |         (474) |        (102) |     (372)  |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Total   Interest-bearing Liabilities**                                                                                                             |   626,421                                                                        |   590,365 | 3.65% | 3.12% |   22,858 |    18,396 |       4,462  |      3,148  |    1,314   |   |
| **Interest-free  Funds   Supporting**                                                                                                      |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  Earning   Assets**                                                                                                                     | 165,325                                                                                    | 161,706 |   |   |   |   |   |   |   |   |
| ** **                                                                                                                                           |                 |                 |            |            |               |                |                  |                 |                |   |
| **Total   Funds Supporting Earning Assets**                                                                                                          | $791,746                                                                                   | $752,071 | 2.89% | 2.45% | $22,858 | $ 18,396 | $    4,462  | $   3,148  | $ 1,314   |   |
| ** **                                                                                                                                           |                                                                                       |   |   |   |   |   |   |   |   |   |
| **Interest   Rate Spread**                                                                                                                           |                                                                                       |   | 3.20% | 3.50% |   |   |   |   |   |   |
| **Impact   of Noninterest-bearing Funds**                                                                                                            |                                                                                       |   |   |   |   |   |   |   |   |   |
| **  on   Net Yield on Earning Assets**                                                                                                     |                                                                                       |   |   .76% |   .68% |               |                |   |   |   |   |
| **Net   Yield on Earning Assets**                                                                                                                    |                                                                                       |   | 3.96% | 4.18% | $31,361 | $ 31,428 |   |   |   |   |
|                                                                                                                                                      |                                                                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1)  Includesnon-accruing loans which do not have a material effect on the Net Yield onEarning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate. 

11

----

**INVESTMENTSECURITIES**

The goal of the investment policy of  he Bank is to provide for management ofthe investment securities portfolio in a manner designed to maximize portfolioyield over the long term consistent with liquidity needs, pledgingrequirements, asset/liability strategies, and safety/soundnessconcerns.  Specific investment objectives include the desire to:provide adequate liquidity for loan demand, deposit fluctuations, and otherchanges in balance sheet mix; manage interest rate risk; maximize theinstitution's overall return; provide availability of collateral for pledging;and manage asset-quality diversification of the bank's assets. At December 31,2008 and 2007, investment securities represented 23.0% and 25.0% of totalassets, respectively.   Total loans increased moderately during 2008after a minimal increase in 2007.  Loan growth in 2008 wasattributable to an increase in loans secured by real estate and some growth inconsumer loans. At  December 31, 2008, 2007, and 2006, theLoans/Total Assets ratios were 68.4%, 66.3%, and 67.7%,respectively.  Investment securities have correspondingly risen andfallen as a percentage of total assets.

Investment securities with a par value of $174,673,000, $182,651,000, and$167,829,000 at December 31, 2008, 2007, 2006, respectively, were pledged tosecure public deposits and for other purposes as required by law.

The following summaries reflect the book value, unrealized gains and losses,approximate market value, weighted-average tax-equivalent yields, andmaturities on investment securities at December 31, 2008, 2007, 2006.

|                                                         | **                        December  31, 2008                        ** |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         | **(Dollars in Thousands)**                                                                                                                                                                                                                                                                                                  |
| ** **                                              | **Book**                                                                                                                                                                                                                                                                                                                    | **Unrealized Holding** | **Fair** | ** ** |
| ** **                                              | **Value**                                                                                                                                                                                                                                                                                                                   | **Gains** | **Losses** | **Value** | **Yield(1)** |
| **AVAILABLE  FOR SALE**                                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|  Government  Sponsored Enterprises                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|      Within  one year          | $    3,725                                                                                                                                                                                                                                                                                              | $      41 | $       - | $    3,766 | 4.56% |  |
|      One  to five years        | 151,174                                                                                                                                                                                                                                                                                                                     | 2,030 | - | 153,204 | 3.66% |  |
|      Six  to ten years         |     14,522                                                                                                                                                                                                                                                                                              |       583 |          - |     15,105 |     4.84% |  |
|                                                         |   169,421                                                                                                                                                                                                                                                                                                         |    2,654 |          - |   172,075 |     3.78% |  |
|   Mortgage  Backed Securities                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|      Six  to ten years         | 507                                                                                                                                                                                                                                                                                                                         | 18 | - | 525 | 4.91% |  |
|      Over  ten years           |       3,021                                                                                                                                                                                                                                                                                   |        63 |          - |       3,084 |     4.65% |  |
|                                                         |       3,528                                                                                                                                                                                                                                                                                   |        81 |          - |       3,609 |     4.66% |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     Within  one year                | 1,370                                                                                                                                                                                                                                                                                                                       | 15 | - | 1,385 | 7.11% |  |
|     One  to five years              | 4,243                                                                                                                                                                                                                                                                                                                       | 133 | - | 4,376 | 7.03% |  |
|     Six  to ten years               | 11,271                                                                                                                                                                                                                                                                                                                      | 16 | 362 | 10,925 | 5.57% |  |
|     Over  ten years                 |       1,115                                                                                                                                                                                                                                                                                   |           - |        39 |       1,076 |     5.91% |  |
|                                                         |     17,999                                                                                                                                                                                                                                                                                              |       164 |      401 |     17,762 |     6.05% |  |
|   Other  Investments                          |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     CRA  Qualified Investment Fund  | 721                                                                                                                                                                                                                                                                                                                         | - | - | 721 | -% |  |
|     Mastercard  International Stock |           11                                                                                                                                                                                                                                                              |           - |           - |            11 |          -% |  |
|                                                         |         732                                                                                                                                                                                                                                                                         |           - |           - |          732 |          -% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   Total  available for sale                   | $191,680                                                                                                                                                                                                                                                                                                                    | $ 2,899 | $    401 | $194,178 |    4.01% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
| **HELD  TO MATURITY**                                   |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     Within  one year                | $       795                                                                                                                                                                                                                                                                              | $        11 | $        - | $       806 | 6.71% |  |
|     One  to five years              | 1,481                                                                                                                                                                                                                                                                                                                       | 9 | 8 | 1,482 | 5.40% |  |
|     Six  to ten years               | 4,589                                                                                                                                                                                                                                                                                                                       | 12 | 70 | 4,531 | 5.51% |  |
|     Over  ten years                 |       2,893                                                                                                                                                                                                                                                                                   |           - |       142 |       2,751 |    5.75% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   Total  held to maturity                     | $    9,758                                                                                                                                                                                                                                                                                              | $      32 | $    220 | $    9,570 |   5.66% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|                                                         |                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |  |  |  |

(1) Tax equivalent adjustment on tax exempt obligations based on a 34% taxrate.

As of the year ended December 31, 2008, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity.

12

----

**INVESTMENT SECURITIES, continued**

|                                                         | **                       December  31, 2007                       ** |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         | **(Dollars in Thousands)**                                                                                                                                                                                                                                                                                      |
| ** **                                              | **Book**                                                                                                                                                                                                                                                                                                        | **Unrealized Holding** | **Fair** | ** ** |
| ** **                                              | **Value**                                                                                                                                                                                                                                                                                                       | **Gains** | **Losses** | **Value** | **Yield(1)** |
| **AVAILABLE  FOR SALE**                                 |                                                                                                                                                                                                                                                                                                            |   |   |   |   |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|  Government  Sponsored Enterprises                 |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|      Within  one year          | $  61,611                                                                                                                                                                                                                                                                                             | $        2 | $    236 | $  61,377 | 3.56% |  |
|      One  to five years        | 103,464                                                                                                                                                                                                                                                                                                         | 1,408 | 8 | 104,864 | 5.03% |  |
|      Six  to ten years         |     18,276                                                                                                                                                                                                                                                                                  |       407 |           - |     18,683 |     5.28% |  |
|                                                         |   183,351                                                                                                                                                                                                                                                                                             |    1,817 |      244 |   184,924 |     4.56% |  |
|   Mortgage  Backed Securities                 |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|      Six  to ten years         | 389                                                                                                                                                                                                                                                                                                             | 11 | - | 400 | 5.77% |  |
|      Over  ten years           |          846                                                                                                                                                                                                                                                       |           4 |        20 |          830 |     4.88% |  |
|                                                         |       1,235                                                                                                                                                                                                                                                                       |        15 |        20 |       1,230 |     5.16% |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|     Within  one year                | 209                                                                                                                                                                                                                                                                                                             | 3 | - | 212 | 7.08% |  |
|     One  to five years              | 6,244                                                                                                                                                                                                                                                                                                           | 166 | - | 6,410 | 6.98% |  |
|     Six  to ten years               | 1,916                                                                                                                                                                                                                                                                                                           | 16 | 6 | 1,926 | 5.56% |  |
|     Over  ten years                 |     10,758                                                                                                                                                                                                                                                                                  |         10 |        49 |     10,719 |     5.60% |  |
|                                                         |     19,127                                                                                                                                                                                                                                                                                  |       195 |        55 |     19,267 |     6.06% |  |
|   Other  Investments                          |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|     CRA  Qualified Investment Fund  | 701                                                                                                                                                                                                                                                                                                             | - | - | 701 | -% |  |
|     Mastercard  International Stock |           11                                                                                                                                                                                                                                                  |           - |           - |            11 |          -% |  |
|                                                         |         712                                                                                                                                                                                                                                                             |           - |           - |          712 |          -% |  |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|   Total  available for sale                   | $204,425                                                                                                                                                                                                                                                                                                        | $ 2,027 | $    319 | $206,133 |    4.71% |  |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
| **HELD  TO MATURITY**                                   |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|     Within  one year                | $       250                                                                                                                                                                                                                                                                  | $        - | $        - | $       250 | 7.56% |  |
|     One  to five years              | 1,438                                                                                                                                                                                                                                                                                                           | 32 | - | 1,470 | 6.94% |  |
|     Six  to ten years               | 3,764                                                                                                                                                                                                                                                                                                           | 20 | 5 | 3,779 | 5.52% |  |
|     Over  ten years                 |       2,259                                                                                                                                                                                                                                                                       |           - |        27 |       2,232 |    5.41% |  |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|   Total  held to maturity                     | $    7,711                                                                                                                                                                                                                                                                                  | $      52 | $      32 | $    7,731 |   5.82% |  |
|                                                         |                                                                                                                                                                                                                                                                                                            |   |   |   |   |  |
|                                                         |                                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |

(1) Tax equivalent adjustment on tax exempt obligations based on a 34% taxrate.

As of the year ended December 31, 2007, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity.

13

----

**INVESTMENT SECURITIES, continued **

|                                                         | **                        December  31, 2006                        ** |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         | **(Dollars in Thousands)**                                                                                                                                                                                                                                                                                                  |
| ** **                                              | **Book**                                                                                                                                                                                                                                                                                                                    | **Unrealized Holding** | **Fair** | ** ** |
| ** **                                              | **Value**                                                                                                                                                                                                                                                                                                                   | **Gains** | **Losses** | **Value** | **Yield(1)** |
| **AVAILABLE  FOR SALE**                                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|  Government  Sponsored Enterprises                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|      Within  one year          | $  68,676                                                                                                                                                                                                                                                                                                         | $        - | $   687 | $  67,989 | 3.29% |  |
|      One  to five years        | 86,891                                                                                                                                                                                                                                                                                                                      | 14 | 1,374 | 85,531 | 3.96% |  |
|      Six  to ten years         |       1,996                                                                                                                                                                                                                                                                                   |           - |           - |       1,996 |     5.29% |  |
|                                                         |   157,563                                                                                                                                                                                                                                                                                                         |        14 |   2,061 |   155,516 |     3.69% |  |
|   Mortgage  Backed Securities                 |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|      Six  to ten years         | 456                                                                                                                                                                                                                                                                                                                         | 12 | - | 468 | 5.87% |  |
|      Over  ten years           |          389                                                                                                                                                                                                                                                                   |           - |        27 |          362 |     3.63% |  |
|                                                         |          845                                                                                                                                                                                                                                                                   |        12 |        27 |          830 |     4.84% |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     Within  one year                | 4,531                                                                                                                                                                                                                                                                                                                       | 1 | 3 | 4,529 | 5.31% |  |
|     One  to five years              | 7,931                                                                                                                                                                                                                                                                                                                       | 173 | 1 | 8,103 | 6.97% |  |
|     Six  to ten years               | 1,511                                                                                                                                                                                                                                                                                                                       | 34 | - | 1,545 | 6.12% |  |
|     Over  ten years                 |       2,711                                                                                                                                                                                                                                                                                   |           - |          8 |       2,703 |     5.66% |  |
|                                                         |     16,684                                                                                                                                                                                                                                                                                              |       208 |        12 |     16,880 |     6.23% |  |
|   Other  Investments                          |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     CRA  Qualified Investment Fund  |          346                                                                                                                                                                                                                                                                   |           - |           - | 346 |         -% |  |
|     Mastercard  International Stock |           10                                                                                                                                                                                                                                                              |           - |           - |            10 |          -% |  |
|                                                         |         356                                                                                                                                                                                                                                                                         |           - |           - |          356 |          -% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   Total  available for sale                   | $175,448                                                                                                                                                                                                                                                                                                                    | $   234 | $2,100 | $173,582 |    3.93% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
| **HELD  TO MATURITY**                                   |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   State,  county and municipal                |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|     Within  one year                | $    1,345                                                                                                                                                                                                                                                                                              | $       7 | $        - | $    1,352 | 7.38% |  |
|     One  to five years              |       1,841                                                                                                                                                                                                                                                                                   | 37 |           - | 1,878 | 7.06% |  |
|     Over  ten years                 |       1,129                                                                                                                                                                                                                                                                                   |        21 |          - |       1,150 |    5.98% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|   Total  held to maturity                     | $    4,315                                                                                                                                                                                                                                                                                              | $      65 | $        - | $    4,380 |   6.88% |  |
|                                                         |                                                                                                                                                                                                                                                                                                                        |   |   |   |   |  |
|                                                    |                                                                                                                                                                                                                                                                                                                             |
|                                                         |                                                                                                                                                                                                                                                                                                                             |  |  |  |  |  |  |  |  |  |

(1)Tax equivalent adjustment on tax exempt obligations based on a 34% tax rate.

As of the year ended December 31, 2006, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity.

14

----

**LOAN PORTFOLIOLENDING ACTIVITIES**

The Company engages, through the Bank, in a full complement of lendingactivities, including commercial, consumer, installment and real estate loans.

**Real Estate Loans**

One of the primary components of the Bank's loan portfolio are loans secured byfirst or second mortgages on residential and commercial realestate.  These loans will generally consist of commercial real estateloans, construction and development loans and residential real estate loans(including home equity and second mortgage loans).  Interest ratesare generally fixed but adjustable rates are also utilized for some commercialpurpose loans.  The bank seeks to manage credit risk in thecommercial real estate portfolio by emphasizing loans on owner-occupied officeand retail buildings.   In addition, the Bank typically requirespersonal guarantees of the principal owners of the property.  TheBank may also facilitate mortgage loans funded and owned by investors in thesecondary market, earning a fee, but avoiding the interest rate risk of holdinglong-term, fixed-rate loans. The principal economic risk associated with allloans, including real estate loans, is the creditworthiness of the Bank'sborrowers.  The ability of a borrower to repay a real estate loan willdepend upon a number of economic factors, including employment levels andfluctuations in the value of real estate.  In the case of a realestate construction loan, there is generally no income from the underlyingproperty during the construction period, borrowings may exceed the currentvalue of the improvements to the property, and the developer's personalobligations under the loan may be limited.  Each of these factorsincreases the risk of nonpayment by the borrower.  In the case of areal estate purchase loan and other first mortgage real estate loans structuredwith a balloon payment, the borrower may be unable to repay the loan at the endof the loan term and may thus be forced to refinance the loan at a higherinterest rate, or, in certain cases, the borrower may default as a result of aninability to refinance the loan.  In either case, the risk ofnonpayment by the borrower is increased.  The Bank will also faceadditional credit risks to the extent that it engages in making adjustable ratemortgage loans ("ARMs").  In the case of an ARM, asinterest rates increase, the borrower's required payments increaseperiodically, thus increasing the potential for default (See "AdjustableRate Mortgage Loans" below). The marketability of all real estate loans,including ARMs, is also generally affected by the prevailing level of interestrates.  Bank management monitors loans with loan-to-value ratios inexcess of regulatory guidelines and secured by real estate in accordance withguidance as set forth by regulatory authorities.  Aggregate levels ofboth commercial and residential real estate loans with loan-to-value ratiosabove regulatory guidelines are reported to the Bank's Board of Directors on aquarterly basis in total dollars and as a percent of capital.  Additionally,loans in excess of $500,000 with a loan-to-value ratio exception aresimultaneously reported on an individual basis.  The total of loanswith loan-to-value ratio exceptions are maintained within regulatorylimitations.  The total amount of loans with loan-to-value ratios inexcess of regulatory guidelines totaled $50,289,000 and $40,862,000 or 8.4% and7.1% of total loans at fiscal year-ends December 31, 2008 and 2007,respectively.

**Commercial Loans**

The Bank makes loans for commercial purposes in various lines ofbusiness.  The commercial loans will include both secured andunsecured loans for working capital (including inventory and receivables),loans for business expansion (including acquisition of real estate andimprovements), and loans for purchases of equipment.  When taken,security usually consists of liens on inventories, receivables, equipment, andfurniture and fixtures.  Unsecured business loans are generallyshort-term with emphasis on repayment strengths and low debt-to-worth ratios.  Commerciallending involves significant risk because repayment usually depends on the cashflows generated by a borrower's business, and debt service capacity candeteriorate because of downturns in national and local economic conditions.  Managementgenerally controls risks by conducting more in-depth and ongoing financialanalysis of a borrower's cash flows and other financial information.

**Consumer Loans**

The Bank makes a variety of loans to individuals for personal and householdpurposes, including secured and unsecured installment and term loans, homeequity loans and lines of credit and unsecured revolving lines of credit suchas credit cards.  The secured installment and term loans to consumerswill generally consist of loans to purchase automobiles, boats, recreationalvehicles, mobile homes and household furnishings, with the collateral for eachloan being the purchased property.  The underwriting criteria forhome equity loans will generally be the same as applied by the Bank when makinga first mortgage loan, as described above, but more restrictive for home equitylines of credit. Consumer loans generally involve more credit risks than otherloans because of the type and nature of the underlying collateral or because ofthe absence of any collateral.  Consumer loan repayments aredependent on the borrower's continuing financial stability and are likely to beadversely affected by job loss, divorce and illness.  Furthermore,the application of various federal and state laws, including federal and statebankruptcy and insolvency laws, may limit the amount which can be recovered onsuch loans in the case of default.  In most cases, any repossessedcollateral will not provide an adequate source of repayment of the outstandingloan balance.  Although the underwriting process for consumer loansincludes a comparison of the value of the security, if any, to the proposedloan amount, the Bank cannot predict the extent to which the borrower's abilityto pay, and the value of the security, will be affected by prevailing economicand other conditions.

15

----

**LOANPORTFOLIOLENDING ACTIVITIES (Continued)**

**Adjustable Rate Mortgage Loans**

The Bank offers adjustable rate mortgages (ARMs)(as defined byregulatory authorities) for consumer purpose real estate loans only in the formof revolving equity lines of credit.  ARMs are typically offered asan alternative structuring only on commercial purpose real estate loans andother commercial purpose loans.  Variable rate loans, the majority ofwhich are real estate secured, totaled $121,396,000 and $149,865,000 or 20.3%and 26.1% of total loans at fiscal year-ends December 31, 2008 and 2007,respectively.  (The Bank does not offer any loan products whichprovide for planned graduated payments or loans which allow negativeamortization.)

**Loan Approval and Review**

The Bank's loan approval policies provide for various levels of officer lendingauthority. When the amount of aggregate loans to a single borrower exceeds anindividual officer's lending authority, the loan request will be considered andapproved by an officer with a higher lending limit or by the Credit Committeeas established by the Board of Directors. The Loan Committee of the Board ofDirectors recommends to the Board of Directors the lending limits for theBank's loan officers.  The Bank has an in-house lending limit to asingle borrower, group of borrowers, or related entities, of the lesser of$10,000,000 or 15% of capital.  An unsecured limit (aggregate) forthe Bank is set at 85% of total capital. 

**CLASSIFICATION OF LOANS**

The following is a summary of loans, in thousands of dollars, at December 31,2008, 2007, 2006, 2005, 2004 by major classification:

|                                                                                                                                                                                                                         | **  2008   **                          | **  2007   **          | **  2006   **                          | **  2005   **          | **  2004   **          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------|-------------------------------------------------|-----------------------------------------------------------------|-------------------------------------------------|-------------------------------------------------|
| **Real  Estate Loans - mortgage**                                                                                                                                                                                       | $366,948                                                   | $350,138                                   | $361,707                                                   | $324,475                                   | $262,543                                   |
| **                                - construction** | 92,010                                                     | 83,398                                     | 74,564                                                     | 50,210                                     | 39,525                                     |
| **Loans to  farmers**                                                                                                                                                                                                   | 3,119                                                      | 3,264                                      | 3,097                                                      | 1,912                                      | 1,582                                      |
| **Commercial  and industrial loans**                                                                                                                                                                                    | 89,348                                                     | 88,106                                     | 83,375                                                     | 84,474                                     | 66,184                                     |
| **Loans to  individuals for household    family and other consumer    expenditures**                                                                                                                | 46,278                                                     | 47,731                                     | 44,124                                                     | 41,400                                     | 35,583                                     |
| **All other  loans, including**                                                                                                                                                                                         |                                                            |                                            |                                                            |                                            |                                            |
| **  Overdrafts  and deferred loan costs**                                                                                                                                                                     |          578  |       1,114  |          458  |       1,455  |       1,566  |
| **  Gross  Loans**                                                                                                                                                                                            |   598,281                                        |   573,751                        |   567,325                                        |   503,926                        |   406,983                        |
| **   Less  allowance for loan losses**                                                                                                                                                                   |     (7,091)                                 |     (6,507)                 |     (6,476)                                 |     (5,918)                 |     (5,104)                 |
| **    Net  loans**                                                                                                                                                                                  | $591,190                                                   | $567,244                                   | $560,849                                                   | $498,008                                   | $401,879                                   |
| ** **                                                                                                                                                                                                              |                                                            |                                            |                                                            |                                            |                                            |

**MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES(Thousands of Dollars)**

The Company's loan portfolio contained approximately $473,895 and $423,025 intotal fixed rate loans and approximately $121,396 and $149,865 in variable rateloans as of December 31, 2008 and 2007, respectively.  At December31, 2008, and 2007, fixed rate loans with maturities in excess of one yearamounted to approximately $316,519 and $275,452, respectively, and variablerate loans with maturities in excess of one year amounted to approximately$34,128 and $36,835 for the same periods, respectively.  As ofDecember 31, 2008, fixed rate loans due after one year through five yearstotaled $246,381 and fixed rate loans due after five years totaled$70,138.  Also as of December 31, 2008, variable rate loans due afterone year through five years totaled approximately $34,128 and variable rateloans due after five years totaled $0.  Fixed rate loans are those onwhich the interest rate generally cannot be changed for the term of theloan.  Variable rate loans are those on which the interest rate canbe adjusted to changes in the Bank's prime rate.  

16

----

******NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS**

The following schedule summarizes the amount of nonaccrual, past due, andrestructured loans, in thousands of dollars, for the periods ended December2008, 2007, 2006, 2005, and 2004:

|                                                                                                                                                                  | **  2008**         | **  2007**              | **  2006**   | **  2005**   | **  2004**        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|-----------------------------------|------------------------|------------------------|-----------------------------|
|                                                                                                                                                                  | ** **                   | ** **                        | ** **             | ** **             | ** **                  |
| **  Nonaccrual  loans**                                                                                                                                | $ 2,990                 | $   861            | $   897 | $   405 | $   880      |
| **   Accruing loans which are contractually     past due 90 days or more as to principal     or interest payments** | $    608 | $   147            | $   232 | $   277 | $    93 |
| **   Restructured troubled debt**                                                                                                                 | -                            | $     25 | -                      | -                      | -                           |

Information relating to interest income on nonaccrual and renegotiated loansoutstanding, in thousands of dollars, for the years ended December 31, 2008,2007, 2006, 2005, and 2004 is as follows:

|                                                                                                                                                      | ** 2008**   | **2007**   | **2006**   | **2005**             | **2004**   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|------------|------------|----------------------|------------|
|                                                                                                                                                      | ** **       | ** ** | ** ** | ** **           | ** ** |
| **   Interest included in income during  the year**                                                                                   | $ 103  | $ 33  | $ 27  | $   8 | $ 28  |
| **   Interest which would have been included at the original     contract rates (includes amount included in income)** | $ 288  | $ 94  | $ 65  | $ 34            | $ 69  |

Accruing loans which are contractually past due 90 days or more are gradedsubstandard within the Bank's internal loan grading system and come underheightened scrutiny. Typically, a loan will not remain in the 90 days past duecategory, but will either show improvement or be moved to nonaccrualloans.  Loans are placed in a nonaccrual status when, in the opinionof management, the collection of additional interest is questionable.Thereafter no interest is taken into income unless received in cash or untilsuch time as the borrower demonstrates the ability to pay principal andinterest.

**POTENTIAL PROBLEM LOANS**

In addition to those loans disclosed under "Nonaccrual, Past Due, andRestructured Loans", there are certain loans in the portfolio which arenot yet 90 days past due but about which management has concerns regarding theability of the borrower to comply with present loan repaymentterms.  Such loans and non-accrual loans of $100,000 or more areclassified as impaired.  Problem loan identification includes areview of individual loans, the borrower's and guarantor's financial capacityand position, loss potential, and present economic conditions. A specificallocation is provided for impaired loans not yet to be placed in non-accrualstatus and not yet to be written down to fair value in management'sdetermination of the allowance for loan losses.

As of December 31, 2008, all loans which management had identified as impairedtotaled $4,158, including $1,075 of the $2,990 in non-accrual loans outlined inthe preceding schedule.

**FOREIGN OUTSTANDINGS**

As of the year ended December 31, 2008, the Company had no foreign loansoutstanding.

**LOAN CONCENTRATIONS**

As of the year ended December 31, 2008, the Company did not have anyconcentration of loans to multiple borrowers engaged in similar activities thatwould cause them to be similarly affected by economic or other conditionsexceeding 10% of total loans which are not otherwise disclosed as a category ofloans in the tables above.

****17

----

**SUMMARY OF LOAN LOSS EXPERIENCE**

**ALLOWANCE FOR LOAN LOSSES**

The following table summarizes loan balances as of the end of each periodindicated, averages for each period, changes in the allowance for loan lossesarising from charge-offs and recoveries by loan category, and additions to theallowance which have been charged to expense.

The allowance for loan losses is increased by the provision for loan losses,which is a direct charge to expense.  Losses on specific loans arecharged against the allowance in the period in which management determines thatsuch loans become uncollectible.  Recoveries of previouslycharged-off loans are credited to the allowance.

|                                                                   | **                             Years  Ended December  31,                        ** |
|-------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                   | **  2008  **                                                                                                                                                                                                                                                                                                                             | **  2007  ** | **  2006  ** | **  2005  ** | **  2004  ** |
|                                                                   | **(Thousands of Dollars)**                                                                                                                                                                                                                                                                                                                                   |
| **Loans:**                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
|   Average loans outstanding for the  period             | $587,931                                                                                                                                                                                                                                                                                                                                                     | $563,864 | $545,451 | $453,610 | $386,899 |
| **Allowance  for loan losses:**                                   |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| ** **                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **Balance  at the beginning of period**                           | $   6,507                                                                                                                                                                                                                                                                                                                                     | $   6,476 | $   5,918 | $   5,104 | $   4,524 |
| ** **                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **  Charge-offs:**                                      |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
|     Commercial,  financial, and agricultural  | $      896                                                                                                                                                                                                                                                                                                                     | $      732 | $      188 | $      324 | $      281 |
|     Real  Estate - construction and mortgage  | 750                                                                                                                                                                                                                                                                                                                                                          | 127 | 44 | 52 | 22 |
|     Loans  to individuals                     |         836                                                                                                                                                                                                                                                                                                          |         587 |         677 |         445 |         514 |
|                                                                   |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **      Total  charge-offs**        | $   2,482                                                                                                                                                                                                                                                                                                                                     | $   1,446 | $      909 | $      821 | $      817 |
| ** **                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
|   **Recoveries**:                                       |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
|    Commercial,  financial, and agricultural        | $      278                                                                                                                                                                                                                                                                                                                     | $        96 | $      201 | $        72 | $        45 |
|    Real  Estate - construction and mortgage        | 44                                                                                                                                                                                                                                                                                                                                                           | 25 | 154 | 85 | 1 |
|    Loans  to individuals                           |         211                                                                                                                                                                                                                                                                                                          |         211 |         304 |         203 |         196 |
|                                                                   |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **     Total  recoveries**               | $      533                                                                                                                                                                                                                                                                                                                     | $      332 | $      659 | $      360 | $      242 |
| ** **                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **Net  charge-offs**                                              | $   1,949                                                                                                                                                                                                                                                                                                                                     | $   1,114 | $      250 | $      461 | $      575 |
| **Additions  charged to operations**                              | $   2,533                                                                                                                                                                                                                                                                                                                                     | $   1,145 | $      808 | $   1,275 | $   1,155 |
| **Balance  at end of period**                                     | $   7,091                                                                                                                                                                                                                                                                                                                                     | $   6,507 | $   6,476 | $   5,918 | $   5,104 |
| ** **                                                        |                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |
| **Net  Charge-offs as a Percentage of Average Loans Outstanding** |     .33%                                                                                                                                                                                                                                                                                                                       |    .20%   |    .05%   |    .10%    |    .15%    |

Theallowance for loan losses is maintained at an amount based on considerations ofclassified and internally-identified problem loans, the current trend indelinquencies, the volume of past-due loans, historical loss experience,current economic conditions, over-margined real estate loans, if any, theeffects of changes in risk selection or underwriting practices, the experience,ability and depth of lending management and staff, industry conditions, theeffect of changes in concentrations of credit, and loan administrationrisks.  In addition, the Asset/Liability Management Committee and theCredit Committee review the adequacy of the allowance quarterly and makerecommendations regarding the appropriate degree of consideration to be giventhe various factors utilized in determining the allowance and to makerecommendations as to the appropriate amount of the allowance.

The Board of Directors maintains an independent Loan Review function which hasestablished controls and procedures to monitor loan portfolio risk on anon-going basis.  Credit reviews on all major relationships areconducted on a continuing basis as is the monitoring of past-due trends andclassified assets.  The function utilizes various methodologies inits assessment of the adequacy of the Allowance for LoanLosses.  Three primary measurements are reported to the Board ofDirectors on a quarterly basis, the Graded Loan Method based on a bank-widerisk grading model, the Migration Analysis Method which tracks risk patterns oncharged-off loans for the previous 10 years, and the Percentage of Net LoansMethod.  Additionally, the function annually reviews the economicassessment conducted by Loan Administration, addresses portfolio risk byindustry concentration, reviews loan policy changes and marketing strategiesfor any effect on portfolio risk, and conducts tests addressing portfolioperformance by type of portfolio, collateral type, and loan officerperformance.

Management utilizes the best information available to establish the allowancefor loan losses.  However, future adjustments to the allowance or tothe reserve adequacy methodology may be necessary if economic conditions differsubstantially, the required methodology is altered by regulatory authoritiesgoverning the Company or the Bank, or alternative accounting methodologies arepromulgated by the Public Company Accounting  Oversight Board.

18

----

The following table presents an estimated allocation of the allowance for loanlosses at December 31, 2008, 2007, 2006, 2005, and 2004. This table ispresented based on the regulatory reporting classifications of the loans.  Thisallocation of the allowance for loan and lease losses is calculated on anapproximate basis and is not necessarily indicative of future losses orallocations.  The entire amount of the allowance is available toabsorb losses occurring in any category of loans and leases.

 

| **ALLOCATION  OF ALLOWANCE FOR LOAN LOSSES**                                 |
|------------------------------------------------------------------------------|
| **(Dollars  in Thousands)**                                                  |
| ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                   | **2008** | **2007** | **2006** | **2005** | **2004** |
| ** **                                                                   | **Amount** | **%  Loans  in eachcategory** | **Amount** | **%  Loans  in eachcategory** | **Amount** | **%  Loans  in eachcategory** | **Amount** | **%  Loans  in eachcategory** | **Amount** | **%  Loans  in eachcategory** |
| **Balance  applicable to:**                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Commercial    Industrial,    Farm Loans**              | $1,608   | 15.5% | $1,527   | 17.3% | $1,265   | 16.0% | $1,217   | 16.7% | $   936   | 16.8% |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Real  Estate -     Construction and    Mortgage** | 1,388   | 76.7% | 584   | 74.0% | 507   | 75.5% | 367   | 73.1% | 320   | 72.9% |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Loans to     Individuals**                                       | 945   | 7.7% | 866   | 7.7% | 1,090   | 7.4% | 978   | 7.9% | 728   | 8.6% |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Other  Loans**                                                             | 30   |   .1% | 21   | 1.0% | 23   | 1.1% | 50   | 2.3% | 25   | 1.7% |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Environmental     Factors**                                 | 3,120   |   - | 3,469   |   - | 3,452   |   - | 3,155   |   - | 2,721   | - |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Unallocated**                                                              |         -   |      -   |        40   |      -   |     139   |      -   |      151   |      -   |      374   |   -   |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Total**                                                                    | $7,091   | 100% | $6,507   | 100% | $6,476   | 100% | $5,918   | 100% | $5,104   | 100% |

****19

----

**DEPOSITSAVERAGE DEPOSITS BY CLASSIFICATION**

The following table sets forth the classification of average deposits for theindicated period, in thousands of dollars:

|                                     | **                                                   Years  Ended December  31,              ** |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | **  **                                                                                                                                                                                                                                                                                                                                                                                                                     | **      2008     ** | **      2007   ** | **      2006    ** |
|                                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | ** ** | ** ** |
| **Noninterest  bearing demand deposits** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                           | $115,724 | $132,765   | $143,325   |
| **Interest  bearing demand deposits**    |                                                                                                                                                                                                                                                                                                                                                                                                                                 | 87,711 | 91,948   | 100,392   |
| **Money  Market Deposits**               |                                                                                                                                                                                                                                                                                                                                                                                                                                 | 81,783 | 80,343   |  83,436   |
| **Savings  deposits**                    |                                                                                                                                                                                                                                                                                                                                                                                                                            | 47,596 | 48,502   | 53,809   |
| **Health  savings deposits**             |                                                                                                                                                                                                                                                                                                                                                                                                                                 | 818 | 586   | 338   |
| **Time  deposits**                       |                                                                                                                                                                                                                                                                                                                                                                                                                                 | 328,629 |   301,129   |   265,245   |
| **Individual  retirement accounts**      |                                                                                                                                                                                                                                                                                                                                                                                                                                 |     40,032 |      33,889   |      30,221   |
| **  Total deposits**           |                                                                                                                                                                                                                                                                                                                                                                                                                            | $702,293 | $689,162 | $676,766 |

**AVERAGE RATES PAID ON DEPOSITS**

The following table sets forth average rates paid on categories ofinterest-bearing deposits for the periods indicated:

|                                            | **             Years  Ended December  31,        ** |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            | **   2008   **                                                                                                                 | **   2007   ** | **   2006   ** |
|                                            | ** **                                                                                                                                                   | ** ** | ** ** |
| **Interest  bearing demand deposits**      | .34%                                                                                                                                                         | .38%   | .38%   |
| **Money  Market Deposits**                 | 1.53%                                                                                                                                                        | 2.99%   | 2.79%   |
| **Savings  deposits**                      | 1.29%                                                                                                                                                        | 1.69%   | 1.63%   |
| **Health savings deposits**                | 3.06%                                                                                                                                                        | 3.75% | 3.85% |
| **Time deposits**                          | 3.85%                                                                                                                                                        | 4.91% | 4.31% |
| **Individual retirement account deposits** | 4.20%                                                                                                                                                        | 4.70% | 3.96% |

**MATURITIES OF TIME DEPOSITS**

The following table sets forth the maturity of time deposits in thousands ofdollars, at December 31, 2008:

| ** **                           | **Time   Deposits of  $100,000 ormore**          | **Time Deposits  of Less Than$100,000**                      | **Total  Time    Deposits**                  |
|--------------------------------------|--------------------------------------------------|--------------------------------------------------------------|--------------------------------------------------------|
| **Maturity within 3 months or less** | $  89,105               | $  42,112                 | $ 131,217                     |
| **Over 3 through 6 months**          | 36,310                            | 37,620                              | 73,930                             |
| **Over 6 through 12 months**         | 51,493                            | 46,775                              | 98,268                             |
| **Over 12 months**                   |     33,761    |     30,367      |     64,128     |
| **    Total**    | $210,669                          | $156,874                            | $367,543                           |

**RETURN ON EQUITY AND ASSETS**

The following table presents certain ratios relating to the Company's equityand assets:

|                                                                                | **   Years  Ended December  31,   ** |
|--------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                | **   2008  **                             | **    2007   ** | **    2006  ** |
|                                                                                |                                                                    |  |  |
| **   Return  on average total assets(1)**                       | 1.04%                                                              | 1.15%   | 1.24%   |
| **   Return  on average stockholders' equity(2)**               | 10.65%                                                             | 11.93%   | 13.36%   |
| **   Cash  dividend payout ratio(3)**                           | 49.02%                                                             | 46.50%   | 45.26%   |
| **   Average equity to average assets  ratio (4)**              | 9.78%                                                              | 9.61% | 9.25% |
| ** **                                                                     |                                                               |   |   |
| **   (1) Net income divided by average  total assets.**         |                                                               |   |   |
| **   (2) Net income divided by average  equity.**               |                                                               |   |   |
| **   (3) Dividends per share divided by  net income per share** |                                                               |   |   |
| **   (4) Average equity divided by average  total assets.**     |                                                               |   |   |

20

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**SHORT-TERM BORROWINGS**

Federal funds purchased and securities sold under repurchase agreements areshort-term borrowings which generally mature within 180 days from the dates ofissuance.  No other category of short-term borrowings had an averagebalance outstanding during the reported period which represented 30 percent ormore of stockholders' equity at the end of the period.

The following is a summary of federal funds purchased and securities sold underrepurchase agreements outstanding at December 31 of each reported period, inthousands of dollars:

|                                                                                            | **                   December  31,            ** |
|--------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                            | **  2008  **                                                                                                                                                                            | **  2007  ** | **  2006  ** |
| **Federal funds purchased and securities sold under    agreement to repurchase** | $67,415                                                                                                                                                                                                     | $60,936 | $72,330 |

The following information relates to outstanding federal funds purchased andsecurities sold under repurchase agreements during 2008, 2007, and 2006, inthousands of dollars:

|                                                                                                                                              | **Maximum  Amount               Outstanding at  Any                                 Month  End                    ** | **Weighted  Average               Interest  Rate                            at  December  31,             ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                   | **2008**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **2007**                                                                                                                                                                                                                                                                                                                                                                                   | **2006** | **2008** | **2007** | **2006** |
|                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |  |
| **  Federal funds  purchased      and securities sold under      agreement to repurchase** | $67,415                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $72,927                                                                                                                                                                                                                                                                                                                                                                                    | $72,330 | 1.86% | 4.20% | 4.39% |

 

|                                                                                                                                                                 | **          Years  ended December  31,     ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                 | **2008   **                                                                                               | **2007       ** | **2006       ** |
| **Federal funds purchased and securities sold under    agreement to repurchase - average daily    amount outstanding during the year** | $58,843                                                                                                             | $68,276  | $47,245  |
|                                                                                                                                                                 |                                                                                                                     |   |   |
| **  Weighted average interest rate paid**                                                                                                             | 2.41%                                                                                                                    | 4.10% | 3.41% |

21

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**ITEM 1A.   RISK FACTORS**

An investment in our common stock involves a significant degree ofrisk.  Any of the following risks could adversely affect ourbusiness, our results of operations and our financial condition, as well as theprice of our common stock.  The risks discussed below also includeforward-looking statements, and our actual results may differ substantiallyfrom those discussed in these forward-looking statements.

##### **Risks Related to Our Business**

**Our growth strategy may not be successful.**

We have plans to maintain our recent asset and deposit growth through the openingof additional branch locations and the hiring of additional bankers. We may notbe successful in identifying or obtaining suitable new branch locations orreceiving regulatory approval for them, or employing and retaining suitablebankers, on terms that we can afford and that are attractive to us. Even if wesuccessfully open additional branch locations and hire additional bankers, wemay not achieve the asset and deposit growth that we seek because ofcompetition or poor economic conditions, or for other reasons.

**Our growth strategy may reduce our earnings in the near term.**

We expect eachnew office we open to take several years to become profitable and we cannotguarantee that any new office will ever become profitable.  We expectthat by having a number of new offices at any given time, our ability tooperate at higher levels of profitability will be reduced until our new officescan operate at levels of profitability that equal or exceed our older offices.

**Our growth strategy may require future increases in capital that we may not beable to accomplish.**

We are requiredby banking regulators to maintain various ratios of capital to assets. As ourassets continue to grow we expect our capital ratios to decline unless we canalso continue to increase our earnings or raise sufficient new capital to keeppace with asset growth.  Our ability to raise additional capital, ifneeded, will depend, among other things, on conditions in the capital marketsat that time, which are outside our control, and on our financial condition andperformance.  If we are unable to limit a capital ratio decline byincreasing our capital, we will have to restrict our asset growth to the amountour earnings will support. 

**We may be unable to manage our sustained growth successfully.**

We have grown substantially in the last several years.  Although wemay not continue to grow as fast as we have in the past, we intend to expandour asset base.  Our future profitability will depend in part on ourability to manage growth successfully.  Our ability to manage growthsuccessfully will depend on our ability to maintain cost controls and assetquality while attracting additional loans and deposits, as well as on factorsbeyond our control, such as economic conditions and interest ratetrends.  If we grow quickly and are not able to control costs andmaintain asset quality, growth could materially adversely affect our financialperformance.

**We depend on the services of a number of key personnel, and a loss of any ofthose personnel could disrupt our operations and result in reduced revenues.**

We are a relationship-driven organization.  Our growth anddevelopment in recent years have depended in large part on the efforts ofseveral members of our senior management team.  These senior officershave primary contact with our customers and are extremely important inmaintaining personalized relationships with our customer base, which are keyaspects of our business strategy, and in increasing our marketpresence.  The unexpected loss of services of one or more of thesekey employees could have a material adverse effect on our operations andpossibly result in reduced revenues if we were unable to find suitablereplacements promptly.

**If our loan customers do not pay us as they have contracted to, we mayexperience losses.**

Our principalrevenue producing business is making loans.  If our customers do notrepay the loans, we will suffer losses. Even though we maintain an allowancefor loan losses, the amount of the allowance may not be adequate to cover thelosses we experience.  We attempt to mitigate this risk by a thoroughreview of the creditworthiness of loan customers. Nevertheless, there is riskthat our credit evaluations will prove to be inaccurate due to changedcircumstances or otherwise.

22

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**ITEM 1A.   RISK FACTORS -Continued**

**Risks Related to Our Business - Continued**

**Our business is concentrated in Horry County and the "Waccamaw Neck"region of Georgetown County, and a downturn in the economy of the Horry County andthe Waccamaw Neck area, a decline in real estate values in the Horry County andthe Waccamaw Neck areas or other events in our market area may adversely affectour business.**

Substantially all of our business is located in the Horry County and the"Waccamaw Neck" region of Georgetown County areas in coastal SouthCarolina.  As a result, our financial condition and results ofoperations may be affected by changes in the Horry County and the Waccamaw Neckeconomies.  A prolonged period of economic recession, a generaldecline in Horry County and the Waccamaw Neck area real estate values or otheradverse economic conditions in Horry County and the Waccamaw Neck and SouthCarolina may result in decreases in demand for our services, increases innonpayment of loans and decreases in the value of collateral securing loans,which could have a material adverse effect on our business, future prospects,financial condition or results of operations.

**We operate in an area susceptible to hurricane and other weather related damagewhich could disrupt our business and reduce our profitability.**

Nearly all of our business and our customers are located in coastal SouthCarolina, an area that often experiences damage from hurricanes and otherweather phenomena.  We attempt to mitigate such risk with insuranceand by requiring insurance on property taken as collateral.  However,catastrophic weather damage to a large portion of our market area could causesubstantial disruptions to our business and our customers' businesses whichwould reduce our profitability for some period.

**We face strong competition from larger, more established competitors which mayadversely affect our ability to operate profitably.**

We encounter strong competition from financial institutions operating in thegreater Horry/Georgetown County and Grand Strand areas of SouthCarolina.  In the conduct of our business, we also compete withcredit unions, insurance companies, money market mutual funds and otherfinancial institutions, some of which are not subject to the same degree ofregulation as we are.  Many of these competitors have substantiallygreater resources and lending abilities than we have and offer services, suchas investment banking, insurance, trust and international banking services thatwe do not provide.  We believe that we have been able to, and willcontinue to be able to, compete effectively with these institutions because ofour experienced bankers and personalized service, as well as through loanparticipations and other strategies and techniques.  However, wecannot promise that we are correct in our belief.  If we are wrong,our ability to operate profitably may be negatively affected.

**Technologicalchanges affect our business, and we may have fewer resources than many of ourcompetitors to invest in technological improvements.**

The financial services industry continues to undergo rapid technologicalchanges with frequent introductions of new technology-driven products andservices.  In addition to enabling financial institutions to serveclients better, the effective use of technology may increase efficiency and mayenable financial institutions to reduce costs.  Our future successmay depend, in part, upon our ability to use technology to provide products andservices that provide convenience to customers and to create additionalefficiencies in our operations.  We may need to make significantadditional capital investments in technology in the future, and we may not beable to effectively implement new technology-driven products and services.  Manyof our competitors have substantially greater resources to invest intechnological improvements.

**Our profitability and liquidity may be affected by changes in interest ratesand economic conditions.**

Our profitability depends upon our net interest income, which is the differencebetween interest earned on our interest earning assets, such as loans andinvestment securities, and interest expense on interest bearing liabilities,such as deposits and borrowings.  Our net interest income will beadversely affected if market interest rates change such that the interest wepay on deposits and borrowings increases faster than the interest earned onloans and investments, or, conversely, if the interest earned on loans andinvestments decreases faster than the interest we pay on deposits andborrowings.  Interest rates, and consequently our results ofoperations, are affected by general economic conditions (domestic and foreign)and fiscal and monetary policies.  Monetary and fiscal policies maymaterially affect the level and direction of interestrates.  Beginning in June 2004 through June 2006, the Federal Reserveraised rates 17 times for a total increase of 4.25%.  Increases ininterest rates generally decrease the market values of interest earninginvestments and loans held and therefore may adversely affect our liquidity andearnings.  Increased interest rates also generally affect the volumeof mortgage loan originations, and the ability of borrowers to perform underexisting loans of all types.  Since September 18, 2007, the FederalReserve has decreased interest rates significantly.  Decreases ininterest rates generally have the opposite affect on market values ofinterest-bearing assets, the volume of mortgage loan originations, and the abilityof borrowers to perform under existing loans of all types.

23

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**ITEM1A.   RISK FACTORS - Continued**

**Risks Related to Our Common Stock**

**Our common stock has a limited trading market, which may make the promptexecution of sale transactions difficult.**

Although our commonstock may be traded from time to time on an individual basis, no active tradingmarket has developed and none is expected to develop in the foreseeablefuture.  Our common stock is not traded on any exchange.  Accordingly, shareholders who wish to sell sharesmay experience a delay or have to sell them at lower prices than they seek inorder to sell them promptly, if at all.

**There is no guarantee we will continue to pay cash dividends in the future atthe same or any level.**

Declaration and payment of dividends are within the discretion of our board ofdirectors.  Our bank is currently our only source of funds with whichto pay cash dividends.  Our bank's declaration and payment of futuredividends to us are within the discretion of the bank's board of directors, andare dependent upon its earnings, financial condition, its need to retainearnings for use in the business and any other pertinentfactors.  The bank's payment of dividends is also subject to variousregulatory requirements and the ability of the bank's regulators to forbid orlimit its payment of dividends.

**Provisions in our articles of incorporation and South Carolina law maydiscourage or prevent takeover attempts, and these provisions may have theeffect of reducing the market price for our stock.**

Our articles of incorporation include several provisions that may have theeffect of discouraging or preventing hostile takeover attempts. The provisionsinclude staggered terms for our board of directors and requirements of supermajorityvotes to approve certain business transactions.  In addition, South Carolina lawcontains several provisions that may make it more difficult for a third partyto acquire control of us without the approval of our board of directors, andmay make it more difficult or expensive for a third party to acquire a majorityof our outstanding common stock.  Tothe extent that these provisions are effective in discouraging or preventingtakeover attempts, they may tend to reduce the market price for our stock.

**Our common stock is not insured, so shareholders could lose their totalinvestments.**

Our common stock is not a deposit or savings account, and is not insuredby the Federal Deposit Insurance Corporation or any other governmentagency.  Should our business fail, shareholders could lose theirtotal investments.

##### **Risks Related to Our Industry**

**We are subject to governmental regulation which could change and increase ourcost of doing business or have an adverse affect on our business.**

We operate in a highly regulated industry and are subject toexamination, supervision and comprehensive regulation by various federal andstate agencies.  Our compliance with the requirements of theseagencies is costly and may limit our growth and restrict certain of ouractivities, including, payment of dividends, mergers and acquisitions,investments, loans and interest rates charged, and locations ofoffices.  We are also subject to capitalization guidelinesestablished by federal authorities and our failure to meet those guidelinescould result, in an extreme case, in our bank's being placed inreceivership.  We are also subject to the extensive and expensiverequirements imposed on public companies by the Sarbanes-Oxley Act of 2002 andrelated regulations.

The laws and regulations applicable to the banking industry could change at anytime, and we cannot predict the impact of these changes on our business orprofitability.  Because government regulation greatly affects thebusiness and financial results of all commercial banks and bank holdingcompanies, our cost of compliance could adversely affect our ability to operateprofitably.

**We are susceptible to changes in monetary policy and other economic factorswhich may adversely affect our ability to operate profitably.**Changes in governmental, economic and monetary policies may affect theability of our bank to attract deposits and make loans.  The rates ofinterest payable on deposits and chargeable on loans are affected bygovernmental regulation and fiscal policy as well as by national, state andlocal economic conditions.  All of these matters are outside of ourcontrol and affect our ability to operate profitably.

** **

****24

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**ITEM 1A.   RISK FACTORS -Continued**

**There can be no assurance that recent government actions will help stabilizethe U.S. financial system.**

Inresponse to the financial crises affecting the banking system and financialmarkets and going concern threats to investment banks and other financialinstitutions, various branches and agencies of the U.S. government have put inplace laws, regulations, and programs to address capital and liquidity issuesin the banking system. There can be no assurance, however, as to the actualimpact that such laws, regulations, and programs will have on the financialmarkets, including the extreme levels of volatility, liquidity and confidenceissues, and limited credit availability currently being experienced. Thefailure of such laws, regulations, and programs to help stabilize the financialmarkets and a continuation or worsening of current financial market conditionscould materially and adversely affect our business, financial condition,results of operations, access to credit or the trading price of our commonstock.

**Current levels of market volatility are unprecedented.**

Inthe past year, the volatility and disruption of financial and credit marketshas reached unprecedented levels for recent times. In some cases, the marketshave produced downward pressure on stock prices and credit availability forcertain issuers without regard to those issuers' underlying financial strength.If current levels of market disruption and volatility continue or worsen, therecan be no assurance that we will not experience an adverse effect, which may bematerial, on our ability to access capital and on our business, financialcondition, and results of operations.

**Thesoundness of other financial institutions could adversely affect us.**

Financialservices institutions are interrelated as a result of trading, clearing,counterparty, or other relationships. We have exposure to many differentindustries and counterparties, and we routinely execute transactions withcounterparties in the financial services industry, including brokers, dealers,commercial banks, investment banks, and government sponsored enterprises. Manyof these transactions expose us to credit risk in the event of default of ourcounterparty. In addition, our credit risk may be exacerbated when thecollateral held by us cannot be realized or is liquidated at prices notsufficient to recover the full amount of the loan or other obligation due us.There is no assurance that any such losses would not materially and adverselyaffect our results of operations or earnings. 

**Current marketdevelopments may adversely affect our industry, business, and results ofoperations.**

Dramatic declines in the housing market during the prior year, with fallinghome prices and increasing foreclosures and unemployment, have resulted insignificant write-downs of asset values by financial institutions, includinggovernment-sponsored entities and major commercial and investment banks. Thesewrite-downs, initially of mortgage-backed securities but spreading to creditdefault swaps and other derivative securities, have caused many financialinstitutions to seek additional capital, to merge with larger and strongerinstitutions and, in some cases, to fail. Reflecting concern about thestability of the financial markets generally and the strength ofcounterparties, many lenders and institutional investors have reduced, and insome cases, ceased to provide funding to borrowers, including other financialinstitutions. The resulting lack of available credit, lack of confidence in thefinancial sector, increased volatility in the financial markets, and reducedbusiness activity could materially and adversely, directly or indirectly,affect our business, financial condition and results of operations.

**ITEM 1B.   UNRESOLVED STAFF COMMENTS**

The Company has no unresolved comments from the SEC staff regarding its1934 Act filings in the 180 days prior to fiscal year-end December 31, 2008.

25 

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**ITEM2.   PROPERTIES**

The Company's subsidiary, The Conway National Bank, has twelve permanentbanking offices in Horry County and two permanent banking offices in GeorgetownCounty, for a total of fourteen banking offices.  In addition, theBank has an Operations and Administration Building, located at 1400 ThirdAvenue in Conway, which houses the Bank's administrative offices and dataprocessing facilities.  This three-story structure containsapproximately 33,616 square feet.  Adjacent to the Operations andAdministration Building is a 24,000 square foot branch banking office, known asthe Conway Banking Office, which provides retail banking functions at theBank's principal site.  In addition, the Bank has a 1,450 square footbuilding for express banking services adjacent to the Conway BankingOffice.  The Bank has a two-story office on Main Street in Conwaycontaining 8,424 square feet, banking offices located at Red Hill in Conway(3,760 square feet), West Conway in Conway (3,286 square feet), North Conway inConway (3,600 square feet), Surfside in Surfside Beach (6,339 square feet),Northside, north of Myrtle Beach (2,432 square feet), Socastee in the southernportion of Myrtle Beach (3,498 square feet), Aynor in the Town of Aynor (2,809square feet), Myrtle Beach in the City of Myrtle Beach (12,000 square feet),Murrells Inlet in Murrells Inlet, Georgetown County (3,600 square feet), NorthMyrtle Beach in the City of North Myrtle Beach (3,600 square feet), PawleysIsland (3,900 square feet) in Pawleys Island, Georgetown County, and LittleRiver northwest of North Myrtle Beach (3,900 square feet). Of the fourteenbanking offices and the Operations and Administration Building, the bank ownsthe Operations and Administration Building, the Conway Banking Office andExpress, the banking offices at Red Hill, West Conway, Surfside Beach,Northside, Main Street, Socastee, Aynor, Myrtle Beach, Murrells Inlet, NorthMyrtle Beach, and Pawleys Island.  In addition to the existingfacilities, the Company has purchased one future office site.  Thesite consists of 1.63 acres at Loop Road and River Oaks Drive, Carolina Forest,Myrtle Beach.  The Company anticipates building a banking office onthe site within the next two to six years, depending on market conditions. Thephysical addresses of each location are as follows:  The Operationsand Administration Building at 1400 Third Avenue, Conway; Conway Banking Officeat 1411 Fourth Avenue, Conway; Coastal Centre Express at 16th Ave.,Conway; Main Street at 309 Main Street, Conway; West Conway at Highway 501& Cultra Road, Conway; North Conway at 2601 Main Street, Conway; Surfsideat Highway 17 & 5th Avenue North, Surfside Beach; Northside at9726 Highway 17 North, Myrtle Beach; Red Hill at Highways 544 & 501,Conway; Socastee at 3591 North Gate Road, Myrtle Beach; Aynor at 2605 Highway501, Aynor; Myrtle Beach at 1353 21st Avenue North, Myrtle Beach;Murrells Inlet at 4345 Highway 17 Bypass, Murrells Inlet;  NorthMyrtle Beach at 110 Highway 17 North, North Myrtle Beach; Pawleys Island at10608 Ocean Highway, Pawleys Island; and Little River at 2380 Highway 9 East,Longs, S.C. The Bank owns all of its offices.

**ITEM 3.   LEGAL PROCEEDINGS**

There were no material legal proceedings against the Company or its subsidiary,The Conway National Bank, as of December 31, 2008.

**ITEM 4.   SUBMISSION OFMATTERS TO VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of security holders in the fourth quarterof 2008.

26

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**PARTII**

**ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITYRELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

As of March 1, 2009, there were approximately 853 holders of record of Companycommon stock. There is no established market for shares of Company common stockand only limited trading in such shares has occurred since the formation of theCompany on June 10, 1985.  During 2007 and 2008, management was awareof a few transactions, including some transactions in which the Company was thepurchaser and one transaction in which the Company was the seller, in which theCompany's common stock traded in the ranges set forth below. However,management has not ascertained that these transactions resulted from arm'slength transactions between the parties involved, and because of the limitednumber of shares involved, these prices may not be indicative of the value ofthe common stock.

|                                                                                    | **2008**                                     | **2007(1)**                                 |
|------------------------------------------------------------------------------------|----------------------------------------------|---------------------------------------------|
| First  Quarter  Second Quarter  Third  Quarter  Fourth Quarter | **High**  $225.00  $192.00  $190.00  $185.00 | **Low**  $162.50  $162.50  $159.50  $152.00 | **High**  $181.82  $181.82  $204.55  $190.00 | **Low**  $147.27  $147.27  $167.27  $162.50 |
|                                                                                    |                                              |                                             |  |  |

             (1)  Marketprices have been adjusted to give retroactive effect to stock dividend declaredSeptember 11, 2007 and distributed                    September 28, 2007.

Holders of shares of Company stock are entitled to such dividends as may bedeclared from time to time by the Board of Directors of the Company. TheCompany paid an annual cash dividend of $5.25 per share in each of 2008 and$5.25 per share in 2007. In addition, the Company distributed a 10% stockdividend on September 28, 2007.  There can be no assurance, however,as to the payment of dividends by the Company in the future.  Paymentof dividends is within the discretion of the Board of Directors, and isdependent upon the earnings and financial condition of the Company and theBank, and other related factors.  The Company's primary source offunds with which to pay dividends are dividends paid to the Company by theBank.  There are legal restrictions on the Bank's ability to paydividends.  See "Supervision and Regulation-Payment ofDividends" under Item 1, Part I of this Form 10-K for a description ofthese legal restrictions.

The Company does not have any equity compensation plans.  Accordingly,no information is required to be disclosed pursuant to Item 201(d) ofRegulation S-K. 

The Company made only one sale of securities during 2008.  OnSeptember 30, 2008 the Company sold 318 shares of common stock to The ConwayNational Bank Profit Sharing and Savings and Profit Sharing Plan for a price of$50,721, or $159.50 per share.  This sale was exempt fromregistration pursuant to Section 4(2) of the Securities Act of 1933 because nopublic offering was involved.

Purchases of stock during the fourth quarter of 2008 are outlined in the belowtable.  Information about all other purchases during 2008 have beenpreviously reported on Forms 10-Q, filed May 9, 2008, August 11, 2008, andNovember 7, 2008, and is incorporated herein by reference.

| **Period**                     | **(a) Total Number  of Shares  Purchased**                        | **(b) Average Price  Paid per Share**             | **(c) Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | **(d) Maximum  Number (or  approximate  dollar amount) of  Shares that May  Yet Be Purchased  Under the Plans  or Programs** |
|--------------------------------|-------------------------------------------------------------------|---------------------------------------------------|-----------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
| October 1 - October 31, 2008   | 2,131           | $159.50        | -                                                                                             | -                                                                                                                            |
| November 1 - November 30, 2008 | 341             | $159.50        | -                                                                                             | -                                                                                                                            |
| December 1 - December 31, 2008 | 380             | $159.50        | -                                                                                             | -                                                                                                                            |
| Total                          | 2,852           | $159.50        | -                                                                                             | -                                                                                                                            |

27

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**ITEM 6. SELECTED FINANCIAL DATACNB CorporationFINANCIAL SUMMARY(All Dollar Amounts, Except Per Share Data, in Thousands)**

The following table sets forth certain selected financial data relating to theCompany and subsidiary and is qualified in its entirety by reference to themore detailed financial statements of the Company and subsidiary and notesthereto included elsewhere in this report.

|                                                  | **                                Years  Ended December 31,                                 ** |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  | **    2008  **                                                                                                                                                                                                                                                                                                                                                                                        | **    2007  ** | **    2006   ** | **     2005     ** | **    2004    ** |
| **Selected Income Statement Data:**              |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| **Total Interest Income**                        | $ 50,119                                                                                                                                                                                                                                                                                                                                                                                                                       | $  53,755 | $  49,411 | $  39,079   | $  32,291 |
| **Total Interest Expense**                       |    18,221                                                                                                                                                                                                                                                                                                                                                                                                            |     22,858 |     18,396 |     10,459   |       6,938 |
| **Net Interest Income**                          |    31,898                                                                                                                                                                                                                                                                                                                                                                                                            |     30,897 |     31,015 |     28,620   |     25,353 |
| **Provision for Loan Losses**                    |      2,533                                                                                                                                                                                                                                                                                                                                                                                                 |       1,145 |          808 |       1,275   |       1,155 |
| **Net  Interest Income**                         |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| **  after  Provision for Loan Losses** |    29,365                                                                                                                                                                                                                                                                                                                                                                                                            |     29,752 |     30,207 |     27,345   |      24,198 |
| **Total  Noninterest Income**                    |    7,188                                                                                                                                                                                                                                                                                                                                                                                                             |    7,002 |    6,958 |    6,411   |    6,257 |
| **Total  Noninterest Expenses**                  |    23,108                                                                                                                                                                                                                                                                                                                                                                                                            |     22,019 |     22,339 |     19,530   |      18,246 |
| **Income Before  Income Taxes**                  |    13,445                                                                                                                                                                                                                                                                                                                                                                                                            |     14,735 |     14,826 |     14,226   |      12,209 |
| **Income  Taxes**                                |      4,488                                                                                                                                                                                                                                                                                                                                                                                                 |       5,015 |       4,780 |       4,748   |        3,927 |
| **Net Income**                                   | $   8,957                                                                                                                                                                                                                                                                                                                                                                                                            | $    9,720 | $  10,046 | $    9,478   | $     8,282 |
| ** **                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| ***Per  Share:**                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| **Net Income  Per Weighted Average**             |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |
| **  Shares  Outstanding**              | $   10.71                                                                                                                                                                                                                                                                                                                                                                                                            | $    11.29 | $    11.60 | $    10.93   | $      9.54 |
| **Cash  Dividend Paid Per Share**                | $     5.25                                                                                                                                                                                                                                                                                                                                                                                                 | $      5.25 | $      5.25 | $      5.00   | $      4.25 |
| **Weighted  Average Shares Outstanding**         | 836,283                                                                                                                                                                                                                                                                                                                                                                                                                             | 861,065 | 865,589 | 867,346   | 867,907 |
| ** **                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |

**              *Adjusted for a 10% stock dividend issued during 2007.**

| **Selected Balance Sheet Data:**     |                |                |                |                |                |
|--------------------------------------|---------------------|---------------------|---------------------|---------------------|---------------------|
| **Assets**                           | $874,625            | $865,638            | $837,622            | $792,720            | $671,569            |
| **Net Loans**                        | 591,190             | 567,244             | 560,849             | 498,008             | 401,879             |
| **Investment Securities**            | 206,960             | 216,141             | 179,598             | 181,942             | 215,827             |
| **Federal Funds Sold**               | 21,000              | 26,000              | 26,000              | 46,000              | -                   |
| **Deposits:**                        |                |                |                |                |                |
| **  Noninterest-Bearing**  | $100,560            | $112,450            | $129,763            | $134,475            | $118,580            |
| **  Interest-Bearing**     |   578,659 |   579,839 |   545,289 |   532,001 |   441,784 |
| **   Total Deposits** | $679,219            | $692,289            | $675,052            | $666,476            | $560,364            |
| **Stockholders' Equity**             | $  83,526 | $  82,112 | $  76,663 | $  70,559 | $  67,585 |

**ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

"Management's Discussion and Analysis" isprovided to afford a clearer understanding of the major elements of theCompany's financial condition, results of operations, liquidity, and capitalresources. The following discussion should be read in conjunction with theCompany's financial statements and notes thereto and other detailed informationappearing elsewhere in this report.  References to dollar amounts inthis section are in thousands, except per share data.

****28

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**CRITICAL ACCOUNTING POLICIES**

The Company hasadopted various accounting policies which govern the application of accountingprinciples generally accepted in the United States in the preparation of theCompany's financial statements. The significant accounting policies of theCompany are described in the footnotes to the consolidated financialstatements.

Certain accounting policies involve significant judgments and assumptions bymanagement which have a material impact on the carrying value of certain assetsand liabilities; management considers such accounting policies to be criticalaccounting policies. The judgments and assumptions used by management are basedon historical experience and other factors, which are believed to be reasonableunder the circumstances. Because of the nature of the judgments and assumptionsmade by management, actual results could differ from these judgments andestimates which could have a material impact on the carrying values of assetsand liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accountingpolicy that requires the most significant judgments and estimates used inpreparation of its consolidated financial statements. Refer to "Provisionfor Loan Losses" below for a detailed description of the Company'sestimation process and methodology related to the allowance for loan losses.

#### Distribution of Assets and Liabilities

The Company maintains a conservative approach in determining the distributionof assets and liabilities.  Loans increased 1.10% from $567,325 atDecember 31, 2006 to $573,751 at December 31, 2007; and 4.3% from December 31,2007 to $598,281 at December 31, 2008.  Loan growth is attributed tooverall business development efforts to meet business and personal loan demandin our market area. Loan demand in our market area remained solid in 2006,softened in 2007, and was moderate in 2008.  Loans decreased as apercentage of total assets from 67.7% at year-end 2006 to 66.3% at year-end2007, and increased to 68.4% at year-end 2008.  Investment securitiesand federal funds sold increased as a percentage of total assets from 24.5% atyear-end 2006 to 28.0% at year-end 2007, but decreased to 26.1% at year-end2008.  Investments and federal funds sold provide for an adequatesupply of secondary liquidity.  Year-end other assets as a percentageof total assets fell from 7.8% at year-end 2006 to 5.8% at year-end 2007, anddecreased to 5.5% at year-end 2008.  Management has sought to buildthe deposit base with stable, relatively noninterest-rate sensitive deposits byoffering the small to medium account holders a wide array of depositinstruments at competitive rates. Noninterest-bearing demand deposits, as apercent of total assets, have declined over the previous three years from 15.5%at year-end 2006 to 13.0% at year-end 2007, and to 11.5% at year-end 2008. TheCompany has anticipated a decline in these deposits over the long-term as morecustomers utilize interest-bearing deposit accounts and repurchaseagreements.  Interest-bearing liabilities as a percentage of totalassets have risen from 74.0% at December 31, 2006 to 76.0% at December 31,2007, and to 77.8% at December 31, 2008.  Stockholders' equity as apercentage of total assets increased from 9.2% at December 31, 2006 to 9.5% forboth  December 31, 2007 and 2008.  The Bank remainswell-capitalized (see Note 16 to the consolidated financial statements,contained elsewhere in this report).

The following table sets forth the percentage relationship to total assets ofsignificant components of the Company's balance sheet as of December 31, 2008,2007, and 2006:

|                                                                                               | **                        December  31,                     ** |
|-----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Assets:**                                                                                   | **2008  **                                                                                                                                                                                                                                                                            | **2007  ** | **2006  ** |
| **   Earning assets:**                                                         | ** **                                                                                                                                                                                                                                                                                      | ** ** | ** ** |
| **     Loans**                                                       | 68.4%                                                                                                                                                                                                                                                                                           | 66.3% | 67.7% |
| **     Investment  securities:**                                     |                                                                                                                                                                                                                                                                                            |   |   |
| **     Taxable**                                                     | 20.6                                                                                                                                                                                                                                                                             | 21.9    | 18.9    |
| **     Tax-exempt**                                                  | 3.1                                                                                                                                                                                                                                                                              | 3.1    | 2.5    |
| **     Federal funds sold  and securities purchased**                |                                                                                                                                                                                                                                                                                            |   |   |
| **       under  agreement to resell**                      |     2.4                                                                                                                                                                                                                                                      |     3.0    |     3.1    |
| **        Total  earning assets**                     |   94.5                                                                                                                                                                                                                                                                 |   94.3    |   92.2    |
| **     Other assets**                                                |     5.5                                                                                                                                                                                                                                                      |     5.7    |     7.8    |
| **        Total  assets**                             | 100.0%                                                                                                                                                                                                                                                                                          | 100.0% | 100.0% |
| ** **                                                                                    |                                                                                                                                                                                                                                                                                            |   |   |
| **Liabilities and stockholders' equity:**                                                     |                                                                                                                                                                                                                                                                                            |   |   |
| **     Interest-bearing  liabilities:**                              |                                                                                                                                                                                                                                                                                            |   |   |
| **       Interest-bearing  deposits**                      | 66.2%                                                                                                                                                                                                                                                                                           | 67.0% | 65.1% |
| **       Federal  funds purchased and securities sold**    |                                                                                                                                                                                                                                                                                            |   |   |
| **         under  agreement to resell**          | 7.7                                                                                                                                                                                                                                                                              | 7.0    | 8.6    |
| **       Other  short-term borrowings**                    |     3.9                                                                                                                                                                                                                                                      |     2.0    |       .3    |
| **         Total  interest-bearing liabilities** |   77.8                                                                                                                                                                                                                                                                 |   76.0    |   74.0    |
| **     Noninterest-bearing  deposits**                               | 11.5                                                                                                                                                                                                                                                                             | 13.0    | 15.5    |
| **     Other liabilities**                                           | 1.2                                                                                                                                                                                                                                                                              | 1.5    | 1.3    |
| **     Stockholders' equity**                                        |     9.5                                                                                                                                                                                                                                                      |     9.5    |     9.2    |
| **       Total  Liabilities and stockholders' equity**     | 100.0%                                                                                                                                                                                                                                                                                          | 100.0% | 100.0% |

29

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**Results ofOperations**

CNB Corporation and subsidiary recognized earnings in 2008, 2007, and2006 of $8,957, $9,720, and $10,046, respectively, resulting in a return onaverage assets of 1.04%, 1.15%, and 1.24%, and a return on averagestockholders' equity of 10.65%, 11.93%, and 13.36%. The earnings were primarilyattributable to favorable but generally declining net interest margins in eachperiod (see "Net Income-Net Interest Income"). Other factors includemanagement's ongoing effort to maintain other income at adequate levels (see"Net Income ‐ Noninterest Income") and to control otherexpenses (see "Net Income - NoninterestExpenses").  Earnings, coupled with a moderate dividend policy,have supplied the necessary capital funds to support bank operations. Totalassets were $874,625 at December 31, 2008 as compared to $865,638 at December31, 2007 and $837,622 at December 31, 2006.  The following table setsforth the financial highlights for fiscal years 2008, 2007, and 2006.

**CNB Corporation and SubsidiaryFINANCIAL HIGHLIGHTS(All Dollar Amounts, Except Per Share Data, in Thousands)**

| ** **                                                                                                                                                                                                                                                                                                                                    | **December 31,  2008  ** | ** 2007   to   2008  Percent  Increase(Decrease)** | **December 31,  2007  ** | ** 2006   to   2007  Percent  Increase(Decrease)** | **December 31,  2006  ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------|-------------------------------------------------------------------|----------------------------------------------|-------------------------------------------------------------------|----------------------------------------------|
| **Net interest income**                                                                                                                                                                                                                                                                                                                       |                                         |                                                              |                                         |                                                              |                                         |  |
| **     after provision for  loan losses**                                                                                                                                                                                                                                                                            | $  29,365                          | (1.3)%                                                            | $  29,752                          | (1.5)%                                                            | $  30,207                          |  |
| **Income before income taxes**                                                                                                                                                                                                                                                                                                                | 13,445                                       | ( 8.8)                                        | 14,735                                       | ( .6)                                    | 14,826                                       |  |
| **Net Income**                                                                                                                                                                                                                                                                                                                                | 8,957                                        | (7.8)                                              | 9,720                                        | (3.2)                                         | 10,046                                       |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| **Per Share (1)**                                                                                                                                                                                                                                                                                                                             |                                         |                                                              |                                         |                                                              |                                         |  |
| **(weighted average of shares outstanding)**                                                                                                                                                                                                                                                                                                  | $    10.71               | (5.1)                                              | $    11.29               | (2.7)                                         | $    11.60               |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| **Cash dividends declared**                                                                                                                                                                                                                                                                                                                   | 4,357                                        | (2.6)                                              | 4,475                                        | 8.5                                      | 4,123                                        |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| **  Per Share**                                                                                                                                                                                                                                                                                                                     | $      5.25    | -                                        | $      5.25    | -                                   | $      5.25    |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| **Total assets**                                                                                                                                                                                                                                                                                                                              | $874,625                                     | 1.0%                                                         | $865,638                                     | 3.3%                                                    | $837,622                                     |  |
| **Total deposits**                                                                                                                                                                                                                                                                                                                            | 679,219                                      | (1.9)                                              | 692,289                                      | 2.6                                      | 675,052                                      |  |
| **Total loans**                                                                                                                                                                                                                                                                                                                               | 598,281                                      | 4.3                                           | 573,751                                      | 1.1                                      | 567,325                                      |  |
| **Investment securities**                                                                                                                                                                                                                                                                                                                     | 206,960                                      | (4.2)                                              | 216,141                                      | 20.3                                     | 179,598                                      |  |
| **Stockholders' equity**                                                                                                                                                                                                                                                                                                                      | 83,526                                       | 1.7                                           | 82,112                                       | 7.1                                      | 76,663                                       |  |
| **    Book value per share (1)**                                                                                                                                                                                                                                                                                          |                                         |                                                              |                                         |                                                              |                                         |  |
| **    (actual number of shares  outstanding)**                                                                                                                                                                                                                                                                            | $  100.69                          | 4.5                                           | $    96.36               | 8.6                                      | $    88.75               |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| **Ratios (2):**                                                                                                                                                                                                                                                                                                                               |                                         |                                                              |                                         |                                                              |                                         |  |
| **Return on average total assets**                                                                                                                                                                                                                                                                                                            | 1.04%                                        | ( 9.6)                                        | 1.15%                                        | ( 7.3)                                   | 1.24%                                        |  |
| **Return on average stockholders' equity**                                                                                                                                                                                                                                                                                                    | 10.65%                                       | (10.7)                                             | 11.93%                                       | (10.7)                                        | 13.36%                                       |  |
| ** **                                                                                                                                                                                                                                                                                                                                    |                                         |                                                              |                                         |                                                              |                                         |  |
| (1) Adjusted for the effect of a 10% stock dividend paid in 2007.                                                                                                                                                                                                                                                                        |                                              |
|                                                                                                                                                                                                                                                                                                                                               |                                         |                                                              |                                         |                                                              |                                         |  |
| (2) For  the fiscal years ended December 31, 2008, 2007, and 2006 average total assets  amounted to        $860,612, $847,601, and $813,122, respectively,  with average stockholders' equity totaling        $84,138, $81,442, and $75,198, for the same periods. |                                              |
|                                                                                                                                                                                                                                                                                                                                               |                                              |                                                                   |                                              |                                                                   |                                              |  |  |  |  |  |

30

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##### **NET INCOME**

**Net Interest Income**

Earnings aredependent to a large degree on net interest income, defined as the differencebetween gross interest and fees earned on earning assets, primarily loans andinvestment securities, and interest paid on deposits and borrowedfunds.  Net interest income is affected by the interest rates earnedor paid and by volume changes in loans, investment securities, deposits, andborrowed funds.

The Bank maintained net interest margins in 2008, 2007, and 2006 of 3.99%,3.96%, and 4.18%, respectively, as compared to management's long-term target of4.20%. Net interest margins have been compressed at the Bank and industry-wide,as a result of strong competition for deposits, competitive lending practices,and the substantial decline in market interest rates.  The Bank has soughtto increase the volume of outstanding loans, while correspondingly reducing theamount of investments held, in order to enhance interest income. Loan demandremained strong throughout 2005 and 2006, declined in 2007, and was moderate in2008.   Fully-tax-equivalent net interest income decreased slightlyfrom $31,428 in 2006 to $31,361 in 2007, and increased to $32,454 in2008.  During the three-year period, total fully-tax-equivalentinterest income increased by 8.8% from $49,824 in 2006 to $54,219 in 2007, anddecreased 6.5% in 2008 to $50,675.  Over the same period, totalinterest expense increased 24.3% from $18,396 in 2006 to $22,858 in 2007, anddecreased 20.3% to $18,221 in 2008. Fully-tax-equivalent net interest income asa percentage of average total earning assets was 4.18% in 2006, 3.96% in 2007,and 3.99% in 2008.

Interest rates paid on deposits and borrowed funds and earned on loans andinvestments have generally followed the fluctuations in market interest ratesin 2008, 2007, and 2006.  However, fluctuations in market interestrates may not necessarily have a significant impact on net interest income,depending on the Bank's rate sensitivity position.  A rate sensitiveasset (RSA) is any loan or investment that can be re-priced up or down ininterest rate within a certain time interval.  A rate sensitiveliability (RSL) is an interest paying deposit or other liability that can bere-priced either up or down in interest rate within a certain time interval.When a proper balance between RSA and RSL exists, market interest ratefluctuations should not have a significant impact on earnings.  Thelarger the imbalance, the greater the interest rate risk assumed by the Bankand the greater the positive or negative impact of interest rate fluctuationson earnings.  When RSAs exceed RSLs for a specific repricing period,a positive interest sensitivity gap results.  The gap is negativewhen interest-sensitive liabilities exceed interest-sensitiveassets.  For a bank with a positive gap, rising interest rates wouldbe expected to have a positive effect on net interest income and falling rateswould be expected to have the opposite effect.  However, gapanalysis, such as set forth in the table below, does not take into accountactions a bank or its customers may take during periods of changing rates,which could significantly change the effects of rate changes that wouldotherwise be expected.  The Bank seeks to manage its assets andliabilities in a manner that will limit interest rate risk and thus stabilizelong-term earning power. The following table sets forth the Bank's static gaprate sensitivity position at each of the time intervalsindicated.  The table illustrates the Bank's rate sensitivityposition on specific dates and may not be indicative of the position at otherpoints in time. Management believes that a 200 basis point rise or fall ininterest rates will have less than a 10 percent effect on before-tax netinterest income over a one-year period, which is within bank guidelines.

# Interest Rate Sensitivity AnalysisDecember 31, 2008(Dollars in Thousands)

|                                                                                                                                  | **1 Day**                                                                                         | **90 Days**                                                                                                        | **180 Days**                                                                                           | **365 Days**                                                                                           | **Over 1    to  5 Years**                                                               | **Over  5 Years**                                                                                |
|----------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|
| **Rate Sensitive  Assets (RSA)**                                                                                                 | ** **                                                                                        | ** **                                                                                                         | ** **                                                                                             | ** **                                                                                             | ** **                                                                                        | ** **                                                                                       |
| **  Federal  Funds Sold**                                                                                              | $  21,000                                                                               | $            -                                    | $            -                        | $            -                        | $            -                        | $           -                             |
| **  Investment  Securities (net of     FRB and FHLB stock in the     amount of $3,024)** | -                                                                                                 | 3,301                                                                                                         | 1,725                                                                                             | 921                                                                                               | 159,061                                                                                           | 38,196                                                                                           |
| **  Loans (net of non-accruals of     $2,990 and deferred loan costs of     $167)**      | 121,396                | 49,493                   | 50,965                 | 56,751                 | 246,381                | 70,138                |
| **Total, RSA**                                                                                                                   | $142,396                                                                                          | $   52,794                                                                                     | $ 52,690                                                                                     | $ 57,672                                                                                     | $405,442                                                                                          | $108,334                                                                                         |
| ** **                                                                                                                       |                                                                                              |                                                                                                               |                                                                                                   |                                                                                                   |                                                                                              |                                                                                             |
| **Rate Sensitive  Liabilities (RSL)**                                                                                            |                                                                                              |                                                                                                               |                                                                                                   |                                                                                                   |                                                                                              |                                                                                             |
| **Deposits:**                                                                                                                    |                                                                                              |                                                                                                               |                                                                                                   |                                                                                                   |                                                                                              |                                                                                             |
| **Certificates of  Deposit of $100,000     or more**                                                              | $           -                              | $   89,105                                                                                     | 36,310                                                                                            | 51,493                                                                                            | 33,761                                                                                            | -                                                                                                |
| **All Other Time  Deposits**                                                                                                     | -                                                                                                 | 42,112                                                                                                        | 38,563                                                                                            | 46,775                                                                                            | 30,368                                                                                            | -                                                                                                |
| **Federal Funds  Purchased and    Securities Sold under Repurchase    Agreements**                           | 43,525                                                                                            | 21,716                                                                                                        | 2,174                                                                                             | -                                                                                                 | -                                                                                                 | -                                                                                                |
| **Federal Home Loan  Bank Advances**                                                                                             |              -                   |      30,000                                                                          |             -                         |             -                         |              -                   |              -                  |
| **Total RSL**                                                                                                                    | $  43,525                                                                               | $ 182,933                                                                                                | $ 77,047                                                                                     | $ 98,268                                                                                     | $  64,129                                                                               | $           -                             |
| **RSA-RSL**                                                                                                                      | $  98,871                                                                               | $(130,139)                                                                                                         | $(24,357)                                                                                              | $(40,596)                                                                                              | $341,313                                                                                          | $108,334                                                                                         |
| **Cumulative  RSA-RSL**                                                                                                          | $  98,871                                                                               | $  (31,268)                                                                                              | $(55,625)                                                                                              | $(96,221)                                                                                              | $245,092                                                                                          | $353,426                                                                                         |
| **Cumulative  RSA/RSL**                                                                                                          | 3.27                                                                                         | .86                                                                                                      | .82                                                                                          | .76                                                                                          | 1.53                                                                                              | 1.76                                                                                             |
|                                                                                                                                  |                                                                                                   |                                                                                                                    |                                                                                                        |                                                                                                        |                                                                                                   |                                                                                                  |  |  |  |  |

31

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**NETINCOME (continued)**

**Provision for Loan Losses**

It is thepolicy of the Bank to maintain the allowance for loan losses in an amountcommensurate with management's ongoing evaluation of the loan portfolio anddeemed appropriate by management to cover estimated losses inherent in theportfolio.  The Company complies with the provisions of SFAS No. 114,"Accounting by Creditors for Impairment of a Loan," as amended bySFAS 118, in connection with the allowance for loan losses (see NOTE 1 to theConsolidated Financial Statements - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES).  The provision for loan losses was $2,533 in 2008, $1,145in 2007, and $808 in 2006.  Net loan charge-offs totaled $1,949 in 2008,$1,114 in 2007, and $250 in 2006, with net charge-offs being centered inconsumer purpose, commercial and industrial loans, and real estate loans in2008, in consumer purpose loans in 2007, and in consumer purpose loans in2006.  The allowance for loan losses as a percentage of net loans was1.20% at December 31, 2008, 1.15% at December 31, 2007, and 1.15% atDecember 31, 2006. 

**Securities Transactions**

Netunrealized gains/(losses) in the investment securities portfolio were $2,310 atDecember 31, 2008, $1,728 at December 31, 2007, and $(1,801) at December 31,2006.  The market value of investment securities has increased due tothe declines in market interest rates, increased demand for bonds, and theconsequent increase in prices. No security gains/losses were realized in 2008.  Securitygains of $9 were realized in 2007 on sales of $2,315 in short-termavailable-for-sale securities to supplement liquidity.   Nosecurity gains/(losses) were realized in 2006.

**Noninterest Income**

Otherincome, net of any securities gains/(losses), increased by .5% from $6,958 in2006 to $6,993 in 2007, and grew 2.8% from $6,993 in 2007 to $7,188 in2008.  During 2007, service charge income on deposit accountsincreased due to an increase in charges implemented by the Company, increasedcommercial services income, and increased charges as a result of declines indemand deposit balances as the economy slowed.  Other service andexchange charges declined due to the non-recurrence of extraordinarymiscellaneous other income experienced in 2006.  During 2008, servicecharge income on deposit accounts increased due to increased charges as aresult of further declines in demand deposit balances and increasednon-sufficient funds and overdraft charges.  Other service andexchange charges remained stable, increasing only .2%.

**Noninterest Expenses**

Noninterestexpenses decreased by 1.4% from $22,339 in 2006 to $22,019 in 2007, andincreased 4.9% from $22,019 in 2007 to $23,108 in 2008.  Thecomponents of other expenses are salaries and employee benefits of $13,684,$14,044, and $14,865; occupancy and furniture and equipment expenses of $3,247,$3,338, and $3,047; and other operating expenses of $5,408, $4,637, and $5,196for 2006, 2007, and 2008, respectively. 

The increase in salary and employee benefits during 2008 reflects compensationincreases, the increased cost of medical insurance, and a decline in deferredloan costs.

The decline in occupancy expense during 2008 was attributable to declines inrepair and upkeep expenses, property insurance expense, and maintenancecontracts.

Noninterest expense is expected to increase in 2009 due to the Company'splanned installation of a new core application system..  

**Income Taxes**

Provisions forincome taxes increased 4.9% from $4,780 in 2006 to $5,015 in 2007, anddecreased 10.5% from $5,015 in 2007 to $4,488 in 2008.  Income taxliability increased in 2006, as income before income taxes increased4.2%.  Income before income taxes decreased .6% in2007.  However, the Company's effective tax rate increased during2007.  Income tax liability decreased in 2008, as income beforeincome taxes decreased 9.3%.

**LIQUIDITY**

The Bank's liquidity position is primarily dependent on short-term demands for fundscaused by customer credit needs and deposit withdrawals and upon the liquidityof bank assets to meet these needs.  The Bank's liquidity sourcesinclude cash and due from banks, federal funds sold, and short-terminvestments.  In addition, the Bank has established federal fundslines of credit from correspondent banks; has the ability, on a short-termbasis, to borrow funds from the Federal Reserve System; and has a line ofcredit from the Federal Home Loan Bank of Atlanta (see NOTE 8 to the ConsolidatedFinancial Statements-LINES OF CREDIT).  The Company had cash balanceson hand of $5,142, $5,837, and $6,670 at December 31, 2008, 2007, and 2006,respectively. At December 31, 2008 the Company had liabilities, consisting ofcash dividends payable, and a short-term note payable, in the amounts of $4,357and $1,120, respectively. At December 31, 2007 and 2006, the Company hadliabilities, consisting of cash dividends payable, totaling $4,475, and $4,123,respectively.  Management feels that liquidity sources are more thanadequate to meet funding needs.

### 32

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### OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

### The Company,through the operations of the Bank, makes contractual commitments to extendcredit in the ordinary course of business.  These commitments arelegally binding agreements to lend money to customers of the Bank atpredetermined interest rates for a specified period of time.  Inaddition to commitments to extend credit, the Bank also issues standby lettersof credit which are assurances to a third party that they will not suffer aloss if the Bank's customer fails to meet its contractual obligation to a thirdparty.  The Bank may also have outstanding commitments to buy/sellsecurities.  At December 31, 2008, the Bank had issued commitments toextend credit of $53.8 million, standby letters of credit of $2.1 million, andno commitments to buy or sell securities (see NOTE 11 to the ConsolidatedFinancial Statements-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK). Themajority of the commitments and standby letters of credit typically maturewithin one year and past experience indicates that many of the commitments andstandby letters of credit will expire unused.  However, through itsvarious sources of liquidity, the Bank believes that it will have the necessaryresources to meet these obligations should the need arise.

### Neither the Company nor the Bank is involved in other off-balance sheetcontractual relationships, unconsolidated related entities that haveoff-balance sheet arrangements or transactions that could result in liquidityneeds or other commitments or significantly impact earnings.

### The following table presents, as of December 31, 2008, the Company's and theBank's fixed and determinable contractual obligations by payment date.  Thepayment amounts represent those amounts contractually due to the recipient

| Contractual Obligations and Other Commitments |
|-----------------------------------------------|
| December 31, 2008                             |
| (Dollars in Thousands)                        |
|                                          |           

**Less  than**
**1  to 3  **
**3  to 5     **   
**Total   **
**One  Year**
**Years  **
**Years     **Contractual Cash Obligations
 
 
    
  Operating  leases
$           2
$           2
$         -
$         -      Time deposits
  367,543
  303,415
  56,799
  7,329         Total  contractual cash obligations
$367,545
$303,417
$56,799
$7,329    Obligations under non-cancelable operating lease agreements totaled $2 atDecember 31, 2008.  These obligations are payable over one year asshown in NOTE 12 to the Consolidated Financial Statements - COMMITMENTS ANDCONTINGENCIES.  Further information regarding the nature of timedeposits is outlined in NOTE 6 to the Consolidated Financial Statements -DEPOSITS.CAPITAL RESOURCES
Total stockholders' equity was $83,526, $82,112, and $76,663 at December 31,2008, 2007, and 2006, representing 9.55%, 9.49%, and 9.15% of total assets,respectively.  At December 31, 2008, the Company and the Bank exceededquantitative measures established by regulation to ensure capital adequacy (seeNOTE 16 to the Consolidated Financial Statements - REGULATORYMATTERS).  Capital is considered sufficient by management to meetcurrent and prospective capital requirements and to support anticipated growthin bank operations.
EFFECTS OF INFLATION
Inflation normally has the effect of accelerating the growth of both a bank'sassets and liabilities.  One result of this inflationary effect is anincreased need for equity capital.  Income is also affected byinflation.  While interest rates have traditionally moved withinflation, the effect on net income is diminished because both interest earnedon assets and interest paid on liabilities vary directly with eachother.  In some cases, however, rate increases are delayed onfixed-rate instruments.  Loan demand normally declines during periodsof high inflation. Inflation has a direct impact on the Bank's noninterestexpense. The Bank responds to inflation changes through re-adjustingnoninterest income by repricing services.

**ACCOUNTING ISSUES**

Accounting standards that have been issued or proposed by the FinancialAccounting Standards Board that do not require adoption until a future date arenot expected to have a material impact on the consolidated financial statementsupon adoption.  (See NOTE 1 to the Consolidated Financial Statements- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES).

****33

**RISKS AND UNCERTAINTIES**

In the normal course of its business the Company encounters two significanttypes of risks: economic and regulatory.  There are three maincomponents of economic risk: interest rate risk, credit risk and marketrisk.  The Company is subject to interest rate risk to the degree thatits interest-bearing liabilities mature or reprice at different speeds, or ondifferent basis, than its interest-earning assets.  Credit risk isthe risk of default on the Company's loan portfolio that results fromborrowers' inability or unwillingness to make contractually requiredpayments.  Market risk, in regard to lending, reflects changes in thevalue of collateral underlying loans receivable and the valuation of realestate held by the Company.

The Company is subject to the regulations of various governmental agencies.  Theseregulations can and do change significantly from period toperiod.  The Company also undergoes periodic examinations by theregulatory agencies, which may subject it to further changes with respect toasset valuations, amounts of required loss allowances and operatingrestrictions from the regulators' judgments based on information available tothem at the time of their examination.

******ITEM 7.AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk, in regard to interest rate risk, is the risk of loss from adversechanges in market prices and rates. The Company's market risk arisesprincipally from the interest rate risk inherent in its lending, deposit andborrowing activities.  Management actively monitors and manages itsinterest rate risk exposure.  In addition to other risks which theCompany manages in the normal course of business, such as credit quality andliquidity risk, management considers interest rate risk to be a significantmarket risk that could potentially have a material effect on the Company'sfinancial condition and results of operations (See Item 7 - MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - NetIncome - Net Interest Income).  Other types of market risks, such asforeign currency risk and commodity price risk, do not arise in the normalcourse of the Company's business activities.

34

**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*****CNB CORPORATION AND SUBSIDIARY*REPORT ON CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDDECEMBER 31, 2008, 2007 and 2006**35

*******CNB CORPORATION AND SUBSIDIARYCONWAY, SOUTH CAROLINA*CONTENTS**

****    

**PAGE**

** **

**REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM     FINANCIAL STATEMENTS     **Consolidated balance sheets     Consolidated statements of income     Consolidated statements of stockholders' equity     Consolidated statements of comprehensive income     Consolidated statements of cash flows   **NOTES TO FINANCIAL STATEMENTS**

37 - 39  40  41  42  43  44  45 - 68

****36

**Elliott Davis, LLCAdvisors-CPAs-Consultants1901 Main Street, Suite 1650P.O. Box 2227Columbia, SC  29202-2227REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

The Directors and Stockholders***CNB Corporation***Conway, South Carolina

We have audited the consolidated balance sheets of CNB Corporation andsubsidiary as of December 31, 2008 and 2007, and the related consolidatedstatements of income, stockholders' equity, comprehensive income and cash flowsfor each of the three years in the period ended December 31, 2008.  Theseconsolidated financial statements are the responsibility of the Company'smanagement.  Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management as well asevaluating the overall financial statement presentation.  We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of CNB Corporation andsubsidiary as of December 31, 2008 and 2007, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2008 in conformity with United States generally acceptedaccounting principles.

We also have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), CNB Corporation and subsidiary'sinternal control over financial reporting as of December 31, 2008, based oncriteria established in "Internal Control-Integrated Framework"issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) and our report dated March 10, 2009 expressed an unqualified opinionthereon.

**Elliott Davis, LLC**

***/s/Elliott Davis, LLC***

Columbia, South CarolinaMarch 10, 2009

****37

**Elliott Davis, LLCAdvisors-CPAs-Consultants1901 Main Street, Suite 1650P.O. Box 2227Columbia, SC  29202-2227REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders***CNB Corporation***Conway, South Carolina

We have audited CNB Corporation and subsidiary's internal control overfinancial reporting as of December 31, 2008, based on criteria established in"Internal Control-Integrated Framework," issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO)*.*  CNBCorporation's management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanyingManagement's Report on Internal Control Over FinancialReporting.  Our responsibility is to express an opinion on theeffectiveness of the company's internal control over financial reporting basedon our audit.

We conducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk.  Our audit also includedperforming such other procedures as we considered necessary in thecircumstances.  We believe that our audit provides a reasonable basisfor our opinion.

A company's internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles.  A company's internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal control over financial reportingmay not prevent or detect misstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

38

In our opinion, CNB Corporation maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2008, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

We have also audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidatedbalance sheets of CNB Corporation and subsidiary as of December 31, 2008 and2007, and the related consolidated statements of income, stockholders' equity,comprehensive income and cash flows for each of the three years in the periodended December 31, 2008, and our report dated March 10, 2009 expressed an unqualifiedopinion thereon.

**Elliott Davis, LLC*/s/Elliott Davis, LLC***Columbia, South CarolinaMarch 10, 2009

39

***CNB CORPORATIONAND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(amounts, except share data, in thousands)***

** **

**         December  31,      **

**                                                     *ASSETS*  CASH AND DUE FROM BANKS  FEDERAL FUNDS SOLD  INVESTMENT SECURITIES AVAILABLE FOR SALE  INVESTMENT SECURITIES HELD TO MATURITY**   (Fair value $9,570 in 2008 and $7,731  in 2007)**OTHER INVESTMENTS, AT COST****LOANS     **Less allowance for loan losses        Net loans**PREMISES AND EQUIPMENT  ACCRUED INTEREST RECEIVABLE  OTHER ASSETS                                          *LIABILITIES  AND STOCKHOLDERS' EQUITY*  LIABILITIES     **Deposits        Noninterest-bearing        Interest-bearing           Total deposits     Securities sold under repurchase agreements     United States Treasury demand notes     Federal Home Loan Bank advances     Short-term note payable     Dividends payable     Other liabilities           Total liabilities**COMMITMENTS AND CONTINGENT LIABILITIES -**Notes 11 and 12**STOCKHOLDERS' EQUITY     **Common stock - $10 par value; authorized 1,500,000 shares;        issued 829,518 and 852,106 shares in 2008  and 2007, respectively     Capital in excess of par value of stock     Retained earnings     Accumulated other comprehensive income           Total stockholders'  equity           

**    2008    **  $   19,259  21,000  194,178  9,758  3,024  598,281        7,091591,190  23,403  7,000         5,813**$ 874,625******  $  100,560   578,659679,219  67,415  2,672  30,000  1,120  4,356       6,317     791,099  8,295  50,085  23,648       1,498       83,526**$ 874,625**

**     2007    **$   20,941  26,000  206,133  7,711  2,297  573,751       6,507567,244  22,928  7,396         4,988**$ 865,638******  $  112,450   579,839692,289  60,936  2,377  15,000  -  4,475      8,449    783,526  8,521  53,519  19,047       1,025       82,112**$ 865,638**

The accompanying notes are an integral part of these consolidated financialstatements.40

***CNB CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(amounts, except per share data, in thousands)***

 

**  For the years ended December  31,     **

**INTEREST INCOME**   Loans and fees on loans     Investment securities        Taxable        Nontaxable           Total interest on  investment securities     Non-marketable equity securities        Federal Reserve Bank dividend income        Federal Home Loan Bank dividend income           Total income on  non-marketable equity securities     Federal funds sold           Total interest  income         **INTEREST EXPENSE     **Deposits     Securities sold under repurchase agreements     United States Treasury demand notes     Federal Home Loan Bank advances     Other short term borrowings           Total interest expense           Net interest income**PROVISION FOR LOAN LOSSES**         Net interest income  after provision for loan losses**NONINTEREST INCOME**   Service charges on deposit accounts     Other service and exchange charges     Gain on sale of investment securities available for sale           Total noninterest  income**NONINTEREST EXPENSES**   Salaries and wages     Pensions and other employee benefits     Occupancy     Furniture and equipment     Examination and professional fees     Office supplies     Credit card operations     Other operating expenses           Total noninterest  expenses           Income before provision  for income taxes**PROVISION FOR INCOME TAXES**         Net income**NET INCOME PER SHARE OF COMMON STOCK**Adjusted for the effect of a 10% stock dividend issued during 2007.

**     2008    **$   40,431  7,939       1,0809,019  3              8588            581       50,119  16,539  1,420  22           205            35       18,221  31,898        2,533      29,365  3,810  3,378             -        7,188  11,337  3,528  1,021  2,026  655  460  824       3,257       23,108  13,445         4,488**$    8,957  $    10.71**

**    2007    **$   43,878  7,337          9018,238  7              96103       1,536       53,755  19,976  2,800  74               8              -       22,858  30,897         1,145       29,752  3,621  3,372              9         7,002  10,453  3,591  1,313  2,025  662  490  953       2,532       22,019  14,735         5,015**$    9,720  $    11.29**

**    2006    **$   41,340  5,825          8026,627  10              99109         1,335       49,411  16,229  1,611  52            504              -       18,396  31,015            808       30,207  3,279  3,679             -          6,958  10,696  2,988  1,372  1,875  760  562  1,048        3,038        22,339  14,826          4,780**$   10,046  $     11.60**

The accompanying notes are an integral part of these consolidated financialstatements.41

***CNB CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the years ended December 31, 2008, 2007, and 2006(amounts, except share data, in thousands)***

** **

    **Common stock      Shares    Amount**

**Capital in  excess of  par value of stock **

**Retained earnings **

**Accumulated  other  comprehensive  income  **

**Total   stockholders'  equity  **

**BALANCE, DECEMBER 31, 2005**     Net income     Cash dividend declared, $5.25 per share     Common shares repurchased, at an         average per share price of  $156.38     Common shares sold, at an average         per share price of $156.50      Net change in unrealized holding         loss, net of income taxes  of  $460**BALANCE, DECEMBER 31, 2006**     Net income     Cash dividend declared, $5.25 per share     10% stock dividend     Cash paid for fractional shares     Common shares repurchased, at an        average per share price of $165.73,        adjusted for the 10% stock dividend     Common shares sold, at an average         per share price of $182.49, adjusted for         the 10% stock dividend      Net change in unrealized holding        gain, net of income taxes of $1,429**BALANCE, DECEMBER 31, 2007**   Net income     Cash dividend declared, $5.25 per share     Common shares repurchased, at an         average per share price of $161.98     Common shares sold, at an average         per share price of $159.70      Net change in unrealized holding         gain, net of income taxes of $315**BALANCE, DECEMBER 31, 2008**

  788,534   -   -   (3,597)  342             -     785,279   -    -    77,848   -    (11,325)304              -      852,106   -     -     (22,929)  341           -   **829,518 **

  $7,886   -    -    (36)      3           -    7,853   -     -     778   -     (113)  3           -     8,521   -     -     (229)3           -   **$8,295 **

  $43,389   -    -    (489)13             -      42,913   -     -     12,376   -     (1,823)53            -     53,519   -     -     (3,485)  51             -   **$50,085 **

  $21,094   10,046   (4,123)  -     -              -     27,017   9,720   (4,475)  (13,154)  (61)-      -              -    19,047   8,957   (4,356)  -  -              -   **$23,648 **

  $(1,810)  -    -    -    -          690   (1,120)  -    -    -    -    -  -        2,145     1,025 -    -  -    -            473 **$   1,498 **

  $70,559   10,046   (4,123)  (525)  16          690    76,663   9,720   (4,475)  -     (61)  (1,936)  56      2,145 82,112   8,957 (4,356)(3,714)54          473 **$83,526 **

The accompanying notes are an integral part of these consolidated financialstatements.42

***CNBCORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in thousands)***

 

**  For  the years ended December 31,  **

**NET INCOME****OTHER COMPREHENSIVE INCOME, NET OF TAX**     Unrealized holding gains on investment securities        available for sale     Reclassification adjustments for gains included in net  income**COMPREHENSIVE INCOME**

**   2008   **$  8,957473            -$  9,430

**    2007   ** $  9,720 2,151            (6)  $ 11,865

**   2006     **$ 10,046690           -     $ 10,736

** **

******The accompanying notes are an integral part of theseconsolidated financial statements.43

***CNB CORPORATION ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)***

 

** For the years ended December 31,**

**OPERATING ACTIVITIES**   Net income     Adjustments to reconcile net income to net cash provided        by operating activities        Depreciation and amortization        Provision for loan losses        Provision for deferred income taxes        Discount accretion and premium  amortization on investment securities        Gain on sale of investment securities  available for sale        Gain on sale of foreclosed assets        Writedown on foreclosed assets        Changes in assets and liabilities:           (Increase)/decrease  in  accrued interest receivable           (Increase)/decrease in  other assets           Increase/(decrease) in  other liabilities              Net  cash provided by operating activities**INVESTING  ACTIVITIES**   Proceeds from sales of investment  securities available for sale     Proceeds from maturities and calls of investment securities  held to maturity     Proceeds from maturities and calls of investment securities  available for sale     Purchases of investment securities held to maturity     Purchases of investment securities available for sale     Proceeds from sales of premises and equipment     Proceeds from sales of foreclosed assets     Net increase in loans     Purchase of equity securities     Premises and equipment expenditures              Net  cash used for investing activities**FINANCING  ACTIVITIES**   Dividends paid     Net increase/(decrease) in deposits     Increase/(decrease) in securities sold under repurchase  agreements     Increase/(decrease) in United States Treasury demand notes     Increase in Federal Home Loan Bank advances     Increase in other short-term borrowings     Cash paid for fractional shares     Common shares repurchased     Common shares sold              Net  cash provided by financing activities              Net  decrease in cash and cash equivalents**CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR****CASH AND CASH EQUIVALENTS, END OF YEAR****CASH PAID FOR**   Interest     Income taxes

**   2008    **  $  8,957  1,330    2,533  191  (820)  -     (6)  -     396    (757)  (2,132)    9,692 -     250   154,017   (2,312)   (140,438)   -     103   (27,151)  (727)   (1,805)   (18,063)  (4,475)   (13,070)  6,479   295   15,000   1,120            -       (3,714)          54        1,689   (6,682)**   46,941   $ 40,259   $ 20,352 $   4,459 **

**   2007***    *  $  9,720    1,285    1,145    (479)   (299)  (9)  -    8    (825)   869      1,861    13,276   2,315   1,500   81,732   (4,895)   (112,725)   -    79   (7,683)  (596)    (1,225)    (41,498)  (4,123)   17,237   (11,394)  (488)  15,000  -             (61)    (1,936)           56       14,291   (13,931)**   60,872 ****$ 46,941***** *    $ 21,480      $   5,086**

**    2006    **  $  10,046   1,202   808   (212)  54   -     -     -     (1,117)  289          339     11,409   -     935   39,014   (1,128)  (35,139)  305   61   (63,710)  (242)   (3,921) (63,825)  (3,942)  8,576   29,034   668   -     -     -     (525)         16     33,827   (18,589) **   79,461** ****$ 60,872*** ***$ 16,294 $   5,285*** *

The accompanying notes are an integral part of these consolidated financialstatements.44

***CNB CORPORATION AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS***

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES***

**Principles of consolidation and nature of operations**

The consolidated financial statements include theaccounts of***CNB Corporation*** (the "Company") and itswholly-owned subsidiary, The Conway National Bank (the"Bank").  The Company operates as one businesssegment.  All significant intercompany balances and transactions havebeen eliminated.  The Bank operates under a national bank charter andprovides full banking services to customers.  The Bank is subject toregulation by the Office of the Comptroller of the Currency and the FederalDeposit Insurance Corporation.  The Company is subject to regulationby the Federal Reserve Board.

**Estimates**

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of the dates of the consolidated balance sheets and the consolidatedstatements of income for the periods covered.  Actual results coulddiffer from those estimates.

**Concentrations of credit risk**

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist principally of loans receivable, investment securities, federalfunds sold and amounts due from banks. 

The Company makes loans to individuals and small businesses for variouspersonal and commercial purposes primarily in Horry County, South Carolina andthe Waccamaw Neck area of Georgetown County, South Carolina.  TheCompany's loan portfolio is not concentrated in loans to any single borrower ora relatively small number of borrowers. The Company monitors concentrations ofloans to classes of borrowers or industries that would be similarly affected byeconomic conditions.  As of December 31, 2008, the Company hadconcentrations of loans to the following classes of borrowers or industries:Land Subdivision and Development, Single Family Housing, Lessors of ResidentialBuildings, Lessors of Non-Residential Buildings, and Other Real Estate RelatedActivities.  The amount of commercial purpose loans outstanding tothese groups of borrowers as of December 31, 2008 was $26,157,000, $25,267,000,$27,244,000, $29,079,000, and $24,644,000, respectively.  Theseamounts represented 28.78%, 27.80%, 29.98%, 32.00%, and 27.12% of TotalCapital, as defined for regulatory purposes, for the same period, alsorespectively.

In addition to monitoring potential concentrations of loans to particularborrowers or groups of borrowers, industries and geographic regions, Managementmonitors exposure to credit risk from concentrations of lending products andpractices such as loans with high loan-to-value ratios, interest-only paymentloans, and balloon payment loans. Management monitors loans with loan-to-valuesin excess of regulatory guidelines and secured by real estate in accordancewith guidance as set forth by regulatory authorities and maintains total loanswith loan-to-value exceptions within regulatory limitations. Managementmonitors and manages other loans with high loan-to-value ratios, interest-onlypayment loans, and balloon payment loans within levels of risk acceptable toManagement.  The Bank does not offer any loan products which providefor planned graduated payments or loans which allow negative amortization.

The Company's investment portfolio consists principally of obligations of theUnited States, its agencies or its corporations and general obligationmunicipal securities.  In the opinion of Management, there is noconcentration of credit risk in its investment portfolio.  TheCompany places its deposits and correspondent accounts with and sells itsfederal funds to high quality institutions.  Management believescredit risk associated with correspondent accounts is not significant.

45

*Continued*

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDACTIVITIES, Continued***

**Cash and cash equivalents**

Cash and cash equivalentsinclude cash and due from banks and federal funds sold.  Generally,both cash and cash equivalents are considered to have maturities of threemonths or less, and accordingly, the carrying amount of such instruments isdeemed to be a reasonable estimate of fair value. 

Investment securities

The Company accounts forinvestment securities in accordance with Statement of Financial AccountingStandards ("SFAS") No. 115*, "Accounting for CertainInvestments in Debt and Equity Securities."*  This statement requiresthat the Company classify debt securities upon purchase as available for sale,held to maturity or trading.  Such assets classified as available forsale are carried at fair value.  Unrealized holding gains or lossesare reported as a component of stockholders' equity (accumulated othercomprehensive income) net of deferred income taxes.  Securitiesclassified as held to maturity are carried at cost, adjusted for theamortization of premiums and the accretion of discounts into interest incomeusing a method which approximates a level yield. To qualify as held to maturitythe Company must have the intent and ability to hold the securities tomaturity. Trading securities are carried at market value.  TheCompany has no trading securities.  Gains or losses on disposition ofsecurities are based on the difference between the net proceeds and theadjusted carrying amount of the securities sold, using the specificidentification method.

**Loans and interestincome**

Loans are recorded at theirunpaid principal balance.  Interest on loans is accrued andrecognized based upon the interest method.

TheCompany accounts for nonrefundable fees and certain direct costs associatedwith the origination of loans in accordance with SFAS No. 91,"Accounting for Nonrefundable Fees and Costs Associated with Originatingor Acquiring Loans and Initial Direct Costs of Leases-an amendment of FASBStatements No. 13, 60, and 65 and a rescission of FASB StatementNo. 17."  Under SFAS No. 91 nonrefundable fees and certaindirect costs associated with the origination of loans are deferred andrecognized as a yield adjustment over the contractual life of the related loansuntil such time that the loan is sold. 

The Company accounts forimpaired loans in accordance with SFAS No. 114, "*Accounting byCreditors for Impairment of a Loan."*  This standard requiresthat all creditors value loans at the loan's fair value if it is probable thatthe creditor will be unable to collect all amounts due according to the termsof the loan agreement. Fair value may be determined based upon the presentvalue of expected cash flows, market price of the loan, if available, or valueof the underlying collateral. Expected cash flows are required to be discountedat the loan's effective interest rate.  SFAS No. 114 was amended bySFAS No. 118 to allow a creditor to use existing methods for recognizinginterest income on an impaired loan and by requiring additional disclosuresabout how a creditor recognizes interest income on an impaired loan.

Under SFAS No. 114, as amendedby SFAS No. 118, when the ultimate collectibility of an impaired loan'sprincipal is in doubt, wholly or partially, all cash receipts are applied toprincipal.  When this doubt does not exist, cash receipts are appliedunder the contractual terms of the loan agreement. Once the reported principalbalance has been reduced to zero, future cash receipts are applied to interestincome, to the extent that any interest has been foregone. Further cashreceipts are recorded as recoveries of any amounts previously charged off.

A loan is also consideredimpaired if its terms are modified in a troubled debtrestructuring.  For these accruing impaired loans, cash receipts aretypically applied to principal and interest receivable in accordance with theterms of the restructured loan agreement.  Interest income isrecognized on these loans using the accrual method of accounting.  

46

*Continued*

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDACTIVITIES, Continued***

**Allowance for loan losses**

The allowance for loan losses is based on management's ongoingevaluation of the loan portfolio and reflects an amount that, in management'sopinion, is adequate to absorb losses in the existing portfolio.  Inevaluating the portfolio, management takes into consideration numerous factors,including current economic conditions, prior loan loss experience, thecomposition of the loan portfolio, and management's estimate of anticipatedcredit losses.  Loans are charged against the allowance at such timeas they are determined to be losses.  Subsequent recoveries arecredited to the allowance.  Management considers the year-endallowance adequate to cover losses in the loan portfolio; however, management'sjudgment is based upon a number of assumptions about future events, which arebelieved to be reasonable, but which may or may not prove valid. Thus, therecan be no assurance that charge-offs in future periods will not exceed theallowance for loan losses or that additional increases in the allowance forloan losses will not be required.

**Non-performing assets**

Non-performing assets includereal estate acquired through foreclosure or deed taken in lieu of foreclosure,and loans on non-accrual status.  Loans are placed on non-accrualstatus when, in the opinion of management, the collection of additionalinterest is questionable.  Thereafter no interest is taken intoincome unless received in cash or until such time as the borrower demonstratesthe ability to pay principal and interest.

**Premises andequipment**

Premises and equipment are stated at cost less accumulated depreciationand amortization. Depreciation and amortization are computed over the estimateduseful lives of the assets using primarily the straight-line method. Additionsto premises and equipment and major replacements or improvements arecapitalized at cost. Maintenance, repairs and minor replacements are expensedwhen incurred.  Gains and losses on routine dispositions arereflected in current operations.

**Treasury stock**

During 2008, the Corporation repurchased 22,929 shares of stock whichwere held in treasury.  On December 31, 2008, the Corporationreturned 38,904 shares of stock held in treasury to authorized but unissuedshares.  Amounts in the Consolidated Balance Sheet for 2007 have beenreclassified for comparable presentation; amounts in the ConsolidatedStatements of Stockholders' Equity have been reclassified for the years endedDecember 31, 2007, 2006, and 2005 for comparable presentation; amounts in theConsolidated Statements of Cash Flows have been reclassified for the yearsended December 31, 2007 and 2006 for comparable presentation; and amounts inthe Condensed Statements of Cash Flows for the Parent Company, Note 18, havebeen reclassified for comparable presentation.

**Advertising expense**

Advertising,promotional and other business development costs are generally expensed asincurred.  External costs incurred in producing media advertising areexpensed the first time the advertising takes place. External costs relating todirect mailing costs are expensed in the period in which the direct mailingsare sent. Advertising, promotional and other business development costs of$537,000, $508,000 and $596,000, were included in the Company's results ofoperations for 2008, 2007, and 2006, respectively.

**Securities sold under agreements to repurchase**

The Bank entersinto sales of securities under agreements torepurchase.  Fixed-coupon repurchase agreements are treated asfinancing, with the obligation to repurchase securities sold being reflected asa liability and the securities underlying the agreements remaining as assets.

47

*Continued*

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ANDACTIVITIES, Continued***

**Income taxes**

Income taxes are accounted for inaccordance with SFAS No. 109, *"Accounting for IncomeTaxes."  *Under SFAS No. 109, deferred tax liabilities arerecognized on all taxable temporary differences (reversing differences wheretax deductions initially exceed financial statement expense, or income isreported for financial statement purposes prior to being reported for taxpurposes).  In addition, deferred tax assets are recognized on alldeductible temporary differences (reversing differences where financialstatements expense initially exceeds tax deductions, or income is reported fortax purposes prior to being reported for financial statement purposes).Valuation allowances are established to reduce deferred tax assets if it isdetermined to be *"*more likely than not*"* that all orsome portion of the potential deferred tax assets will not be realized.

In 2006, the FASB issued Interpretation No. 48(FIN 48), "Accounting for Uncertainty in Income Taxes - anInterpretation of SFAS No. 109." FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise's financialstatements in accordance with SFAS No. 109, "Accounting for IncomeTaxes." FIN 48 also prescribes a recognition threshold andmeasurement of a tax position taken or expected to be taken in an enterprise'stax return. FIN 48 was effective for fiscal years beginning afterDecember 15, 2006. Accordingly, the Company adopted FIN 48 effectiveJanuary 1, 2007. The adoption of FIN 48 did not have any impact onthe Company's consolidated financial position.

**Reclassifications**

Certain amounts in thefinancial statements for the years ended December 31, 2007 and 2006 have beenreclassified, with no effect on net income, to be consistent with theclassifications adopted for the year ended December 31, 2008.

**Net income per share**

The Company computes net incomeper share in accordance with SFAS No. 128, *"Earnings Per Share."*  Netincome per share is computed on the basis of the weighted average number ofcommon shares outstanding: 836,283 in 2008, 861,065 in 2007 and 865,589 in2006.  The Company does not have any dilutive instruments andtherefore only basic net income per share is presented.  Net incomeper share and the weighted average common shares outstanding have been adjustedfor 2007 and 2006 to reflect the 10% stock dividend issued in 2007.

**Fair values offinancial instruments**

SFAS No. 107, *"Disclosures About Fair Value of FinancialInstruments,"* as amended by SFAS No. 119 and SFAS No. 133, requiresdisclosure of fair value information for financial instruments, whether or notrecognized in the balance sheet, when it is practicable to estimate the fairvalue.  SFAS No. 107 defines a financial instrument as cash, evidenceof an ownership interest in an entity or contractual obligations which requirethe exchange of cash or other financial instruments.  Certain itemsare specifically excluded from the disclosure requirements, including theCompany's common stock.  In addition, other nonfinancial instrumentssuch as premises and equipment and other assets and liabilities are not subjectto the disclosure requirements.

The following methods and assumptions were used by the Company in estimatingfair values of financial instruments as disclosed herein:

***          Cash and due from banks*** - The carryingamounts of cash and due from banks (cash on hand, due from banks and interest             bearing deposits with other banks) approximate their fair value.

***          Federal funds sold*** - The carrying amounts offederal funds sold approximate their fair value.

***          Investment securities available for sale and held to maturity*** - Fair values for investment securities are based on quoted             marketprices.

 

48

*Continued*

***NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Fair values of financial instruments - continued**

***          Other investments -***No ready market exists forFederal Reserve and Federal Home Loan Bank Stock and they have no quoted             marketvalue.  However, redemption of this stock has historically been atpar value.  Management has determined it is not             practicable toestimate the fair value and has not performed an impairment analysis.

***          Loans*** - For variable rate loans that reprice frequently andfor loans that mature within one year, fair values are based on carrying             values.  Fairvalues for all other loans are estimated using discounted cash flow analyses,with interest rates currently being offered             for loans with similar terms toborrowers of similar credit quality.  Fair values for impaired loansare estimated using discounted             cash flow analyses or underlying collateralvalues, where applicable.

***          Deposits*** - The fair values disclosed for demand deposits are, bydefinition, equal to their carrying amounts. The carrying amounts             of variablerate, fixed-term money market accounts and short-term certificates of depositapproximate their fair values at the             reporting date.  Fair values forlong-term fixed-rate certificates of deposit are estimated using a discountedcash flow calculation             that applies interest rates currently being offered oncertificates to a schedule of aggregated expected monthly maturities.

***          Short-term borrowings*** - The carrying amounts ofborrowings under repurchase agreements, federal funds purchased, U. S.             Treasurydemand notes, and Federal Home Loan Bank advances approximate their fairvalues.

***          Off balance sheet instruments*** - Fair values ofoff balance sheet lending commitments are based on fees currently charged to            enter into similar agreements, taking into account the remaining terms of theagreements and the counterparties' credit standing.

**Recently issued accounting standards**

The following isa summary of recent authoritative pronouncements that may affect accounting,reporting, and disclosure of financial information by the Company:

In December 2007, the Financial Accounting Standards Board (the"FASB") issued SFAS No. 141(R), "Business Combinations,"("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. FAS 141(R) is effective for acquisitions by the Companytaking place on or after January 1, 2009. Early adoption is prohibited.Accordingly, a calendar year-end company is required to record and disclosebusiness combinations following existing accounting guidance until January 1,2009. The Company will assess the impact of SFAS 141(R) if and when a futureacquisition occurs.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about DerivativeInstruments and Hedging Activities" ("SFAS161").  SFAS 161 requires enhanced disclosures about an entity'sderivative and hedging activities, thereby improving the transparency offinancial reporting.  It is intended to enhance the currentdisclosure framework in SFAS 133 by requiring that objectives for usingderivative instruments be disclosed in terms of underlying risk and accountingdesignation. This disclosure better conveys the purpose of derivative use interms of the risks that the entity intends to manage. SFAS 161 is effective forthe Company on January 1, 2009. This pronouncement does not impact accountingmeasurements but will result in additional disclosures if the Company isinvolved in material derivative and hedging activities at that time.

49

*Continued*

***NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Recently issued accounting standards - continued**

In February 2008, the FASB issued FASB Staff Position No. 140-3,"Accounting for Transfers of Financial Assets and Repurchase FinancingTransactions" ("FSP 140-3").  This FSP providesguidance on accounting for a transfer of a financial asset and the transferor'srepurchase financing of the asset.  This FSP presumes that an initialtransfer of a financial asset and a repurchase financing are considered part ofthe same arrangement (linked transaction) under SFAS No. 140. However, ifcertain criteria are met, the initial transfer and repurchase financing are notevaluated as a linked transaction and are evaluated separately under Statement140.  FSP 140-3 will be effective for financial statements issued forfiscal years beginning after November 15, 2008, and interim periods withinthose fiscal years and earlier application is not permitted. Accordingly, thisFSP is effective for the Company on January 1, 2009.  The Company iscurrently evaluating the impact, if any, the adoption of FSP 140-3 will have onits financial position, results of operations and cash flows.

In May, 2008, the FASB issued Statement of Financial Accounting Standard("SFAS") No. 162, "The Hierarchy of Generally AcceptedAccounting Principles," ("SFAS No. 162").  SFAS No.162 identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (GAAP) in the United States (the GAAPhierarchy).  SFAS No. 162 will be effective 60 days following theSEC's approval of the Public Company Accounting Oversight Board's amendments toAU Section 411, "The Meaning ofPresent Fairly in Conformity WithGenerally Accepted Accounting Principles."  The FASB has statedthat it does not expect SFAS No. 162 will result in a change in currentpractice. The application of SFAS No. 162 will have no effect on the Company'sfinancial position, results of operations or cash flows.

The FASB issued FASB Staff Position No. APB 14-1, "Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement)," ("FSP No. APB 14-1"). TheStaff Position specifies that issuers of convertible debt instruments that maybe settled in cash upon conversion should separately account for the liabilityand equity components in a manner that will reflect the entity's nonconvertibledebt borrowing rate when interest cost is recognized in subsequent periods.  FSPNo. APB 14-1 provides guidance for initial and subsequent measurement as wellas derecognition provisions.  The Staff Position is effective forfinancial statements issued for fiscal years beginning after December 15, 2008,and interim periods within those fiscal years. Early adoption is notpermitted.  The adoption of this Staff Position will have no materialeffect on the Company's financial position, results of operations or cashflows.

In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,"Determining Whether Instruments Granted in Share-Based PaymentTransactions are Participating Securities," ("FSP EITF03-6-1").  The Staff Position provides that unvested share-basedpayment awards that contain nonforfeitable rights to dividends or dividendequivalents are participating securities and must be included in the earningsper share computation.  FSP EITF 03-6-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those years. All prior-period earnings per share datapresented must be adjusted retrospectively. Early application is notpermitted.  The adoption of this Staff Position will have no materialeffect on the Company's financial position, results of operations or cashflows.

50                                                                      C*ontinued*

***NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Recently issued accounting standards - continued**

FSP SFAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives andCertain Guarantees: An Amendment of FASB Statement No. 133 and FASBInterpretation No. 45; and Clarification of the Effective Date of FASBStatement No. 161," ("FSP SFAS 133-1 and FIN 45-4") was issuedSeptember 2008, effective for reporting periods (annual or interim) endingafter November 15, 2008.  FSP SFAS 133-1 and FIN 45-4 amends SFAS 133to require the seller of credit derivatives to disclose the nature of thecredit derivative, the maximum potential amount of future payments, fair valueof the derivative, and the nature of any recourseprovisions.  Disclosures must be made for entire hybrid instrumentsthat have embedded credit derivatives.

The staffposition also amends FIN 45 to require disclosure of the current status of thepayment/performance risk of the credit derivative guarantee.  If anentity utilizes internal groupings as a basis for the risk, how the groupingsare determined must be disclosed as well as how the risk is managed.

The staff position encourages that the amendments be applied in periods earlierthan the effective date to facilitate comparisons at initialadoption.  After initial adoption, comparative disclosures arerequired only for subsequent periods.

FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such thatrequired disclosures should be provided for any reporting period (annual orquarterly interim) beginning after November 15, 2008.  The adoptionof this Staff Position will have no material effect on the Company's financialposition, results of operations or cash flows. 

The SEC's Office of the Chief Accountant and the staff of the FASB issued pressrelease 2008-234 on September 30, 2008 ("Press Release") to provideclarifications on fair value accounting.  The Press Release includesguidance on the use of management's internal assumptions and the use of"market" quotes.  It also reiterates the factors in SECStaff Accounting Bulletin ("SAB") Topic 5M which should be consideredwhen determining other-than-temporary impairment: the length of time and extentto which the market value has been less than cost; financial condition andnear-term prospects of the issuer; and the intent and ability of the holder toretain its investment for a period of time sufficient to allow for anyanticipated recovery in market value.

On October 10, 2008, the FASB issued FSP SFAS 157-3, "Determining the FairValue of a Financial Asset When the Market for That Asset Is Not Active"("FSP SFAS 157-3"). This FSP clarifies the application of SFAS No.157, "Fair Value Measurements" in a market that is not active andprovides an example to illustrate key considerations in determining the fairvalue of a financial asset when the market for that asset is notactive.  The FSP is effective upon issuance, including prior periodsfor which financial statements have not been issued. For the Company, this FSPbecame effective for the quarter ended September 30, 2008. 

The Company considered the guidance in the Press Release and in FSP SFAS 157-3when conducting its review for other-than-temporary impairment as ofSeptember30, 2008 and determined that it did not result in a change to itsimpairment estimation techniques as outlined and discussed in Note 17-Estimated Fair Value of Financial Instruments.

51                                                                                          *Continued*

***NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Recently issued accounting standards - continued**

FSP EITF 99-20-1, "Amendments to the Impairment Guidance of EIFT Issue No.99-20," ("FSP EITF 99-20-1") was issued in January2009.  Prior to the Staff Position, other-than-temporary impairmentwas determined by using either EITF Issue No. 99-20, "Recognition ofInterest Income and Impairment on Purchased Beneficial Interests and BeneficialInterests that Continue to be Held by a Transferor in Securitized FinancialAssets," ("EITF 99-20") or SFAS No. 115, "Accounting forCertain Investments in Debt and Equity Securities," ("SFAS 115")depending on the type of security.  EITF 99-20 required the use ofmarket participant assumptions regarding future cash flows regarding theprobability of collecting all cash flows previously projected.  SFAS115 determined impairment to be other than temporary if it was probable thatthe holder would be unable to collect all amounts due according to thecontractual terms. To achieve a more consistent determination ofother-than-temporary impairment, the Staff Position amends EITF 99-20 todetermine any other-than-temporary impairment based on the guidance in SFAS115, allowing management to use more judgment in determining anyother-than-temporary impairment.  The Staff Position is effective forinterim and annual reporting periods ending after December 15, 2008 and shallbe applied prospectively.  Retroactive application is notpermitted.  Management has reviewed the Company's security portfolioand evaluated the portfolio for any other-than-temporary impairments asdiscussed in Note 3 - Investment Securities.

Other accounting standards that have been issued or proposed by the FASB orother standards-setting bodies are not expected to have a material impact onthe Company's financial position, results of operations and cash flows.

**Risks and uncertainties**

Inthe normal course of its business the Company encounters two significant typesof risks: economic and regulatory. There are three main components of economicrisk: interest rate risk, credit risk and market risk.  The Companyis subject to interest rate risk to the degree that its interest-bearingliabilities mature or reprice at different speeds, or on different basis, thanits interest-earning assets.  Credit risk is the risk of default onthe Company's loan portfolio that results from borrower's inability orunwillingness to make contractually required payments.  Market risk,as it relates to lending and real estate held for operating locations, reflectschanges in the value of collateral underlying loans receivable and thevaluation of real estate held by the Company. 

The Company is subject to the regulations of various governmentalagencies.  These regulations can and do change significantly fromperiod to period.  The Company also undergoes periodic examinationsby the regulatory agencies, which may subject it to further changes withrespect to asset valuations, amounts of required loss allowances and operatingrestrictions from the regulators' judgments based on information available tothem at the time of their examination.

***NOTE 2 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS***

     The Bank is required to maintain average reservebalances either at the Bank or on deposit with the Federal ReserveBank.  The average amounts of these reserve balances for the yearsended December 31, 2008 and 2007 were approximately $2,638,000 and $10,486,000,respectively.

52

***NOTE 3 - INVESTMENT SECURITIES***

     The amortized cost and fair value of investmentsecurities are based on contractual maturity dates.  Actualmaturities may differ from the contractual maturities because borrowers mayhave the right to prepay obligations with or without penalty.  Theamortized cost, approximate fair value, and expected maturities of investmentsecurities are summarized as follows (tabular amounts in thousands):

**                         December  31, 2008                         Amortized         Unrealized  Holding            Fair    **

**AVAILABLE FOR  SALE**     Government sponsored enterprises        Within one year       One to five years        Six to ten years     State, county and municipal        Within one year        One to five years        Six to ten years        Over ten years     Mortgage backed        Six to ten years        Over ten years     Other Investments        CRA Qualified Investment Fund        Master Card International Stock          Total available for sale**HELD TO MATURITY**     State, county and municipal        Within one year        One to five years        Six to ten years        Over ten years        Total held to maturity

**     Cost      **   $    3,725  151,174      14,522      169,421  1,370  4,243  11,271        1,115        17,999  507        3,021          3,528  721            11            732**$ 191,680**  $        795        1,481  4,589       2,893**$     9,758**

**  Gains   **  $         41  2,030       583      2,654  15  133  16                    164  18         63           81         -            -              -   **$  2,899**  $        11  9  12      -   **$     32**

** Losses **  $     -     -          -            -          -          -     362        39        401  -           -            -            -           -             -   **$    401******  $      -          8  70       142**$     220**

**  Value   **  $   3,766  153,204     15,105     172,075  1,385  4,376  10,925       1,076       17,762  525       3,084         3,609  721            11            732**$ 194,178**  $         806  1,482  4,531       2,751**$     9,570**

53

*Continued*

 ***NOTE 3 - INVESTMENT SECURITIES***

 

** **

**                           December  31, 2007                           Amortized         Unrealized  Holding              Fair    **

**AVAILABLE  FOR SALE**     Government sponsored enterprises        Within one year        One to five years        Six to ten years     State, county and municipal        Within one year        One to five years        Six to ten years        Over ten years     Mortgage backed        Six to ten years        Over ten years     Other Investments        CRA Qualified Investment Fund        Master Card International Stock       Total available for sale**HELD TO MATURITY**     State, county and municipal        Within one year        One to five years        Six to ten years        Over ten years        Total held to maturity

**     Cost      **   $    61,611  103,464      18,276      183,351  209  6,244  1,916      10,758        19,127  389          846         1,235  701            11            712**$ 204,425**  $         250        1,438  3,764       2,259**$     7,711**

**  Gains   **  $         2  1,408       407      1,817  3  166  16         10         195  11           4           15         -            -              -   **$  2,027**  $        -     32  20          -   **$        52**

** Losses **  $   236  8       -         244       -          -     6        49          55  -           20          20         -           -             -   **$    319******  $       -          -     5       27**$      32**

**  Value   **  $   61,377  104,864     18,683     184,924  212  6,410  1,926     10,719       19,267  400          830         1,230  701            11            712**$ 206,133**  $         250  1,470  3,779       2,232**$     7,731**

54

*Continued*

***NOTE3 - INVESTMENT SECURITIES, Continued***

     Thefollowing table shows gross unrealized losses and fair value, aggregated byinvestment category, and length of time that individual securities have been ina continuous unrealized loss position, at December 31, 2008 (tabular amounts inthousands):

**Availablefor Sale**

**State, county, and municipal****          Total**

**            Less  than        twelve  months      **

**         Twelve  months                or  more          **

**             Total                  **

**Fair value**

**Unrealized     losses  **

**Fair value**

**Unrealized      losses  **

**Fair value**

**Unrealized    losses    **

  $    10,926

  $          401

  $             -

  $              -

  $    10,926

  $          401

**$    10,926**

**$          401**

**$             -**

**$              -**

**$    10,926**

**$          401**

     Securities classified asavailable-for-sale are recorded at fair market value.  There were nounrealized losses consisting of securities in a continuous loss position fortwelve months or more.

     Investment securities with an aggregate par valueof $174,673,000 at December 31, 2008 and $182,651,000 at December 31, 2007 werepledged to secure public deposits and for other purposes.

     During 2007, $2,315,000 of available-for-salesecurities were sold for a gain of $9,000.  There were no sales ofsecurities available-for-sale in 2008 or 2006.

     Managementreviews securities for other-than-temporary impairment on at least a quarterlybasis, and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) the length of time and theextent to which the fair value has been less than cost, (2) the financialcondition and near-term prospects of the issuer, and (3) the intent and abilityof the Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

**Other Investments, at Cost**

     The Bank,as a member institution, is required to own certain stock investments in theFederal Home Loan Bank of Atlanta ("FHLB") and the Federal ReserveBank.  The stock is generally pledged against any borrowings fromthese institutions (see Note 8).  No ready market exists for thestock and it has no quoted market value.  However, redemption ofthese stocks has historically been at par value.  

     TheCompany's investments in stock are summarized below (tabular amounts inthousands):

**            December 31,   **

**Federal Reserve Bank  FHLB**

**   2008   **  $     116   2,908**$ 3,024**

**     2007    **  $     116   2,181**$ 2,297**

*** ***

55

***NOTE4 - LOANS AND ALLOWANCE FOR LOAN LOSSES***

     Followingis a summary of loans by major classification (tabular amounts in thousands):

**      December  31,        **

  Real estate - mortgage  Real estate - construction  Commercial and industrial  Loans to individuals for household, family and    other consumer expenditures  Agriculture  All other loans, including overdrafts  Unamortized deferred loan costs

**     2008   **  $  366,948  92,010  89,348  46,278  3,119  411         167**$ 598,281**

**     2007   **  $  350,138  83,398  88,106  47,731  3,264  794           320**$ 573,751**

     The Bank's loan portfolio consisted of$473,895,000 and $423,025,000 in fixed rate loans as of December 31, 2008 and 2007,respectively.  Fixed rate loans with maturities in excess of one yearamounted to $316,519,000 and $275,452,000 at December 31, 2008 and 2007,respectively.  The Bank has an available line of credit from theFHLB. The line is secured by a blanket lien on qualifying 1-4 family mortgages.

     Changes in the allowance for loan losses aresummarized as follows (tabular amounts in thousands):

** **

** For the years ended December 31, **

** **

**     2008  **

**    2007    **

**    2006   **

Balance, beginning of year  Recoveries of loans previously charged    against the allowance  Provided from current year's income  Loans charged against the allowance  Balance, end of year

$   6,507        533      2,533   (2,482)**$ 7,091 **

$   6,476    332    1,145    (1,446)**$  6,507 **

$  5,918    659    808       (909)**$  6,476 **

As of December 31, 2008 and 2007, loans individually evaluated andconsidered impaired under SFAS No. 114 "Accounting by Creditors forImpairment of a Loan" were as follows (tabular amounts in thousands):

**   December 31,    **

**  2008  **

**  2007  **

Total loans considered impaired

$4,158

$  861  

 

 

Loans considered  impaired for which there is a related       allowance for loan loss:

 

 

Outstanding loan balance

3,082

-  

Related allowance established

572

-  

 

 

Loans considered impaired and previously written down to fair value

1,075

861  

 

 

Average annual investment in impaired loans

1,589

755  

 

 

Interest income  recognized on impaired loans during the period of       impairment.

-

-  

56                                                                            *Continued*

***NOTE 4 - LOANS AND ALLOWANCE FOR LOANLOSSES - continued***

     At December 31, 2008 and 2007, non-accrual loanstotaled $2,990,000 and $861,000, respectively.  The total amount ofinterest earned on non-accrual loans was $103,000 in 2008, $33,000 in 2007 and$27,000 in 2006.  The gross interest income which would have beenrecorded under the original terms of the non-accrual loans amounted to $288,000in 2008, $94,000 in 2007, and $65,000 in 2006.  Foregone interest onnon-accrual loans totaled $185,000 in 2008, $61,000 in 2007, and $38,000 in2006.  TheCompany writes down any potential losses associated with non-accrual loans atthe time such loans are placed in a non-accrual status.  Accrued andunpaid current period interest income on non-accrual loans is reversed tocurrent period income at the time a loan is placed in non-accrualstatus.  Accrued and unpaid prior period interest income onnon-accrual loans is charged to the Allowance for Loan Losses at the time theloan is placed in non-accrual status.  Any payments received on loansplaced in non-accrual status are applied first to principal.  TheCompany does not recognize interest income on non-accrual loans on a cashbasis.

***NOTE 5 - PREMISES AND EQUIPMENT***     Premises and equipment at December 31 issummarized as follows (tabular amounts in thousands):

** **

**   2008   **

**   2007   **

  Land and buildings  Furniture, fixtures and equipment  Less accumulated depreciation and amortization  Construction in progress

  $ 26,262       8,81135,073     11,78923,284          119**$ 23,403**

  $ 25,192       7,76832,960     10,70122,259          669**$ 22,928**

     Depreciation and amortization of premises andequipment charged to operating expense totaled $1,330,000 in 2008, $1,285,000in 2007 and $1,202,000 in 2006.  As of December 31, 2008 constructionin progress consisted of $33,000 for expenditures associated with renovationsto the Surfside branch office, with an approximate remaining contractualbalance of $29,000, and $86,000 for expenditures associated with the sitepreparation and the establishment of an ATM at the Company's Carolina Forestsite, with an approximate remaining contractual balance of $164,000.

     Depreciation with regard to premises andequipment owned by the Company is recorded using the straight-line method overthe estimated useful life of the related asset for financial reportingpurposes. Estimated lives range from fifteen to thirty-nine years for buildingsand improvements and from five to seven years for furniture and equipment.Estimated lives for computer software are typically fiveyears.  Estimated lives of Bank automobiles are typically five years.Estimating the useful lives of premises and equipment includes a component ofmanagement judgment.  

******57

***NOTE 6 - DEPOSITS***

     A summary of deposits, by type, as ofDecember 31 follows (tabular amounts in thousands):

** **

**    2008    **

**    2007   **

Transaction accounts  Savings deposits  Insured money market accounts  Time deposits over $100,000  Other  time deposits         Total deposits

$  186,911  48,354  76,411  210,669  156,874**$679,219**

$200,052  46,019  83,329  201,855  161,034**$692,289**

     Interest paid on certificates of deposit of$100,000 or more totaled $8,110,000 in 2008, $8,944,000 in 2007 and $6,841,000in 2006.
     AtDecember 31, 2008, the scheduled maturities of time deposits are as follows(dollar amounts in thousands):
             2009               2010               2011               2012               2013  and after

$ 303,415  51,133  5,666  3,538       3,791**$367,543**

***NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS***

*** ***     Securitiessold under repurchase agreements are summarized as follows (dollar amounts inthousands):

**At and for the year ended            December  31,            **

  Amount outstanding at year end  Average amount outstanding during year  Maximum outstanding at any month-end  Weighted average rate paid at year-end  Weighted average rate paid during year

**     2008      **$   67,415       58,843       67,415    1.86%    2.41%  

**     2007     **$   60,936       68,276       72,927    4.20%    4.10%  

     The Bank enters into sales of securities underagreements to repurchase. These obligations to repurchase securities sold arereflected as liabilities in the consolidated balance sheets.  Thedollar amount of securities underlying the agreements are book entry securitiesmaintained with an independent third party safekeeping agent.  Governmentsponsored enterprise and municipal securities with a book value of $71,752,000($72,845,000 fair value) and $74,717,000 ($76,064,000 fair value) at December31, 2008 and 2007, respectively, are pledged as collateral for the agreements.

******58

***NOTE 8 - LINES OF CREDIT***

     At December 31, 2008, the Bank had unusedshort-term lines of credit totaling $33,500,000 to purchase Federal Funds fromunrelated banks.  These lines of credit are available on a one toseven day basis for general corporate purposes of the Bank.  All ofthe lenders have reserved the right to withdraw these lines at their option.

     The Bank has a demand note through the U.S.Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond(FRB).  The Bank may borrow up to $7,000,000 under the arrangement atvarying rates set weekly by the FRB.  The average rate paid by theCompany under the arrangement was 1.42% for 2008.  The note issecured by Federal agency securities with a market value of $3,009,000 at December31, 2008.  The amount outstanding under the note totaled $2,672,000and $2,377,000 at December 31, 2008 and 2007, respectively.

     The Bank also has a line of credit from theFederal Home Loan Bank (FHLB) for $91,328,000 secured by a lien on the Bank'squalifying 1-4 family mortgages and the Bank's investment in FHLBstock.  Allowable terms range from overnight to 20 years at varyingrates set daily by the FHLB.  The amount outstanding under theagreement totaled $30,000,000 and $15,000,000 at December 31, 2008 and 2007,respectively.  The $30,000,000 outstanding at December 31, 2008consists of two advances in the amounts of $20,000,000 and$10,000,000.  The $20,000,000 advance is due and payable in onepayment on March 2, 2009.  The $10,000,000 advance is due and payablein one payment on March 31, 2009.  Interest on these advances ispayable monthly at 1.43% and .86%, respectively.

***NOTE9 - NOTE PAYABLE***

     OnApril 10, 2008, the Company executed a note with Silverton Bank, N.A.establishing a revolving credit facility for the Company in the amount of$1,200,000.  All principal is payable on or before the maturity dateof the note on April 10, 2010.  Interest is payable quarterly on thefollowing dates of each quarter:  July 10, October 10, January 10,and April 10.  The interest rate on the note is paid at the rate ofthe Prime Rate as published in the Money Rates section of the Wall StreetJournal, Eastern Edition, printed edition, minus one percent.  Theamount outstanding on the note at December 31, 2008 was $1,119,511, and theinterest rate on the note payable at December 31, 2008 was2.25%.  The note is unsecured.

***NOTE10 - INCOME TAXES***

     The provision for income taxes isreconciled to the amount of income tax computed at the federal statutory rateon income before income taxes as follows (dollar amounts in thousands):

** **

**                              For the years ended  December 31,                     **

** **

**             2008              **

**            2007             **

**               2006               **

****Tax expense at statutory rate  Increase (decrease) in taxes resulting from:     Tax exempt interest     State bank tax (net of federal benefit)     Other - net     Tax provision

**Amount**$4,600 ****(369)****228 ****       29 **$4,488 **

**   %      **34.21%   (2.74)    1.70         .21   **33.38%**

**Amount**$5,047 ****(309)  263 **       **14 **$5,015 **

**   %      **34.25%   (2.10)    1.78         .10   **34.03%**

**Amount**$5,081    (276)   313     (338) **$4,780 **

**    %     **34.27%  (1.86)    2.11     (2.31)  **32.21%**

59

*Continued*

***NOTE 10 - INCOME TAXES -Continued***     The sources and tax effects of temporarydifferences that give rise to significant portions of the deferred tax assets anddeferred tax liabilities are as follows (tabular amounts in thousands):

** **

**     December 31,    **

**Deferred tax assets:     **Allowance for loan losses deferred for tax purposes     Deferred compensation     Executive retirement plan     Other        Gross deferred tax assets        Less valuation allowance        Net deferred tax assets**Deferred tax liabilities:**   Depreciation for income tax reporting in excess of  amount        for financial reporting     Unrealized net gains on securities available for sale     Other        Gross deferred tax liabilities        Net deferred tax asset

**  2008  **  $ 2,411   548   152      187   3,298           -   3,298     (523)  (998)    (186) (1,707)**$ 1,591**

**   2007   **  $ 2,212   512   143      136     3,003            -       3,003     (392)  (683)    (216) (1,291)**$ 1,712**

**     **The net deferredtax asset is included in other assets at December 31, 2008 and 2007.

     A portion of the change in net deferred taxesrelates to the change in unrealized net gains and losses on securitiesavailable for sale.  The related 2008 tax expense of $315,000 and the2007 tax expense of $1,429,000 have been recorded directly to stockholders'equity.  The balance of the change in net deferred taxes results fromthe current period deferred tax benefit or expense.

    The following summary of the provision for income taxesincludes tax deferrals which arise from temporary differences in therecognition of certain items of revenue and expense for tax and financialreporting purposes (amounts in thousands):

** **

** For the years ended December 31,  **

****Income taxes currently payable    Federal    State  Net deferred income tax (benefit)/expense      Provision for income taxes

**    2008   **  $ 4,336       346   4,682      (194)**$ 4,488 **

**    2007    **  $ 4,588       400   4,988         27 **$ 5,015**** **

**    2006    **  $ 4,367       476   4,843        (63)**$ 4,780 **

60

***NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK***

     The Bank is a party to financial instruments withoff balance sheet risk in the normal course of business to meet the financingneeds of its customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  Those instrumentsinvolve, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the accompanying consolidated balancesheets.  The contractual amounts of those instruments reflect theextent of involvement the Bank has in particular classes of financialinstruments.  The Bank uses the same credit policies in makingcommitments and conditional obligations as it does for on balance sheetinstruments.

     The contractual value of the Bank's off balancesheet financial instruments is as follows as of December 31, 2008 (amounts inthousands):

****Commitments to extend credit  Standby letters of credit

**Contract amount **  $   53,838  $     2,111

     Commitmentsto extend credit are agreements to lend as long as there is no violation of anycondition established in the contract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments are expected to expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash requirements.  The Bank evaluates each customer'screditworthiness on a case-by-case basis.  The amount of collateralobtained if deemed necessary by the Bank upon extension of credit is based onmanagement's credit evaluation.

***NOTE 12 - COMMITMENTS AND CONTINGENCIES***

     At December 31, 2008, the Bank was obligatedunder a non-cancelable lease for a billboard contract that had initial orremaining terms of more than one year.  Future minimum payments underthis agreement at December 31, 2008 were (tabular amounts in thousands):

**Payable in year ending**      2009        2010         2011 and thereafter           Total future minimum  payments required

**  Amount   **  $   2     -     -**$   2**

     Leasepayments under all operating leases charged to expense totaled $5,000 in 2008,$6,000 in 2007 and $6,000 in 2006.  The leases provide that thelessee pay property taxes, insurance and maintenance cost.

     The Company is party to litigation and claimsarising in the normal course of business.  Management, afterconsultation with legal counsel, believes that the liabilities, if any, arisingfrom such litigation and claims will not be material to the Company's financialposition.

61

***NOTE 13 - RESTRICTION ONDIVIDENDS***

     Payment of dividends is within the discretion ofthe Board of Directors, and the ability of the Company to pay cash dividends isdependent upon receiving cash in the form of dividends from theBank.  Federal banking regulations restrict the amount of dividendsthat can be paid and such dividends are payable only from the retained earningsof the Bank.  At December 31, 2008, the Bank's retained earnings were$78,467,000.

***NOTE 14 - TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND ASSOCIATES***

     Directors and executive officers of the Companyand the Bank and associates of such persons are customers of and have loan anddeposit transactions with the Bank in the ordinary course ofbusiness.  Additional transactions may be expected to take place inthe future.  Loans and commitments are made on comparable terms,including interest rates and collateral, as those prevailing at the time forother customers of the Bank, and do not involve more than normal risk ofcollectibility or present other unfavorable features. 

     Total loans to all executive officers anddirectors, including immediate family and business interests, at December 31,were as follows (tabular amounts in thousands):

** **

**    December 31,     **

**Balance, beginning of year**     New loans     Less loan payments**Balance, end of year**

**  2008   **  $   1,956  343        675**$  1,624**

**  2007   **  $   2,400  775     1,219**$  1,956**

     Deposits by directors and executiveofficers of the Company and the Bank, and associates of such persons, totaled$12,478,000 and $11,036,000 at December 31, 2008 and 2007, respectively.

***NOTE 15 - EMPLOYEE BENEFIT PLAN***

     The Bank has a defined contribution pension plancovering all employees who have attained age twenty-one and have a minimum ofone year of service.  Upon ongoing approval of the Board ofDirectors, the Bank matches one hundred percent of employee contributions up tothree percent of employee salary deferred and fifty percent of employeecontributions in excess of three percent and up to five percent of salarydeferred.  The Board of Directors may also make discretionarycontributions to the Plan.  For the years ended December 31, 2008,2007 and 2006, $579,000, $712,000 and $605,000, respectively, were charged tooperations under the plan.

     Supplemental benefits are provided to certain keyofficers under The Conway National Bank Executive Supplemental Income Plan (ESI)and the Long-Term Deferred Compensation Plan (LTDC).  These plans arenot qualified under the Internal Revenue Code.  The plans areunfunded.  However, certain benefits under the ESI Plan areinformally and indirectly funded by insurance policies on the lives of thecovered employees.

     The ESI plan provides a life insurance benefit onthe life of the covered officer payable to the officer's beneficiary. The planalso provides a retirement stipend to certain officers.  For theyears ended December 31, 2008, 2007, and 2006, the Bank had $51,888, $96,056and $84,283 in income and $50,436, $111,256 and ($30,198) of expense associatedwith this plan, respectively.  The negative expense noted for 2006was the result of the forfeiture of benefits from departingofficers.  The LTDC plan provides cash awards to certain officerspayable upon death, retirement, or separation from service.  Theawards are made in dollar increments equivalent to the value of the Company'sstock at the time of the award.  The Bank maintains the value ofawards in amounts equal to the future value of the Company' stock plus any cashdividends paid.  Such plans are commonly referred to as phantom stockplans.  For the years ended December 31, 2008, 2007 and 2006,$179,493, $223,630 and ($91,144), respectively, was charged to operations underthe plan.  The negative expense noted for 2006 was the result of theforfeiture of benefits from departing officers.

62

***NOTE 16 -REGULATORY MATTERS***

     The Company and the Bank are subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Company and Bank.  Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Company and the Bank must meet specific capital guidelines thatinvolve quantitative measures of assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accountingpractices.  The Company's and the Bank's capital amounts andclassification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

     Quantitative measures established by regulationto ensure capital adequacy require the Company and the Bank to maintain minimumamounts and ratios (set forth in the table below) of total and Tier 1 capitalto risk-weighted assets, and of Tier 1 capital to averageassets.  Management believes, as of December 31, 2008, the Companyand the Bank meet all capital adequacy requirements to which they are subject.

     The Company's and the Bank's actual capitalamounts and ratios and minimum regulatory amounts and ratios are presented asfollows (dollar amounts in thousands):

***CNB Corporation***

**                Actual                   **

**For capital               adequacy purposes                  Minimum             **

** **

**As of December 31, 2008**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)**As of December 31, 2007**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)

**   Amount  **   $   89,119        82,028        82,028   $   87,594        81,087        81,087

**  Ratio   **** **14.67%   13.50     9.56** **14.86%   13.76     9.47

**      Amount****  **$   48,607         24,304         34,312    $   47,154         23,577         34,243

**  Ratio  ****  **8.00%    4.00    4.00    8.00%    4.00    4.00

 

***The Conway National Bank***

**                Actual                **

**For  capital                 adequacy purposes                  Minimum               **

**To be well capitalized   under prompt corrective      action  provisions                   Minimum              **

**As of December 31, 2008**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)**As of December 31, 2007**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)

**   Amount  **    $   89,428         82,337         82,337    $   85,087         78,580         78,580

**  Ratio   **** **14.72%   13.55     9.60** **14.46%   13.36     9.19

**    Amount ****   **$   48,604          24,302          34,311     $   47,062          23,531          34,197

**  Ratio  ****   **8.00%     4.00     4.00     8.00%     4.00     4.00

**    Amount        **$   60,755          36,453          42,889     $   58,828          35,297          42,746

**    Ratio**          10.00%       6.00       5.00     10.00%       6.00       5.00

63

***NOTE 17 -ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS***

     The estimated fair values of the Company's financialinstruments were as follows at December 31 (amounts in thousands):

** **

**                2008  **    **           **** Carrying        **  **Fair     **

**                2007                  Carrying       **  **Fair     **

**FINANCIAL ASSETS**    Cash and due from banks      Federal funds sold      Investment securities available for sale      Investment securities held to maturity      Other investments      Loans (net)**FINANCIAL LIABILITIES**    Deposits      Securities sold under repurchase agreements      Federal Home Loan Bank advance      U.S. Treasury demand notes      Other short-term borrowings

**  Amount   **  $  19,259    21,000    194,178    9,758    3,024    591,190    679,219    67,415    30,000    2,672    1,120  

**   Value   **$  19,259   21,000   194,178   9,570   3,024   605,602   680,172   67,415   30,000   2,672   1,120 

**    Amount   **  $  20,941    26,000    206,133    7,711    2,297    567,244    692,289    60,936    15,000    2,377    -  

**   Value   **$  20,941   26,000   206,133   7,731   2,297   569,930   692,189   60,936   15,000   2,377   -  

**  **

**Notional  **

**Fair   **

**Notional  **

**Fair   **

** **

**Amount   **

**Value **

**Amount  **

**Value **

**OFF BALANCE SHEET INSTRUMENTS**

** **

** **

** **

** **

Commitments to extend credit

$  53,838  

$         -  

$  58,002  

$          -  

Standby letters of credit

2,111  

-  

4,080  

-  

     EffectiveJanuary 1, 2008, the Company adopted SFAS No. 157, "Fair ValueMeasurements" ("SFAS 157") which provides a framework formeasuring and disclosing fair value under generally accepted accountingprinciples. SFAS 157 requires disclosures about the fair value of assets andliabilities recognized in the balance sheet in periods subsequent to initialrecognition, whether the measurements are made on a recurring basis (forexample, available-for-sale investment securities) or on a nonrecurring basis(for example, impaired loans). 

     SFAS 157defines fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. SFAS 157 also establishesa fair value hierarchy which requires an entity to maximize the use ofobservable inputs and minimize the use of unobservable inputs when measuringfair value. The standard describes three levels of inputs that may be used tomeasure fair value:

**Level 1**

Quoted prices in active markets for  identical assets or liabilities. Level 1 assets and liabilities include debt  and equity securities and derivative contracts that are traded in an active  exchange market, as well as U.S. Treasuries and money market funds.

**Level 2**

Observable inputs other than Level 1  prices such as quoted prices for similar assets or liabilities; quoted prices  in markets that are not active; or other inputs that are observable or can be  corroborated by observable market data for substantially the full term of the  assets or liabilities. Level 2 assets and liabilities include debt securities  with quoted prices that are traded less frequently than exchange-traded  instruments, mortgage backed securities, municipal bonds, corporate debt securities,  and derivative contracts whose value is determined using a pricing model with  inputs that are observable in the market or can be derived principally from  or corroborated by observable market data. This category generally includes  certain derivative contracts and impaired loans.

64                                                                      *Continued*

***NOTE 17 -ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued***

**Level 3**

Unobservable inputs that are supported  by little or no market activity and that are significant to the fair value of  the assets or liabilities. Level 3 assets and liabilities include financial  instruments whose value is determined using pricing models, discounted cash  flow methodologies, or similar techniques, as well as instruments for which  the determination of fair value requires significant management judgment or  estimation. For example, this category generally includes certain private  equity investments, retained residual interests in securitizations,  residential mortgage servicing rights, and highly-structured or long-term  derivative contracts.

     TheCompany has no assets or liabilities whose fair values are measured using level1 inputs.

     TheCompany's available-for-sale investment securities ($194,178 at December 31,2008) include debt securities of U.S. government sponsored enterprises,municipal bonds, and mortgage backed securities.  The Companyconsiders the market quoted prices of these instruments to be equivalent todebt securities that are traded less frequently than exchange-tradedinstruments and therefore classifies them as Level 2 inputs.  Also,the Company predominantly makes loans for the purposes of real estateacquisition, construction, agriculture, commercial and industrial needs, andconsumer expenditures.  The majority of the Company's loans are realestate secured.  Loans which are deemed to be impaired are primarilyvalued at the fair values of the underlying real estate collateral. Such fairvalues are obtained using independent appraisals, which the Company considersto be level 2 inputs. The aggregate carrying amount of impaired loans atDecember 31, 2008 was $4,158.  The Company's available-for-saleinvestment securities and impaired loans are the only assets whose fair valuesthe Company measures using level 2 inputs.  The Company has noliabilities whose fair values are measured using level 2 inputs.

     TheCompany has no assets or liabilities whose fair values are measured using level3 inputs. 

     FASB StaffPosition No. FAS 157-2 delays the implementation of SFAS 157 until the firstquarter of 2009 with respect to goodwill, other intangible assets, real estateand other assets acquired through foreclosure and other non-financial assetsmeasured at fair value on a nonrecurring basis.
*NOTE 18 - PARENT COMPANY INFORMATION*
     Following is condensed financial information ofCNB Corporation (parent company only) (amounts in thousands):

***CONDENSED BALANCESHEETS     ***

** **

**       December  31,      **

**ASSETS     **Cash     Investment in subsidiary     Land     Other assets**LIABILITIES AND STOCKHOLDERS' EQUITY**   Dividends payable     Short term borrowings     Other Liabilities     Stockholders' equity

**    2008**    $     5,142  83,835  -           37  $  89,014  $     4,356  1,120              12       83,526  $   89,014

**   2007**   $     5,836  79,605  1,109           37  $  86,587  $    4,475  -                -    82,112  $  86,587

65

*Continued*

***NOTE18 - PARENT COMPANY INFORMATION, Continued***

***CONDENSED STATEMENTS OF INCOME***

** **

**For the years ended December 31,**

**INCOME**   Dividend from bank subsidiary     Other income**EXPENSES**    Interest expense      Legal      Sundry      Other        Income before equity in undistributed           net income of bank  subsidiary**EQUITY IN UNDISTRIBUTED NET INCOME OF      SUBSIDIARY**      Net income

**    2008    **$    5,032  284  35  -     17           64  5,200        3,757**$    8,957**

**     2007   **$    5,129  199  -  27  17           54  5,230        4,490**$    9,720**

**   2006   **$    5,032  2  -  154  74          307  4,499        5,547**$  10,046**

***CONDENSED STATEMENTS OF CASH FLOWS***

** **

**For the years ended December 31, **

**OPERATING  ACTIVITIES**     Net income     Adjustments to reconcile net income to net cash provided        by operating activities        Equity in undistributed net income of  bank subsidiary     Net change in other liabilities            Net cash provided  by operating activities**INVESTING ACTIVITIES**     Sale of land            Net cash provided  by investing activities**FINANCING ACTIVITIES**     Dividends paid     Common shares repurchased     Common shares sold     Cash paid for fractional shares     Change in short term borrowings****        Net cash used for  financing activities          Net increase (decrease) in  cash**CASH, BEGINNING OF THE YEAR  CASH, END OF THE YEAR**

**    2008    **$    8,957   (3,757)           12        5,212         1,109         1,109   (4,475)     (3,714)  54              -        1,120       (7,015)  (694)        5,836   $    5,142** **

**    2007    **$    9,720   (4,490)           -           5,230             -                -      (4,123)     (1,936)  56             (61)          -          (6,064)  (834)        6,670   $    5,836 

**     2006   **$  10,046   (5,547)           -           4,499              -               -      (3,943)         (525)  16               -              -         (4,452)  47          6,623   $   6,670  

*** ***

***NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)***

     Unauditedcondensed financial data by quarter for 2008 and 2007 is as follows (amounts,except per share data, in thousands):

** **

**                                  Quarter  ended                                       **

**2008**  Interest income  Interest expense     Net interest income  Provision for loan losses     Net interest income after        provision for loan losses  Noninterest income  Noninterest expenses     Income before income taxes  Income taxes     Net income  Net income per share  Weighted average shares outstanding

**   March 31 **  $    13,680       5,694  7,986          359  7,627  1,845       5,637  3,835       1,295**$     2,540  $       3.00     847,936**

**    June 30  **  $    12,428        4,660   7,768           495   7,273   1,728        5,824   3,177        1,040 **$     2,137   $       2.56      834,264 **

**September 30**  $    12,050       4,050  8,000          500  7,500  2,047       5,917  3,630       1,245**$     2,385  $       2.86     832,897**

**December 31**  $    11,961       3,817  8,144        1,179  6,965  1,568        5,730  2,803           908**$     1,895  $       2.28     830,035**

**  **

**                                     Quarter  ended                                        **

**2007**

**  March 31 **

**  June 30  **

**September 30**

**December 31**

****Interest income  Interest expense     Net interest income  Provision for loan losses     Net interest income after        provision for loan losses  Noninterest income  Noninterest expenses     Income before income taxes  Income taxes     Net income  Net income per share(1)  Weighted average shares outstanding(1)

  $    13,176       5,503  7,673          365  7,308  1,556       5,096  3,768       1,327**$     2,441  $       2.83     863,499**

  $    13,251        5,645   7,606             (4)  7,610   1,789        5,510   3,889        1,359 **$     2,530   $       2.93      863,145 **

  $    13,671       5,767  7,904          220  7,684  1,753       5,703  3,734       1,188**$     2,546  $       2.96     860,914**

  $    13,657       5,943  7,714          564  7,150  1,904        5,710  3,344       1,141**$     2,203  $       2.57     856,752**

(1)        Adjusted for the effect of a 10% stock dividend issued during 2007.

67

***NOTE 20 - SUBSEQUENT EVENTS***

     Duringthe first quarter of 2009, the Company initiated a private placement stock offeringto issue up to 25,000 shares of the Company's common stock at $158 pershare.  The offering is not expected to be completed until the secondquarter of 2009.  Proceeds from the offering are being used forgeneral corporate purposes, including, but not limited to, the repayment ofdebt previously incurred for the purchase of common shares.

     On March 2, 2009 the Company's $20,000,000 FHLBadvance matured. This advance was renewed into an overnight advance of the sameamount on March 2, 2009 and March 3, 2009.  The Company paid intereston these overnight advances at the rates of .62% and .61% for the same dates,respectively.  On March 4, 2009 the Company repaid the $20,000,000overnight advance with four new advances in the amount of $5,000,000 each,maturing on December 4, 2009, March 4, 2010, September 7, 2010, and March 4,2011, respectively, and at interest rates of 1.30%, 1.30%, 1.65%, and 2.07%,respectively.

68

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

None.

**ITEM 9A.  CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

**(a)** Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or240.15d-15(b) of the Corporation's disclosure controls and procedures (asdefined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), theCorporation's chief executive officer and chief financial officer concludedthat such controls and procedures, as of the end of the period covered by thisannual report, were effective.

**Internal Control over Financial Reporting**

**(a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

     The management of CNB Corporation is responsiblefor establishing and maintaining adequate internal control over financialreporting for the company.  Internal control over financial reportingis a process designed to provide reasonable assurance that assets aresafeguarded against loss from unauthorized use or disposition, transactions areexecuted in accordance with appropriate management authorization and accountingrecords are reliable for the preparation of financial statements in accordancewith generally accepted accounting principles.  Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

     Management has assessed the effectiveness of CNBCorporation's internal control over financial reporting as of December 31,2008.  In making our assessment, management has utilized theframework published by the Committee of Sponsoring Organizations("COSO") of the Treadway Commission "Internal Control-IntegratedFramework."  Based on our assessment, management has concludedthat, as of December 31, 2008, internal control over financial reporting waseffective.

     Elliott Davis, LLC, the independent registeredpublic accounting firm that audited the Company's consolidated financialstatements included in this report, has issued an attestation report on theCompany's internal control over financial reporting, and a copy of ElliottDavis, LLC's report is included with this report.

Date:  March 10, 2009

* /s/W.  Jennings  Duncan                        *

* /s/L.  Ford Sanders,  II                          *

W.  Jennings Duncan

L.  Ford Sanders, II

President  and Chief Executive Officer

Executive  Vice President, Treasurer and  Chief Financial Officer

**(b) REPORT OF INDEPENDENTREGISTERED****PUBLIC ACCOUNTING FIRM**

The Report ofIndependent Registered Public accounting firm on Internal Control overFinancial Reporting, is included in Item 8- Financial Statements andSupplementary Data, of this Form 10-K.

**(c)** There has been no change in the Company's internal control overfinancial reporting identified in connection with management's assessmentthereof that occurred during the Company's last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, theCompany's internal control over financial reporting.

**ITEM 9B. - OTHER INFORMATION**

None. 

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**PART IIIITEM 10.  DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT ANDCORPORATE GOVERNANCE**

The informationset forth under the captions "Information about Nominees, Directors Whose Termswill Continue after the Annual Meeting of Shareholders and ExecutiveOfficers," "Section 16(a) Beneficial Ownership ReportingCompliance" and "Governance Matters - -Committees of the Board ofDirectors - - Audit Committee" set forth in the Company's Proxy Statementfiled in connection with the Company's 2009 Annual Meeting of the Shareholders(the "2009 Proxy Statement") is incorporated herein by reference.

**Audit Committee Financial Expert**

TheCompany's board of directors has determined that the Company does not have an"audit committee financial expert," as that term is defined by Item407(d)(5) of Regulation S-K promulgated by the Securities and ExchangeCommission, serving on its audit committee.  The Company's auditcommittee is comprised of directors who are independent of the Company and itsmanagement.  After reviewing the experience and training of all ofthe Company's independent directors, the board of directors has concluded thatno independent director currently meets the SEC's very demanding definition of"audit committee financial expert."  Therefore, it would benecessary to find a qualified individual willing to serve as both a directorand member of the audit committee and have that person elected by theshareholders in order to have an "audit committee financial expert"serving on the Company's audit committee.  The Company's auditcommittee is, however, authorized to use consultants to provide financial accountingexpertise in any instance where members of the committee believe suchassistance would be useful.  Accordingly, the Company does notbelieve that it needs to have an "audit committee financial expert"on its audit committee.

**Code of Ethics**The Company has adopted a Code ofEthics applicable to its principal executive officer, principal financialofficer, and principal accounting officer.  The Company will providea copy of the Code of Ethics to any person, without charge, upon request to:Corporate Secretary, CNB Corporation, 1400 Third Avenue, Conway, South Carolina29526.

**ITEM11.  EXECUTIVE COMPENSATION**

Theinformation set forth in the 2009 Proxy Statement under the caption"Compensation of Directors and Executive Officers" is incorporatedherein by reference; provided, however, the information set forth under thecaption "Compensation Committee Report" shall be deemed to be"furnished" and not "filed" and will not be deemedincorporated by reference into any filing under the Securities Act of 1933 orthe Securities Exchange Act of 1934 as a result of being so furnished.

**ITEM12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMEENTAND RELATED STOCKHOLDER MATTERS**

Theinformation set forth in the 2009 Proxy Statement under the captions"Security Ownership of Certain Beneficial Owners" and "SecurityOwnership of Management" is incorporated herein by reference.

The Company does not have any equity compensationplans pursuant to which securities may be issued.  Accordingly, nodisclosure is required pursuant to Regulation S-K, Item 201(d).

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE**

Theinformation set forth in the 2009 Proxy Statement under the caption"Transactions with Related Persons" and "Governance Matters --Director Independence" is incorporated herein by reference. The members ofthe Company's Audit and Governance (nominating and compensation) Committees areindependent as defined in the Nasdaq Global Market Rules.

**ITEM14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

Theinformation set forth in the 2009 Proxy Statement under the caption"Ratification of Appointment of Independent Registered Public AccountingFirm - Fees Billed by Independent Auditors" and "Audit CommitteePre-Approval of Audit and Permissible Non-Audit Services of IndependentAuditors" is incorporated herein by reference.

70

**PART IV.ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

The following exhibits, financial statements and financial statement schedulesare filed as part of this report:**(a) FINANCIAL STATEMENTS**Report of Independent Registered Public Accounting FirmConsolidated Statements of Condition - December 31, 2008 and 2007Consolidated Statements of Income - Years ended December 31, 2008, 2007, and2006Consolidated Statements of Stockholders' Equity - Years ended December 31,2008,  2007, and 2006Consolidated Statements of Comprehensive Income - Years ended December 31,2008, 2007, and 2006.Consolidated Statements of Cash Flows - Years Ended December 31, 2008, 2007,and 2006Notes to Consolidated Financial Statements **(b) EXHIBITSSee Exhibit Index.(c) FINANCIAL STATEMENT SCHEDULES**

All financial statement schedules have been omitted from this Annual Reportbecause the required information is presented in the financial statements or inthe notes thereto or the required subject matter is not applicable.

71

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

**CNBCorporation                                                                  ***/s/W. Jennings Duncan*                                                           W. Jennings Duncan, President and Chief ExecutiveOfficer      

Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of the registrantand in the capacities indicated on March 10, 2009.

Signature                                                                              Capacity*/s/Harold G. Cushman, Jr.*                                                  Chairmanof the BoardHarold G. Cushman, Jr.*/s/W. Jennings Duncan*                                                        President,Chief Executive Officer, and DirectorW. Jennings Duncan*/s/L. Ford Sanders, II*                                                          ExecutiveVice President, Chief Financial Officer, and Treasurer L. Ford Sanders, II*/s/Virginia B. Hucks*                                                            VicePresident and SecretaryVirginia B. Hucks*/s/James W. Barnette, Jr.*                                                    DirectorJames W. Barnette, Jr.*/s/William R. Benson*                                                            DirectorWilliam R. Benson*/s/Harold G. Cushman, III*                                                   DirectorHarold G. Cushman, III*/s/Edward T. Kelaher*                                                           DirectorEdward T. Kelaher*/s/William O. Marsh *                                                            DirectorWilliam O. Marsh*/s/George F. Sasser*                                                              DirectorGeorge F. Sasser*/s/Lynn G. Stevens*                                                                DirectorsLynn G. Stevens*/s/John C. Thompson*                                                            DirectorJohn C. Thompson

72

**EXHIBIT INDEX**

**ExhibitNumber**     **3.1**   Articles ofIncorporation - The Articles of Incorporation of the Company are incorporatedherein by reference to Exhibit 3(a)             which wasfiled with a Form 8-A dated June 24, 1998.

     **3.2**   By-laws of theCompany as amended June 14, 2005. The Bylaws of the Company are incorporated byreference to Exhibit 3             which wasfiled with the Form 10-Q for the quarter ended June 30, 2005.

   **10.1**   Executive Supplemental IncomePlan - The Executive Supplemental Income Plan is incorporated herein byreference to Exhibit             10(a)which was filed with a Form 10-K/A Annual Report dated June 10, 2002

   **10.2**   Deferred Compensation Planentitled "Phantom Stock Plan" - The Phantom Stock DeferredCompensation Plan is incorporated             hereinby reference to Exhibit 10(b) which was filed with a Form 10-K/A Report datedJune 10, 2002.

   **14.1**   Code of Ethics Policy - TheConway National Bank Code of Ethics Policy is incorporated herein by referenceto Exhibit 99             whichwas filed with a Form 8-K filed August 13, 2004.

**   22**      Subsidiaries ofthe Registrant - Incorporated herein by reference to Exhibit 22 whichwas  filed with a Form 10-K Annual              Reportdated March 28, 1986.

**   31.1**   Certification of PrincipalExecutive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of theSecurities Exchange Act of             1934,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**   31.2**   Certification of PrincipalFinancial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of theSecurities Exchange Act of             1934,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**   32.1**   Certification of Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the             Sarbanes-OxleyAct of 2002.

**   32.2   **Certification of Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-             OxleyAct of 2002. |