| **UNITED STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **  **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **SECURITIES AND EXCHANGE  COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Washington, D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                    For  the fiscal year ended**                                    December  31, 2009                                          **                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|                    For  the transition period from                                                    to                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Commission file number:  **000-24523**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ***                              CNB  Corporation                              ***                                                                                                                                                                                                                                                                                                                                                                                                              |
| (Exact name of registrant as  specified in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **                                          South  Carolina                                  **                                                                                                                                                                                                                                                                                                                 | **                      57-0792402                    ** |
|    (State or  other jurisdiction of incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (I.R.S. Employer Identification  No.)   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| **1400 Third Avenue, P.O. Box  320, Conway, South Carolina**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **                             29528                      ** |
|                    (Address  of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (Zip Code)                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| (Registrant's telephone number,  including area code):  **(843) 248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Securities registered pursuant  to section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Securities registered pursuant  to Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Common Stock, $5.00 par value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (Title of class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      Indicate  by check mark if the registrant is a well-known seasoned issuer, as defined  in Rule 405 of the Securities Act. [  ] Yes [**X**] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      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.                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      Indicate  by check mark whether the registrant has submitted electronically and posted  on its corporate Web site, if any, every interactive Data File required to be  submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this  chapter) during the preceding 12 months (or for such shorter period that the  registrant was required to submit and post such files).  (Not applicable to  registrant).  [  ] Yes [  ] No.                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      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. [  ]                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      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 [  ]                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  [  ] Yes [**X** ]  No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     As of June 30, 2009 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 $129,140,036.  As of March 1, 2010, there were 1,676,714  shares of Common Stock of CNB Corporation outstanding.                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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 11, 2010 are incorporated by reference  in Part III of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |

----

| **CNB  CORPORATION AND SUBSIDIARY  2009 ANNUAL REPORT ON FORM 10-K**** ** |
|--------------------------------------------------------------------------------|
| **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   **                                                             | **(Removed  and Reserved)** | 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** | 29-35 |
| **ITEM 7A   **                                                            | **Quantitative and Qualitative Disclosures About Market  Risk** | 35 |
| **ITEM 8   **                                                             | **Financial Statements and Supplementary Data** | 36-70 |
| **ITEM 9**                                                                     | **Changes in and Disagreements with Accountants on  Accounting and  Financial Disclosure   ** | 71 |
| **ITEM 9A   **                                                            | **Controls and Procedures** | 71 |
| **ITEM 9B   **                                                            | **Other Information** | 71 |

**PART III**
| **ITEM 10   ** | **Directors, Executive Officers, and Corporate Governance**                                          | 72     |
|---------------------|------------------------------------------------------------------------------------------------------|--------|
| **ITEM 11   ** | **Executive Compensation**                                                                           | 72     |
| **ITEM 12   ** | **Security Ownership of Certain Beneficial Owners and  Management and  Related Stockholder Matters** | 72     |
| **ITEM 13**         | **Certain Relationships and Related Transactions, and  Director Independence   **               | 72     |
| **ITEM 14   ** | **Principal Accountant Fees and Services**                                                           | 72     |
| ** **          | **PART IV**                                                                                          |   |
| ** **          | ** **                                                                                           |   |
| **ITEM 15**         | **Exhibits and Financial Statement Schedules**                                                       | 73     |
| **Signatures**      | 74                                                                                                   |

----

******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-lookingstatements." You can identify these forward-looking statements through theuse 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-looking statements include, but arenot limited to, statements regarding the Company's future 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 operating performance.  Thesestatements are not guarantees of future performance and are subject to risks,uncertainties and assumptions that are difficult to predict. Therefore, actualresults may differ materially from those expressed or forecasted in suchforward-looking statements.  The risks and uncertainties include, butare not limited to:

| ● | future economic and business  conditions;                                                                                                                                                                                                                                                                                                  |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ● | 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.

** **

----

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

CNB Corporation (the "Company") is a SouthCarolina business corporation organized in 1985 for the purpose of becoming abank holding company for The Conway National Bank (the "Bank") underthe Bank Holding Company Act.  The Company's only business isownership of the Bank.  The activities of the Company are subject tothe supervision 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 in 1903.  TheBank's Main Office consists of an Operations and Administration Center alongwith an adjacent branch office known as the Conway Banking Office.  TheBank also operates thirteen other branch offices throughout Horry County andthe "Waccamaw Neck" area of Georgetown County.    TheBank employs approximately 250 full-time-equivalent employees at its Main Officeand 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-hour automatedteller machines on the STAR Network, internet banking, bank by phone, directdeposits, a MasterCard/Visa program, cash management services, commerciallockbox services, and remote deposit capture. The Bank offers discountbrokerage services through a correspondent relationship.  Additionally,the Bank provides long-term mortgage loans through its secondary mortgagedepartment which 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, 2009 the Bank had three concentrations ofcredit to single industries (See Note 1 to the consolidated financialstatements, contained elsewhere in this report).  There are nomaterial seasonal factors that would have any adverse effect on the Bank nordoes the Bank rely on foreign sources of funds or income.

Further information about the Bank's business is set forth below under "SupplementaryFinancial Data, Guide 3 Statistical Disclosure by Bank Holding Companies"and in Item 7, "Management's Discussion and Analysis of FinancialCondition and Results of Operations."

**COMPETITION**

The Bank actively competes with other institutions in Horry County and the "WaccamawNeck" region of Georgetown County in providing customers with deposit,credit and other financial services.  The principal competitors ofthe Bank include local offices of seven regional banks, six state-wide banks, twelvelocally owned banks in Horry and Georgetown Counties and various otherfinancial and thrift institutions.  At June 30, 2009, the Bank rankedsecond in Horry County and twelfth in Georgetown County in deposits among itscompetitors. 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. Significantcompetitive factors include interest rates on loans and deposits, prices andfees for services, office location, customer service, community reputation, andcontinuity of personnel.

1

----

**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 "State Board").  ASouth Carolina bank holding company may be required to provide the State Boardwith information with respect to the financial condition, operations,management and inter-company relationships of the holding company and itssubsidiaries.  The State Board also may require such otherinformation as is necessary to keep itself informed about whether theprovisions of South Carolina law and the regulations and orders issuedthereunder by the State Board have been complied with, and the State Board mayexamine any bank holding company and its subsidiaries. Furthermore, pursuant toapplicable law and regulations, the Company must receive approval of, or givenotice to (as applicable) the State Board prior to engaging in the acquisitionof 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 is insolvent.  Forexample, under the policy of the Federal Reserve, a bank holding company isrequired to serve as a source of financial strength to its subsidiarydepository institutions and to commit resources to support such institutions incircumstances where it might not do so absent such policy.  Inaddition, the "cross-guarantee" provisions of the Federal DepositInsurance Act, as amended ("FDIA"), require insured depositoryinstitutions under common control to reimburse the FDIC for any loss sufferedor reasonably anticipated by the FDIC as a result of the default of a commonlycontrolled insured depository institution or for any assistance provided by theFDIC to a commonly controlled insured depository institution in danger ofdefault.  The FDIC may decline to enforce the cross-guaranteeprovisions if it determines that a waiver is in its best interest.  TheFDIC's claim for damages is superior to claims of stockholders of the insureddepository institution or its holding company but is subordinate to claims ofdepositors, secured creditors and holders of subordinated debt (other thanaffiliates) of the commonly controlled insured depository 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 or stockholder.  Thisprovision gives depositors a preference over general and subordinated creditorsand stockholders in the event a receiver is appointed to distribute the assetsof 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.

2

----

**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 the Bank.  Mostof the revenues of the Company result from dividends paid to the Company by theBank.  There are statutory and regulatory requirements applicable tothe payment of dividends by subsidiary banks as well as by the Company to itsshareholders.

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 of 2005.  TheFDIC maintains the DIF by assessing depository institutions an insurancepremium.  The amount each institution is assessed is based uponstatutory factors that include the balance of insured deposits as well as thedegree of risk the institution poses to the insurance fund.  The FDICuses a risk-based premium system that assesses higher rates on thoseinstitutions that pose greater risks to the DIF.  Under the ruleadopted by the FDIC in November 2006, as of  January 1, 2007, theFDIC began placing each institution in one of four risk categories using atwo-step process based first on capital ratios (the capital group assignment)and then on other relevant information (the supervisory group assignment).  Asof  January 1, 2007, rates ranged between 5 and 43 cents per $100 inassessable deposits.  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 FDIC alsomade an additional "emergency assessment" of 5 cents per $100 ofassessable assets held on June 30, 2009, not to exceed to 10 cents per $100 ofan institution's deposit insurance base for the second quarter of 2009, which waspayable in September 2009.  In November of 2009 the FDIC adopted a final ruleamending the assessment regulation to require insured depository institutionsto prepay their quarterly risk-based assessments for the fourth quarter of 2009,and for all of 2010, 2011, and 2012 on December 30, 2009, along with eachinstitutions risk-based assessment for the third quarter of 2009.

3

----

**Regulation of the Bank**

The Bank is also subject to regulation and examination by the OCC.  Inaddition, the Bank is subject to various other state and federal laws andregulations, including state usury laws, laws relating to fiduciaries, consumercredit laws and laws relating to branch banking.  The Bank's loanoperations are subject to certain federal consumer credit laws and regulationspromulgated thereunder, including, but not limited to:  the federalTruth-In-Lending Act, governing disclosures of credit terms to consumerborrowers; the Home Mortgage Disclosure Act, requiring financial institutionsto provide certain information concerning their mortgage lending; the EqualCredit Opportunity Act and the Fair Housing Act, prohibiting discrimination onthe basis of certain prohibited factors in extending credit; and the Fair DebtCollection Act, governing the manner in which consumer debts may be collectedby collection agencies.  The deposit operations of the Bank are subjectto the Truth in Savings Act, requiring certain disclosures about rates paid onsavings accounts; the Expedited Funds Availability Act, which deals withdisclosure of the availability of funds deposited in accounts and thecollection and return of checks by banks; the Right to Financial Privacy Act,which imposes a duty to maintain certain confidentiality of consumer financialrecords; and the Electronic Funds Transfer Act and regulations promulgatedthereunder, which govern automatic deposits to and withdrawals from depositaccounts and customers' rights and liabilities arising from the use ofautomated teller machines and other electronic banking services.  TheBank is also subject 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,including low and moderate-income neighborhoods, consistent with the safe andsound operation 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 also subjectto provisions of the Gramm-Leach-Bliley Act of 1999 (See the section below ofthe same title); the Fair Credit Reporting Act, governing the use and provisionof information to credit reporting agencies; the Bank Secrecy Act, dealing with,among other things, the reporting of certain currency transactions; and the USAPatriot Act, dealing with, among other things, requiring the establishment ofanti-money laundering programs, including standards for verifying customerinformation 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 "wellcapitalized," "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 additionally subject to restrictions on compensation paid to seniormanagement of the bank, and a bank that is "critically undercapitalized"is further subject to restrictions on the activities of the bank andrestrictions on payments of subordinated debt of the bank, and will ordinarilybe placed in receivership.  The purpose of these provisions is torequire banks with less than adequate capital to act quickly to restore theircapital and to have the OCC move promptly to take over banks that are unwillingor unable to take such steps.

Brokered Deposits.  Under current FDIC regulations, "well-capitalized"banks may accept brokered deposits without restriction, "adequatelycapitalized" banks may accept brokered deposits with a waiver from theFDIC (subject to certain restrictions on payments of rates), while "undercapitalized"banks may not accept brokered deposits.  The regulations provide thatthe definitions of "well capitalized", "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 capitalized bank holding company locatedin South Carolina can acquire a bank located in any other state, and a bankholding company located outside South Carolina can acquire any SouthCarolina-based bank, in either case subject to certain deposit percentage andother restrictions.  Riegle-Neal also provides that, in any statethat has not previously elected to prohibit out-of-state banks from operatinginterstate branches within its territory, adequately capitalized and managedbank holding companies can consolidate their multi-state bank operations into asingle bank subsidiary and branch interstate through acquisitions.  Denovo branching by an out-of-state bank is permitted only if it is expresslypermitted by the laws of the host state.  The authority of a bank toestablish and operate branches within a state will continue to be subject toapplicable state branching laws.  South Carolina law was amended,effective July 1, 1996, to permit such interstate branching but not de novobranching by an out-of-state bank. 

The Riegle-Neal Act, together with legislation adopted in South Carolina, has resultedin a number of South Carolina banks being acquired by large out-of-state bankholding companies.  Size gives the larger banks certain advantages incompeting for business from larger customers.  These advantagesinclude higher lending limits and the ability to offer services in other areasof South Carolina and the region.  As a result, the Bank does notgenerally attempt to compete for the banking relationships of largecorporations, but concentrates its efforts on small to medium-sized businessesand on individuals.  The Company believes the Bank has competedeffectively in this market segment by offering 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 regulations removeDepression-era barriers that had separated banks and securities firms, and seekto protect the privacy of consumers' financial information.

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 "financial activities,"which are activities that are (1) financial in nature; (2) incidental toactivities that are financial in nature; or (3) complementary to a financialactivity and that do not impose a safety and soundness risk.  Significantly,the permitted financial activities for financial holding companies includeauthority to engage in merchant banking and insurance activities, includinginsurance portfolio investing.  A bank holding company can qualify asa financial holding company and expand the services it offers only if all ofits subsidiary depository institutions are well-managed, well-capitalized andhave received a rating of "satisfactory" on their last CommunityReinvestment Act examination.

The legislation also created another new type of entity called a "financialsubsidiary."  A financial subsidiary may be used by a nationalbank or a group of national banks to engage in many of the same activitiespermitted for a financial holding company, though several of these activities,including real estate development or investment, insurance or annuityunderwriting, insurance portfolio investing and merchant banking, are reservedfor financial holding companies.  A bank's investment in a financialsubsidiary affects the way in which the bank calculates its regulatory capital,and the assets and liabilities of financial subsidiaries may not beconsolidated with those of the bank.  The bank must also be certainthat its risk management procedures are adequate to protect it from financialand operational risks created both by itself and by any financial subsidiary.  Further,the bank must establish policies to maintain the separate corporate identitiesof the bank and its financial subsidiary and to prevent each from becomingliable for the obligations of the other.

The Act also establishes the concept of "functional supervision,"meaning that similar activities should be regulated by the same regulator.  Accordingly,the Act spells out the regulatory authority of the bank regulatory agencies,the Securities and Exchange Commission and state insurance regulators so thateach type of activity is supervised by a regulator with correspondingexpertise.  The Federal Reserve is intended to be an umbrellasupervisor with the authority to require a bank holding company or financialholding company or any subsidiary of either to file reports as to its financialcondition, risk management systems, transactions with depository institutionsubsidiaries and affiliates, and compliance with any federal law that it hasauthority 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.  The Act and its implementing regulations also 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.

**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 do so.  However,the Company has not been affected by Sarbanes-Oxley and the SEC regulations inways that are materially different or more onerous than those of other publiccompanies of similar size and in similar business.

**Government Response to 2008 Financial Crisis**

During the fourth quarter of 2008 and continuing into 2009 the FDIC, theFederal Reserve, the Department of the Treasury and Congress took a number ofactions designed to alleviate or correct mounting problems in the financialservices industry.  A number of these initiatives were directlyapplicable to community banks.

5

----

**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.  Institutionswishing to participate in the CPP were required to file an application withtheir principal federal regulators.  The Company elected not toparticipate in the CPP because of (i) the cost of the preferred stock, (ii) theopen-ended administrative burdens associated with the preferred stock includinghaving to agree to allow Treasury to unilaterally amend the stock purchaseagreement to comply with subsequent changes in applicable federal statutes,(iii) the fact that the Company and the Bank were already well capitalizedunder regulatory guidelines and expected to continue to be so, and (iv)management's belief that other sources of capital were, and would continue tobe, 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 two years has been a large increase in bank failures whichhas led 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 raised its assessments on banks for 2009 and also made a one-time specialassessment of 5 cents per $100 of assessable deposits at June 30,2009.  Under the new methodology, assessments will range between 7and 77.5 cents per $100 in assessable deposits.  The FDIC has alsomade an additional "emergency assessment" of 5 cents per $100 ofassessable assets held on June 30, 2009, not to exceed to 10 cents per $100 ofan institution's deposit insurance base for the second quarter of 2009, whichwas payable in September 2009.  In November of 2009 the FDIC adopted a finalrule amending the assessment regulation to require insured depositoryinstitutions to prepay their quarterly risk-based assessments for the fourthquarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009,along with each institutions risk-based assessment for the third quarter of2009.

**Legislative Proposals**

Legislation which could significantly affect the business of banking isintroduced in Congress from time to time.  For example, numerous bills are pendingin Congress and the South Carolina Legislature to provide various forms ofrelief 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 current  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 2009 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**

The followingtables present additional statistical information about CNB Corporation and itsoperations and financial condition and should be read in conjunction with theconsolidated financial statements and related notes thereto contained elsewherein this report.

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

The tables on the following 3 pages present selectedfinancial data and an analysis of average balance sheets, average yield and theinterest earned on earning assets, and the average rate paid and the interestexpense on interest-bearing liabilities for the years ended December 31, 2009,2008, 2007.

6

----

|                                                                                                   |
|--------------------------------------------------------------------------------------------------------|
|  
**CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)** |
|                                                                                                   |
|                                                                                                   |
|                                                                                                        | **Twelve Months Ended 12/31/09** | ** ** |
|                                                                                                        | ** ** | **Interest** | **Avg. Annual** | ** ** | ** ** | ** ** |
|                                                                                                        | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                        | **Balance** | **Expense** | **     Rate   ** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income (1)

$593,370

$  37,170     

6.26%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable  (3)

188,454

5,452     

2.89   

** **

** **

** **

 
        Tax-exempt

31,956

1,847 (2)

5.78   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    13,162

         32     

.24   

** **

** **

** **

 
      Other  Earning Assets

    32,353

           74     

.23   

** **

** **

** **

 
          Total  earning assets

$859,295

$  44,575     

5.19   

** **

** **

** **

 
    Other  assets

    45,571

** **

** **

** **

** **

** **

 
          Total  assets

$904,866

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$579,927

$  10,668     

1.84   

** **

** **

** **

 
      Securities  sold under agreement to repurchase

101,461

1,121     

1.10   

** **

** **

** **

 
      Other  short-term borrowings

    23,242

         340     

1.46   

** **

** **

** **

 
          Total  interest-bearing liabilities

$704,630

$  12,129     

1.72   

** **

** **

** **

 
    Noninterest-bearing  deposits

105,182

** **

** **

** **

** **

** **

 
    Other  liabilities

9,283

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    85,771

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$904,866

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$859,295

$  32,446     

3.78%

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Return  on average total assets

** **

** **

.56%

** **

** **

** **

 
Return  on average stockholders' equity

** **

** **

5.91   

** **

** **

** **

 
Cash  dividends declared as a percent of net income

** **

** **

41.37   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

9.48   

** **

** **

** **

 
  Average  total deposits

** **

** **

12.52   

** **

** **

** **

 
  Average  loans

** **

** **

14.45   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

94.96%

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
(1)

The  Company had no out-of-period adjustments or foreign  activities.  Loan fees of $514 are included in the above interest  income.  Loans on a non-accrual basis for the recognition of  interest income totaling $12,678 as of December 31, 2009 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  $628.

 
 

 
(3)

Includes  other investments.

 
7

 
 
**CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)**

 

 

**Twelve Months Ended 12/31/08**

** **

** **

**Interest**

**Avg. Annual**

** **

** **

** **

**Avg.**

**Income/**

**Yield or**

** **

** **

** **

**Balance**

**Expense**

**     Rate   **

** **

** **

** **

**Assets:**

** **

** **

** **

** **

** **

** **

 
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income (1)

$587,931

$  40,431     

6.88%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable  (3)

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   

** **

** **

** **

 
      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

** **

** **

48.62   

** **

** **

** **

 
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.

 
 

 
(3)

Includes  other investments.

 
 

8

 
 
**CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)**

 

 

**Twelve Months Ended 12/31/07**

** **

** **

**Interest**

**Avg. Annual**

** **

** **

** **

**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   

** **

** **

** **

 
      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.

 
 

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 current year.  Rate/VolumeVariance has been allocated to change due to volume.

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2009 and 2008   (Dollars in Thousands)**

 
 

 
 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

** **

 

**2009**

**2008**

**2009**

**2008**

**2009**

**2008**

**Variance**

**Rate**

**Volume**

** **

**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

**Loans   , Net of unearned Income (1)**

$593,370

$587,931

6.26%

6.88%

$37,170

$40,431

$  (3,261)

$ (3,602)

$     341 

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

188,454

173,483

2.89%

4.63%

5,452

8,027

(2,575)

(3,008)

433 

 

**    Tax-exempt   (2)**

31,956

27,146

5.78%

6.03%

1,847

1,636

211 

(67)

278 

 

**  Federal   funds sold and Securities**

 

 

 

 

 

 

 

 

 

 

**    purchased   under agreement to resell**

    13,162

   24,439

.24%

2.38%

       32

       581

       (549)

      (522)

   (27)

 

**  Other   Earning Assets**

    32,353

             0

  .23%

0.00%

         74

           0

          74  

           0 

         74 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$859,295

$812,999

5.19%

6.23%

$44,575

$50,675

$ (6,100 )

$ (7,199)

$  1,099 

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$579,927

$586,569

1.84%

2.82%

$10,668

$16,539

$ (5,871)

$ (5,749)

$  (122) 

 

**  Securities   sold under agreement to       repurchase**

101,461

58,843

1.10%

2.41%

1,121

1,420

(299)

(770)

471  

 

**  Other   short-term borrowings**

    23,242

      8,289

1.46%

3.16%

       340

       262

         78  

      (141)

      219  

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  704,630

  653,701

1.72%

2.79%

  12,129

  18,221

   (6,092)

   (6,660)

      568  

 

**Interest-free  Funds   Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

154,665

159,298

 

 

 

 

 

 

 

 

** **

               

               

          

          

             

             

               

               

              

 

**Total   Funds Supporting Earning Assets**

$859,295

$812,999

1.41%

2.24%

$12,129

$18,221

$ (6,092)

$ (6,660)

$    568  

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest   Rate Spread**

 

 

3.47%

3.44%

 

 

 

 

 

 

**Impact   of Noninterest-bearing Funds**

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

  .31%

  .55%

             

              

 

 

 

 

**Net   Yield on Earning Assets**

 

 

3.78%

3.99%

$32,446

$ 32,454

 

 

 

 

(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, 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 

 

**  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 nothave a material effect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate. 

11

**INVESTMENTSECURITIES**

The goal of the investment policy of the 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/soundness concerns.  Specificinvestment objectives include the desire to: provide adequate liquidity forloan demand, deposit fluctuations, and other changes in balance sheet mix;manage interest rate risk; maximize the institution's overall return; provideavailability of collateral for pledging; and manage asset-qualitydiversification of the bank's assets. At December 31, 2009 and 2008, investmentsecurities represented 24.9% and 23.3% of total assets, respectively.  Total loans increased moderately during 2008 after a minimal increase in 2007.  Loangrowth in 2008 was attributable to an increase in loans secured by real estateand some growth in consumer loans.  Loans declined in 2009 due to weakened loandemand as a result of the recessionary economy during the first three quartersof the year and continued pressure on local real estate markets.  At December31, 2009, 2008, and 2007, the Loans/Total Assets ratios were 63.0%, 68.4%, and66.3%, respectively.  Investment securities have correspondingly risenand fallen as a percentage of total assets.

Investment securities with a par value of $207,233,000, $174,673,000, and $182,651,000at December 31, 2009, 2008, 2007, respectively, were pledged to secure publicdeposits 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, 2009, 2008, 2007.

**                               December  31, 2009                               **

**(Dollars in Thousands)**

** **

**Book**

**Unrealized Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

**AVAILABLE  FOR SALE**

 

 

 

 

 

 

 

 

 

 

 
 Government  Sponsored Enterprises

 

 

 

 

 

 
     One  to five years

$    135,494

$      945

$       11

$    136,428

2.18%

 
     Six  to ten years

    42,907

      116

      144

    42,879

    2.61%

 
  178,401

   1,061

      155

  179,307

    2.28%

 
  Mortgage  Backed Securities

 

 

 

 

 

 
     Six  to ten years

2,240

63

1

2,302

3.87%

 
     Over  ten years

      6,975

      165

          -

      7,140

    3.94%

 
      9,215

      228

          1

      9,442

    3.92%

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

1,381

13

-

1,394

7.04%

 
    One  to five years

2,543

93

-

2,636

6.64%

 
    Six  to ten years

16,563

442

68

16,937

5.61%

 
    Over  ten years

    4,010

        62

          -

      4,072

    5.39%

 
    24,497

      610

        68

    25,039

    5.77%

 
  Other  Investments

 

 

 

 

 

 
    CRA  Qualified Investment Fund

780

-

-

780

-%

 
    MasterCard  International Stock

          11

          -

          -

           11

         -%

 
    Other

          36

          -

          -

           36

         -%

 
        827

          -

          -

         827

         -%

 
 

 

 

 

 

 
  Total  available for sale

$212,940

$ 1,899

$    224

$214,615

   2.76%

 
 

 

 

 

 

 
**HELD  TO MATURITY**

 

 

 

 

 

 
 

 

 

 

 

 
 Government  Sponsored Enterprises

 

 

 

 

 

 
     One  to five years

       6,003

          -

        17

      5,986

   1.29%

 
       6,003

          -

        17

      5,986

   1.29%

 
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

$        645

$        5

$        -

$       650

6.98%

 
    One  to five years

826

26

-

852

4.41%

 
    Six  to ten years

6,232

161

28

6,365

5.80%

 
    Over  ten years

       1,243

        69

          -

      1,312

   6.44%

 
       8,946

      261

       28

      9,179

   5.85%

 
 

 

 

 

 

 
  Total  held to maturity

$   14,949

$    261

$      45

$  15,165

  4.01%

 
 

 

 

 

 

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

As of the year ended December 31, 2009, the Bank did not hold any securities ofan issuer thatexceeded 10% of stockholders' equity.

12

**INVESTMENT SECURITIES, continued **

**                               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

         -%

 
    Other

          36

          -

          -

           36

         -%

 
        768

          -

          -

         768

         -%

 
 

 

 

 

 

 
  Total  available for sale

$191,716

$ 2,899

$    401

$194,214

   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 thatexceeded 10% of stockholders' equity.

13

**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

         -%

 
    Other

          36

          -

          -

           36

         -%

 
        748

          -

          -

         748

         -%

 
 

 

 

 

 

 
  Total  available for sale

$204,461

$ 2,027

$    319

$206,169

   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% tax rate.

As of the year ended December 31, 2007, the Bank did not hold any securities ofan issuer thatexceeded 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 real estate.  Theseloans will generally consist of commercial real estate loans, construction anddevelopment loans and residential real estate loans (including home equity andsecond mortgage loans).  Interest rates are generally fixed butadjustable rates are also utilized for some commercial purpose loans.  TheBank seeks to manage credit risk in the commercial real estate portfolio byemphasizing loans on owner-occupied office and retail buildings.   Inaddition, the Bank typically requires personal guarantees of the principalowners of the property.  The Bank may also facilitate mortgage loansfunded and owned by investors in the secondary market, earning a fee, butavoiding the interest rate risk of holding long-term, fixed-rate loans. Theprincipal economic risk associated with all loans, including real estate loans,is the creditworthiness of the Bank's borrowers.  The ability of aborrower to repay a real estate loan will depend upon a number of economicfactors, including employment levels and fluctuations in the value of realestate.  In the case of a real estate construction loan, there isgenerally no income from the underlying property during the constructionperiod, borrowings may exceed the current value of the improvements to theproperty, and the developer's personal obligations under the loan may belimited.  Each of these factors increases the risk of nonpayment bythe borrower.  In the case of a real estate purchase loan and otherfirst mortgage real estate loans structured with a balloon payment, theborrower may be unable to repay the loan at the end of the loan term and maythus be forced to refinance the loan at a higher interest rate, or, in certaincases, the borrower may default as a result of an inability to refinance theloan.  In either case, the risk of nonpayment by the borrower isincreased.  The Bank will also face additional credit risks to theextent that it engages in making adjustable rate mortgage loans ("ARMs").  Inthe case of an ARM, as interest rates increase, the borrower's requiredpayments increase periodically, 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 $64,552,000 and $50,289,000 or 11.1%and 8.4% of total loans at fiscal year-ends December 31, 2009 and 2008,respectively.

**Commercial Loans**

The Bank makes loans for commercial purposes in various lines of business.  Thecommercial loans will include both secured and unsecured loans for workingcapital (including inventory and receivables), loans for business expansion(including acquisition of real estate and improvements), and loans for purchasesof equipment.  When taken, security usually consists of liens oninventories, receivables, equipment, and furniture and fixtures.  Unsecuredbusiness loans are generally short-term with emphasis on repayment strengthsand low debt-to-worth ratios.  Commercial lending involvessignificant risk because repayment usually depends on the cash flows generatedby a borrower's business, and debt service capacity can deteriorate because ofdownturns in national and local economic conditions.  Managementgenerally seeks to control risks by conducting more in-depth and ongoingfinancial analysis 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 and othercommercial purpose loans.  Variable rate loans, the majority of whichare real estate secured, totaled $90,829,000 and $121,396,000 or 15.7% and 20.3%of total loans at fiscal year-ends December 31, 2009 and 2008, respectively.  (TheBank does not offer any loan products which provide for planned graduatedpayments or loans which allow negative amortization.)

**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. 

**CATEGORIES OF LOANS**

The following is a summary of loans, in thousands of dollars, at December 31,2009, 2008, 2007, 2006, 2005 by major category:

**  2009   **

**  2008   **

**  2007   **

**  2006   **

**  2005   **

**Real  Estate Loans - mortgage**

$375,741 

$366,948 

$350,138 

$361,707 

$324,475 

**                                - construction**

81,311 

92,010 

83,398 

74,564 

50,210 

**Loans to  farmers**

2,930 

3,119 

3,264 

3,097 

1,912 

**Commercial  and industrial loans**

74,565 

89,348 

88,106 

83,375 

84,474 

**Loans to  individuals for household    family and other consumer    expenditures**

  44,865 

  46,278 

  47,731 

  44,124 

  41,400 

**All other  loans, including**

 

 

 

 

 

**  Overdrafts  and deferred loan costs**

          384 

         578 

      1,114 

         458 

      1,455 

**  Gross  Loans**

  579,796 

  598,281 

  573,751 

  567,325 

  503,926 

**   Less  allowance for loan losses**

    (9,142)

    (7,091)

    (6,507)

    (6,476)

    (5,918)

**    Net  loans**

$570,654 

$591,190 

$567,244 

$560,849 

$498,008 

** **

 

 

 

 

 

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

The Company's loan portfolio contained approximately $488,967 and $476,885 in totalfixed rate loans and approximately $90,829 and $121,396 in variable rate loans asof December 31, 2009 and 2008, respectively.  At December 31, 2009,and 2008, fixed rate loans with maturities in excess of one year amounted toapproximately $328,356 and $316,519, respectively, and variable rate loans withmaturities in excess of one year amounted to approximately $29,283 and $34,128for the same periods, respectively.  As of December 31, 2009, fixedrate loans due after one year through five years totaled $267,226 and fixedrate loans due after five years totaled $61,130.  Also as of December31, 2009, variable rate loans due after one year through five years totaledapproximately $18,011 and variable rate loans due after five years totaled $11,272.  Fixedrate loans are those on which the interest rate generally cannot be changed forthe term of the loan.  Variable rate loans are those on which theinterest rate can be 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 December 2009,2008, 2007, 2006, and 2005:

**  2009**

**  2008**

**  2007**

**  2006**

**  2005**

** **

** **

** **

** **

** **

**  Nonaccrual  loans**

$ 12,678

$ 2,990

$   861

$   897

$   405

**   Accruing loans which are contractually     past due 90 days or more as to principal     or interest payments**

  $      961

  $    607

  $   147

  $   232

  $   277

**   Restructured troubled debt**

$        22

$      24

  $     25

  -

  -

Accruingloans which are contractually past due 90 days or more are graded substandardwithin the Bank's internal loan grading system and come under heightenedscrutiny. Typically, a loan will not remain in the 90 days past due category,but will either show improvement or be moved to nonaccrual loans.  Loansare placed in a nonaccrual status when, in the opinion of management, thecollection of additional interest is questionable.  Thereafter, nointerest is taken into income unless received in cash or until such time as theborrower demonstrates the ability to pay principal and interest.  At December31, 2009 the Company had $12,678 of nonaccrual loans consisting of 71 loansaveraging $179.  Nonaccrual loans are written down to the fair value of theunderlying collateral at the time of transfer to nonaccrual, or as soon asreasonably possible, based on a current appraisal.  At December 31, 2009 theCompany had $961 of accruing loans which were contractually past due 90 days ormore consisting of 68 consumer purpose loans averaging $14.  At December 31,2009 the Company had $22 of restructured troubled debt consisting of 1 consumerloan.  

Information relating to interest income on nonaccrual and renegotiated loansoutstanding, in thousands of dollars, for the years ended December 31, 2009,2008, 2007, 2006, and 2005 is as follows:

** 2009**

**2008**

**2007**

**2006**

**2005**

** **

** **

** **

** **

** **

**   Interest included in income during  the year**

$ 318 

$ 103 

$ 33

$ 27

$   8

**   Interest which would have been included at the original        contract rates (includes amount included  in income)**

  $ 953 

  $ 288 

  $ 94

  $ 65

  $ 34

**POTENTIAL PROBLEM LOANS**

In addition to those loans disclosed under "Nonaccrual, Past Due, andRestructured Loans", there are certain loans in the portfolio which are notyet 90 days past due but about which management has concerns regarding theability of the borrower to comply with present loan repayment terms.  Suchloans and non-accrual loans are classified as impaired.  Problem loanidentification includes a review of individual loans, the borrower's and guarantor'sfinancial capacity and position, loss potential, and present economicconditions. A specific allocation is provided for impaired loans not yet placedin non-accrual status and not yet written down to fair value in management'sdetermination of the allowance for loan losses.

As of December 31, 2009, all loans which management had identified as impairedtotaled $900, excluding $12,678 of non-accrual loans outlined in the precedingschedule.

**FOREIGN OUTSTANDINGS**

As of the year ended December 31, 2009, the Company had no foreign loansoutstanding.

**LOAN CONCENTRATIONS**

As of the year ended December 31, 2009, 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,                    **

**  2009  **

**  2008  **

**  2007  **

**  2006  **

**  2005  **

**(Thousands of Dollars)**

**Loans:**

 

 

 

 

 

  Average  loans outstanding for the period

$593,370

$587,931

$563,864

$545,451

$453,610

**Allowance  for loan losses:**

 

 

 

 

 

** **

 

 

 

 

 

**Balance  at the beginning of period**

$   7,091

$   6,507

$   6,476

$   5,918

$   5,104

** **

 

 

 

 

 

**  Charge-offs:**

 

 

 

 

 

    Commercial,  financial, and agricultural

$    2,251

$      896

$      732

$      188

$      324

    Real  Estate - construction and mortgage

4,383

750

127

44

52

    Loans  to individuals

     1,141

        836

        587

        677

        445

 

 

 

 

 

**      Total  charge-offs**

$   7,775

$   2,482

$   1,446

$      909

$      821

** **

 

 

 

 

 

  **Recoveries**:

 

 

 

 

 

   Commercial,  financial, and agricultural

$      593

$      278

$        96

$      201

$        72

   Real  Estate - construction and mortgage

16

44

25

154

85

   Loans  to individuals

        469

        211

        211

        304

        203

 

 

 

 

 

**     Total  recoveries**

$   1,078

$      533

$      332

$      659

$      360

** **

 

 

 

 

 

**Net  charge-offs**

$   6,697

$   1,949

$   1,114

$      250

$      461

**Additions  charged to operations**

$   8,748

$   2,533

$   1,145

$      808

$   1,275

**Balance  at end of period**

$   9,142

$   7,091

$   6,507

$   6,476

$   5,918

** **

 

 

 

 

 

**Net  Charge-offs as a Percentage of Average Loans Outstanding**

  1.13%  

    .33%  

   .20%  

   .05%   

   .10%   

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 administration risks.  Inaddition, the Asset/Liability Management Committee and the Credit Committeereview the adequacy of the allowance quarterly and make recommendations regardingthe appropriate degree of consideration to be given the various factorsutilized in determining the allowance and to make recommendations as to theappropriate amount of the allowance.

The Bank's real estate loan portfolio and consequently the allowance for loanlosses has been significantly impacted by deterioration of local real estatemarkets in terms of both real estate market activity and real estate values duringthe most recent recession, 2007 through 2009, and although local real estatemarkets have begun to recover, management expects that full recovery of thiseconomic sector will not be evident before 2012 or later.  Management hassought to maintain the allowance for loan losses at a level commensurate withthe level of risk identified in the loan portfolio and has continuouslymonitored the methodologies employed in determining the allowance for loanlosses.  Management has reduced all real estate exposures to levels belowacceptable thresholds established by regulatory authorities, and management hasconducted a secondary comprehensive review of the loan portfolio to ensure thatrisks are appropriately identified and quantified.  As a result of theseactions and growth in past due, nonaccrual, and impaired loans (outlined in the"Past Due, Nonaccrual, and Restructured Loans" and "Potential Problem Loans" onpage 17 of this report), provisions for loan losses and the allowance for loanlosses have exceeded historical norms since the onset of the recession in 2007.

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 

18

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.  The graded loans and migration methodologies are calculatedbased on gross charge offs.  Additionally, the function annually reviews theeconomic assessment conducted by Loan Administration, addresses portfolio riskby industry 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.  During 2009, twoprimary changes to the methodology of determining the allowance for loan loseswere implemented.  The first of these was to determine and apply qualitativeenvironmental factors to each category of loans outlined in the "Allocation ofAllowance for Loan Losses" table below in order to better account for riskcharacteristics associated with each category of loans.  The second change wasto set the period of the of the recovery rate applied to the migrationanalysis, calculated at gross charge offs, to the most recent twelve monthperiod in order that the impact of recoveries on the determined reserverequirement appropriately reflects the current economic environment.

The following table presents an estimated allocation of the allowance for loanlosses at December 31, 2009, 2008, 2007, 2006, and 2005. This table ispresented based on the regulatory reporting classifications of theloans.  This allocation of the allowance for loan and lease losses iscalculated on an approximate basis and is not necessarily indicative of futurelosses or allocations.  The entire amount of the allowance isavailable to absorb losses occurring in any category of loans and leases.

 

**ALLOCATION  OF ALLOWANCE FOR LOAN LOSSES**

**(Dollars in Thousands)**

** **

** **

** **

** **

** **

** **

** **

**         2009         **

**         2008         **

**         2007         **

**         2006         **

**         2005         **

** **

**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**

$2,886  

13.4%

$1,608  

15.5%

$1,527  

17.3%

$1,265  

16.0%

$1,217  

16.7%

** **

 

 

 

 

 

 

 

 

 

 

**Real  Estate -     Construction    and    Mortgage**

2,172  

78.8%

1,388  

76.7%

584  

74.0%

507  

75.5%

367  

73.1%

** **

 

 

 

 

 

 

 

 

 

 

**Loans to     Individuals**

788  

7.7%

945  

7.7%

866  

7.7%

1,090  

7.4%

978  

7.9%

** **

 

 

 

 

 

 

 

 

 

 

**Other  Loans**

59  

  .1%

30  

  .1%

21  

1.0%

23  

1.1%

50  

2.3%

** **

 

 

 

 

 

 

 

 

 

 

**Environmental    Factors**

3,222  

  -

3,120  

  -

3,469  

  -

3,452  

  -

3,155  

  -

** **

 

 

 

 

 

 

 

 

 

 

**Unallocated**

         15 

     -  

          -  

     -  

       40  

     -  

    139  

     -  

     151  

     -  

** **

 

 

 

 

 

 

 

 

 

 

**Total**

$9,142  

100%

$7,091  

100%

$6,507  

100%

$6,476  

100%

$5,918  

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,              **

** **

**      2009    **

**     2008      **

**      2007          **

** **

** **

** **

** **

**Noninterest  bearing demand deposits**

** **

$105,182      

$115,724   

$132,765       

**Interest  bearing demand deposits**

 

89,172      

87,711   

91,948       

**Money  market deposits**

 

75,979      

81,783   

80,343       

**Savings  deposits**

 

51,743      

47,596   

48,502       

**Health  savings deposits**

 

896      

818   

586       

**Time  deposits**

 

314,367      

328,629   

  301,129       

**Individual  retirement accounts**

 

    47,770      

    40,032   

     33,889       

**  Total deposits**

 

$685,109      

$702,293   

$689,162       

**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,            **

**   2009   **

**   2008     **

**   2007     **

** **

** **

** **

**Interest  bearing demand deposits**

.14%   

.34%   

.38%    

**Money  Market Deposits**

1.03%   

1.53%   

2.99%    

**Savings deposits**

.81%   

1.29%   

1.69%    

**Health savings deposits**

1.85%   

3.06%   

3.75%    

**Time deposits**

2.48%   

3.85%   

4.91%    

**Individual retirement account deposits**

3.23%   

4.20%   

4.70%    

**MATURITIES OF TIME DEPOSITS**

The following table sets forth the maturity of time deposits in thousands ofdollars, at December 31, 2009:

** **

**Time   Deposits of  $100,000 ormore**

**Time Deposits  of Less Than$100,000**

**Total  Time    Deposits**

**Maturity within 3 months or less**

$  92,335        

$  45,763         

$ 138,098       

**Over 3 through 6 months**

49,851        

44,944         

94,795       

**Over 6 through 12 months**

59,800        

53,216         

113,016       

**Over 12 months**

    28,018        

    12,703        

    40,721      

**    Total**

$230,004        

$156,626        

$386,630      

**RETURN ON EQUITY AND ASSETS**

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

**             Years Ended December 31,        **

**   2009  **

**   2008  **

**    2007   **

 

 

 

**   Return  on average total assets(1)**

.56%

1.04%

1.15%  

**   Return  on average stockholders' equity(2)**

5.91%

10.65%

11.93%  

**   Cash  dividend payout ratio(3)**

41.25%

49.07%

46.55%  

**   Average equity to average assets  ratio (4)**

9.48%

9.78%

9.61%

** **

 

 

 

**   (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

**SHORT-TERM BORROWINGS**

Securities sold under repurchase agreements are short-term borrowings whichgenerally mature within 180 days from the dates of issuance.  Noother category of short-term borrowings had an average balance outstandingduring the reported period which represented 30 percent or more ofstockholders' equity at the end of the period.

The following is a summary of securities sold under repurchase agreementsoutstanding at December 31 of each reported period, in thousands of dollars:

**                           December 31,                  **

**  2009  **

**  2008  **

**  2007  **

**Securities sold under agreement to repurchase**

  $104,654

  $67,415

  $60,936

The following information relates to outstanding securities sold underrepurchase agreements during 2009, 2008, and 2007, in thousands of dollars:

**Maximum  Amount               Outstanding at Any                                 Month  End                    **

**Weighted  Average               Interest Rate                                at  December 31,                **

** **

**2009**

**2008**

**2007**

**2009**

**2008**

**2007**

**  Securities sold  under      agreement to repurchase**

$114,267  

$67,415   

$72,927   

.94%     

1.86%    

4.20%    
 
**                     Years  ended December 31,           **

**2009     **

**2008       **

**2007       **

**Securities sold under agreement to repurchase -    average daily amount outstanding during the year**

$101,286 

$58,843    

$68,276    

 

 

 

**  Weighted average interest rate paid**

1.11%

2.41%   

4.10%   

21 

**ITEM 1A.   RISK FACTORS**

An investment in our common stock involves a significant degree of risk.  Anyof the following risks could adversely affect our business, our results ofoperations and our financial condition, as well as the price of our commonstock.  The risks discussed below also include forward-lookingstatements, and our actual results may differ substantially from thosediscussed in these forward-looking statements.
**Risks Relatedto Our Business**
**Our growth strategy may not be successful.**

We have plans to maintain our recent asset and deposit growth through theopening of additional branch locations and the hiring of additional bankers. Wemay not be successful in identifying or obtaining suitable new branch locationsor receiving 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 rate trends.  Ifwe grow quickly and are not able to control costs and maintain asset quality,growth could materially adversely affect our financial performance.

**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 market presence.  Theunexpected loss of services of one or more of these key employees could have amaterial adverse effect on our operations and possibly result in reducedrevenues if we were unable to find suitable replacements 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

**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 Countyand the Waccamaw Neck area, a decline in real estate values in the Horry Countyand the Waccamaw Neck areas or other events in our market area may adverselyaffect our business.**

Substantially all of our business is located in the Horry County and the "WaccamawNeck" region of Georgetown County areas in coastal South Carolina.  Asa result, our financial condition and results of operations may be affected bychanges in the Horry County and the Waccamaw Neck economies.  Aprolonged period of economic recession, a general decline in Horry County andthe Waccamaw Neck area real estate values or other adverse economic conditionsin Horry County and the Waccamaw Neck and South Carolina may result indecreases in demand for our services, increases in nonpayment of loans and decreasesin the value of collateral securing loans, which could have a material adverseeffect on our business, future prospects, financial condition or results ofoperations.

**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 South Carolina.  Inthe conduct of our business, we also compete with credit unions, insurancecompanies, money market mutual funds and other financial institutions, some ofwhich are not subject to the same degree of regulation as we are.  Manyof these competitors have substantially greater resources and lending abilitiesthan we have and offer services, such as investment banking, insurance, trustand international banking services that we do not provide.  Webelieve that we have been able to, and will continue to be able to, competeeffectively with these institutions because of our experienced bankers andpersonalized service, as well as through loan participations and otherstrategies and techniques.  However, we cannot promise that we arecorrect in our belief.  If we are wrong, our ability to operateprofitably 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 interest rates.  Beginningin June 2004 through June 2006, the Federal Reserve raised rates 17 times for atotal increase of 4.25%.  Increases in interest rates generallydecrease the market values of interest earning investments and loans held andtherefore may adversely affect our liquidity and earnings.  Increasedinterest rates also generally affect the volume of mortgage loan originations,and the ability of borrowers to perform under existing loans of all types.  SinceSeptember 18, 2007, the Federal Reserve has decreased interest rates significantly,to near zero in 2009.  Decreases in interest rates generally have theopposite affect on market values of interest-bearing assets, the volume ofmortgage loan originations, and the ability of borrowers to perform underexisting loans of all types.

23

**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 foreseeable future.  Ourcommon stock is not traded on any exchange.  Accordingly, shareholders who wish to sell shares may experience a delayor have to sell them at lower prices than they seek in order to sell thempromptly, 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 pertinent factors.  Thebank's payment of dividends is also subject to various regulatory requirementsand the ability of the bank's regulators to forbid or limit its payment ofdividends.

**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 ofsupermajority votes 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 government agency.  Shouldour business fail, shareholders could lose their total 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 of offices.  Weare also subject to capitalization guidelines established by federalauthorities and our failure to meet those guidelines could result, in anextreme case, in our bank's being placed in receivership.  We arealso subject to the extensive and expensive requirements imposed on publiccompanies by the Sarbanes-Oxley Act of 2002 and related 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

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

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

In response 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.**

In the 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.

**The soundness of other financial institutions could adversely affect us.**

Financial services institutions are interrelated as a result of trading,clearing, counterparty, or other relationships. We have exposure to manydifferent industries and counterparties, and we routinely execute transactionswith counterparties in the financial services industry, including brokers,dealers, commercial banks, investment banks, and government sponsoredenterprises. Many of these transactions expose us to credit risk in the eventof default of our counterparty. In addition, our credit risk may be exacerbatedwhen the collateral held by us cannot be realized or is liquidated at pricesnot sufficient to recover the full amount of the loan or other obligation dueus. There is no assurance that any such losses would not materially andadversely affect our results of operations or earnings. 

**Current market developments may adversely affect our industry, business, andresults of operations.**

Dramatic declines in the housing market during the prior two years, withfalling home prices and increasing foreclosures and unemployment, have resultedin significant 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 as well as other financial assets,have caused many financial institutions to seek additional capital, to mergewith larger and stronger institutions and, in some cases, to fail. Reflectingconcern about the stability of the financial markets generally and the strengthof counterparties, many lenders and institutional investors have reduced, andin some cases, ceased to provide funding to borrowers, including otherfinancial institutions. The resulting lack of available credit, lack ofconfidence in the financial sector, increased volatility in the financialmarkets, and reduced business activity could materially and adversely, directlyor indirectly, affect our business, financial condition and results ofoperations.

**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, 2009.

25 

**ITEM2.   PROPERTIES**

The Company's subsidiary, The Conway National Bank, has twelve permanent bankingoffices in Horry County and two permanent banking offices in Georgetown County,for a total of fourteen banking offices.  In addition, the Bank hasan Operations and Administration Building, located at 1400 Third Avenue inConway, which houses the Bank's administrative offices and data processingfacilities.  This three-story structure contains approximately 33,616square feet.  Adjacent to the Operations and Administration Building isa 24,000 square foot branch banking office, known as the Conway Banking Office,which provides retail banking functions at the Bank's principal site.  Inaddition, the Bank has a 1,450 square foot building for express bankingservices adjacent to the Conway Banking Office.  The Bank has atwo-story office on Main Street in Conway containing 8,424 square feet, bankingoffices located at Red Hill in Conway (3,760 square feet), West Conway inConway (3,286 square feet), North Conway in Conway (3,600 square feet),Surfside in Surfside Beach (6,339 square feet), Northside, north of MyrtleBeach (2,432 square feet), Socastee in the southern portion of Myrtle Beach(3,498 square feet), Aynor in the Town of Aynor (2,809 square feet), MyrtleBeach in the City of Myrtle Beach (12,000 square feet), Murrells Inlet inMurrells Inlet, Georgetown County (3,600 square feet), North Myrtle Beach inthe City of North Myrtle Beach (3,600 square feet), Pawleys Island (3,900square feet) in Pawleys Island, Georgetown County, and Little River northwestof North Myrtle Beach (3,900 square feet). Of the fourteen banking offices andthe Operations and Administration Building, the bank owns the Operations andAdministration Building, the Conway Banking Office and Express, the bankingoffices at Red Hill, West Conway, Surfside Beach, Northside, Main Street,Socastee, Aynor, Myrtle Beach, Murrells Inlet, North Myrtle Beach, and PawleysIsland.  In addition to the existing facilities, the Company haspurchased one future office site.  The site consists of 1.63 acres atLoop Road and River Oaks Drive, Carolina Forest, Myrtle Beach.  TheCompany anticipates building a banking office on the site within the next twoto six years, depending on market conditions. The physical addresses of eachlocation are as follows:  The Operations and Administration Buildingat 1400 Third Avenue, Conway; Conway Banking Office at 1411 Fourth Avenue,Conway; Coastal Centre Express at 16th Ave., Conway; Main Street at309 Main Street, Conway; West Conway at Highway 501 & Cultra Road, Conway; NorthConway at 2601 Main Street, Conway; Surfside at Highway 17 & 5thAvenue North, Surfside Beach; Northside at 9726 Highway 17 North, Myrtle Beach;Red Hill at Highways 544 & 501, Conway; Socastee at 3591 North Gate Road,Myrtle Beach; Aynor at 2605 Highway 501, Aynor; Myrtle Beach at 1353 21stAvenue North, Myrtle Beach; Murrells Inlet at 4345 Highway 17 Bypass, MurrellsInlet;  North Myrtle Beach at 110 Highway 17 North, North MyrtleBeach; Pawleys Island at 10608 Ocean Highway, Pawleys Island; and Little River at2380 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, 2009.

**ITEM 4. (REMOVED AND RESERVED)**

26

**PART II**

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

As of March 1, 2010, there were approximately 963 holders of record of Company commonstock. There is no established market for shares of Company common stock andonly limited trading in such shares has occurred since the formation of theCompany on June 10, 1985.  During 2008 and 2009, 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.

**2009(1)**

**2008(1)**

  First  Quarter  Second Quarter  Third  Quarter  Fourth Quarter

**High**  $82.50  $85.00  $91.50  $81.75

**Low**  $79.00  $79.00  $79.00  $80.00

**High**  $112.50  $  96.00  $  95.00  $  92.50

**Low**  $81.25  $81.25  $79.75  $76.00

(1)  Marketprices have been adjusted to give retroactive effect for a two-for-one stocksplit declared October 13, 2009 and distributed        November 5,2009.

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 $1.25 per share in 2009 and $5.25 pershare in 2008. In addition, the Company distributed 838,741 common stock sharesassociated with a two-for-one stock split on November 5, 2009.   Therecan be no assurance, however, as to the payment of dividends by the Company inthe future.  Payment of dividends is within the discretion of theBoard of Directors, and is dependent upon the earnings and financial conditionof the Company and the Bank, and other related factors.  TheCompany's primary source of funds with which to pay dividends are dividendspaid to the Company by the Bank.  There are legal restrictions on theBank's ability to pay dividends.  See "Supervision andRegulation-Payment of Dividends" under Item 1, Part I of this Form 10-Kfor a description of these 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 Companycompleted a limited offering of up to 25,000 shares of the Company's CommonStock, $10.00 par value per share, in June, 2009, prior to the two-for-onestock split declared in October 2009.  The offering price was $158.00 per sharewith a minimum purchase of 25 shares, or $3,950, and an aggregate offeringamount of $3,950,000.  Through March 31, 2009, the Company had sold 400 sharesfor $63,200. Through June 1, 2009, when the offering terminated, total sales(including sales through March, 2009) equaled 18,826 shares, or $2,974,508. There were no underwriting discounts or commissions.  The shares were offered toand purchased by selected accredited investors and nonaccredited investorsemployed by or having a business relationship with the Company (limited to 35nonaccredited purchasers).  The shares were offered in reliance upon theexemption from registration provided by Section 4(2) of the Securities Act of1933 and Rule 506 thereunder. The Companymade one additional sale of securities during 2009.  On October 1,2009 the Company sold 228 shares of common stock to The Conway National Bank ProfitSharing and Savings Plan for a price of $137,278, or $163.50 per share.  Thissale was exempt from registration pursuant to Section 4(2) of the SecuritiesAct of 1933 because no public offering was involved.

Purchases of stock during the fourth quarter of 2009 are outlined in the belowtable.  Information about all other purchases during 2009 have beenpreviously reported on Forms 10-Q, filed May 12, 2009, August 14, 2009, andNovember 12, 2009, and is incorporated herein by reference.

**Period**

**(a) Total Number      of Shares       Purchased(1)**

**(b) Average Price     Paid per Share(1)**

**(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, 2009

2,098          

$  81.75       

-

-

November 1 - November 30, 2009

161          

$  81.75       

-

-

December 1 - December 31, 2009

88          

$  81.75       

-

-

Total

2,347          

$  81.75       

-

-

(1) Adjusted to give retroactive effect for a  two-for-one stock split declared October 13, 2009 and distributed November 5,       2009.

27

**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,                                   **

**    2009  **

**    2008  **

**    2007  **

**    2006   **

**     2005     **

**Selected Income Statement Data:**

 

 

 

 

 

**Total Interest Income**

$     43,947

$     50,119

$     53,755

$     49,411

$     39,079  

**Total Interest Expense**

       12,129

       18,221

       22,858

       18,396

       10,459  

**Net Interest Income**

       31,818

       31,898

       30,897

       31,015

       28,620  

**Provision for Loan Losses**

         8,748

         2,533

         1,145

            808

         1,275  

**Net  Interest Income**

 

 

 

 

 

**  after  Provision for Loan Losses**

       23,070

       29,365

       29,752

       30,207

       27,345  

**Total  Noninterest Income**

   8,140

   7,188

   7,002

   6,958

   6,411  

**Total  Noninterest Expenses**

       24,030

       23,108

       22,019

       22,339

       19,530  

**Income  Before Income Taxes**

         7,180

       13,445

       14,735

       14,826

       14,226  

**Income  Taxes**

         2,113

         4,488

         5,015

         4,780

         4,748  

**Net Income**

$       5,067

$       8,957

$       9,720

$     10,046

$       9,478  

** **

 

 

 

 

 

***Per  Share:**

 

 

 

 

 

**Net Income  Per Weighted Average**

 

 

 

 

 

**  Shares  Outstanding**

$         3.03

$         5.36

$         5.65

$         5.80

$         5.47  

**Cash  Dividend Paid Per Share**

$         1.25

$         2.63

$         2.63

$         2.63

$         2.50  

**Weighted  Average Shares Outstanding**

1,672,527

1,672,566

1,722,130

1,731,178

1,734,692  

** **

 

 

 

 

 

***Years2008-2005 adjusted for the effect of a two-for-one stock split issued during2009, years 2006-2005 adjusted for the  effect of a 10% stock dividend issued during 2007.**

**Selected Balance Sheet Data:**

 

 

 

 

 

**Assets**

$   920,641

$  874,625

$  865,638

$  837,622

$  792,720

**Net Loans**

570,654

591,190

567,244

560,849

498,008

**Investment Securities (1)**

232,605

206,996

216,177

179,634

181,978

**Federal Funds Sold**

14,000

21,000

26,000

26,000

46,000

**Deposits:**

 

 

 

 

 

**  Noninterest-Bearing**

$     96,834

$   100,560

$  112,450

$  129,763

$  134,475

**  Interest-Bearing**

     608,436

     578,659

  579,839

    545,289

    532,001

**   Total Deposits**

$   705,270

$   679,219

$  692,289

$  675,052

$  666,476

**Stockholders' Equity**

$     87,429

$     83,527

$    82,112

$    76,663

$    70,559

** **

 

 

 

 

 

**(1) Includes other investments**

 

 

 

 

 

****28

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

"Management's Discussion and Analysis" is provided to afford aclearer understanding of the major elements of the Company's financialcondition, results of operations, liquidity, and capital resources. Thefollowing discussion should be read in conjunction with the Company's financialstatements and notes thereto and other detailed information appearing elsewherein this report.  References to dollar amounts in this section are inthousands, except per share data.

**Economic Conditions**

The national recession which began in 2007 and which appears to have ended inSeptember of 2009 has significantly impacted the Company's market area, two coastalcounties of South Carolina, Horry County and the Waccamaw Neck region ofGeorgetown County.  Although many industries within our market have beenaffected during this difficult period, the primary impact of this recession wasto depress real estate sales, and consequently real estate values.  The declinein real estate values, ensuing defaults, and foreclosures has had a moderatelynegative impact on the Company resulting in historically low profitability.  With the national and local economies expected toremain subdued through much of 2010, we anticipate that profitability willremain below historical levels while, at the same time, expect that the Bankwill continue to grow, further strengthen, and generallyprosper.  Although the Bank's credit concerns have remained moderatein terms of the magnitude of non-performing assets in the industry and localmarkets, we will continue to address credit concerns during the first sixmonths of 2010.  Loan losses have leveled, but will remain athistorically high levels during the first half of 2010.  Loan losses areexpected to begin a downward trend in the third quarter of 2010.

Although the national and local economies have begun to show somestrengthening, much uncertainty remains about the sustainability and speed ofthe current recovery.  The Bureau ofEconomic Analysis, a division of the U.S. Department of Commerce, indicatedthat real gross domestic product (GDP) increased at an annual rate of 2.2% forthe third quarter of 2009, and the advance estimate for the fourth quarterindicates that GDP increased at an annual rate of 5.7%.  The fourthquarter increase reflects an acceleration in private inventory investment, adeceleration in imports, and an upturn in nonresidential fixed investment thatwere partly offset by decelerations in federal government spending and personalconsumption expenditures.  Locally, the real estate sector also posted gains inthe fourth quarter of 2009 with the total number of real estate transactionsincreasing approximately 33% as compared to the fourth quarter of2008.  This is an improvement from the approximate 11%, 21%, and 44%declines experienced for the third, second, and first quarters of 2009,respectively, in comparison to the same periods in 2008.  The bankingindustry has continued to experience significant difficulties with 140 bankfailures occurring in 2009 compared to 25 for 2008.  Further failuresare anticipated for 2010.

**Critical Accounting Policies**

The Company has adopted various accounting policies which govern theapplication of accounting principles generally accepted in the United States inthe preparation of the Company's financial statements. The significantaccounting policies of the Company are described in the footnotes to theconsolidated financial statements.

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.
29Distribution of Assets and Liabilities
The Company maintains a conservative approach in determining the distributionof assets and liabilities.  Loans increased 4.3% from $573,751 atDecember 31, 2007 to $598,281 at December 31, 2008; and decreased 3.1% fromDecember 31, 2008 to $579,796 at December 31, 2009.  Loan demand fromcreditworthy borrowers in our market area softened in 2007, was moderate in2008, and decreased during 2009.   Loans increased as a percentage oftotal assets from 66.3% at year-end 2007 to 68.4% at year-end 2008, and decreasedto 63.0% at year-end 2009.  Investment securities, federal funds sold,and other earning assets decreased as a percentage of total assets from 28.0%at year-end 2007 to 26.1% at year-end 2008, but increased to 30.8% at year-end2009.  Investments and federal funds sold provide for an adequatesupply of secondary liquidity.  Year-end other assets as a percentageof total assets fell from 5.7% at year-end 2007 to 5.5% at year-end 2008, and increasedto 6.2% at year-end 2009.  Management has sought to build the depositbase with stable, relatively noninterest-rate sensitive deposits by offeringthe small to medium account holders a wide array of deposit instruments atcompetitive rates. Noninterest-bearing demand deposits, as a percent of totalassets, have declined over the previous three years from 13.0% at year-end 2007to 11.5% at year-end 2008, and to 10.5% at year-end 2009. The Company hasanticipated a decline in these deposits over the long-term as more customersutilize interest-bearing deposit accounts and repurchase agreements.  Interest-bearingliabilities as a percentage of total assets have risen from 76.0% at December31, 2007 to 77.8% at December 31, 2008, and to 79.2% at December 31, 2009.  Stockholders'equity as a percentage of total assets was 9.5% for December 31, 2007, 2008 and2009.  The Bank remains well-capitalized (see Note 16 to theconsolidated financial statements, contained elsewhere in this report).

The table on the following page sets forth the percentage relationship to totalassets of significant components of the Company's balance sheet as of December31, 2009, 2008, and 2007:

 

**                             December 31,                     **

**Assets:**

**2009  **

**2008  **

**2007  **

**   Earning assets:**

** **

** **

** **

**     Loans**

63.0%

68.4%

66.3%

**     Investment securities:**

 

 

 

**     Taxable**

21.6   

20.6   

21.9   

**     Tax-exempt**

3.7   

3.1   

3.1   

**     Federal funds sold  and securities purchased**

 

 

 

**       under  agreement to resell**

    1.5   

    2.4   

    3.0   

**     Other earning assets**

    4.0   

    0.0   

    0.0   

**        Total  earning assets**

  93.8   

  94.5   

  94.3   

**     Other assets**

    6.2   

    5.5   

    5.7   

**        Total  assets**

100.0%

100.0%

100.0%

** **

 

 

 

**Liabilities and stockholders' equity:**

 

 

 

**     Interest-bearing  liabilities:**

 

 

 

**       Interest-bearing  deposits**

66.1%

66.2%

67.0%

**       Securities  sold under agreement to resell**

11.4   

7.7   

7.0   

**       FHLB  Advances and other borrowings**

    1.7   

    3.9   

    2.0   

**         Total  interest-bearing liabilities**

  79.2   

  77.8   

  76.0   

**     Noninterest-bearing  deposits**

10.5   

11.5   

13.0   

**     Other liabilities**

.8   

1.2   

1.5   

**     Stockholders' equity**

    9.5   

    9.5   

    9.5   

**       Total  Liabilities and stockholders' equity**

100.0%

100.0%

100.0%

****

****30

**Results of Operations**

CNB Corporation and subsidiary recognized earnings in 2009, 2008, and 2007of $5,067, $8,957, and $9,720, respectively, resulting in a return on averageassets of .56%, 1.04%, and 1.15%, and a return on average stockholders' equityof 5.91%, 10.65%, and 11.93%. The earnings were primarily attributable tofavorable but generally declining net interest margins in each period (see "NetIncome-Net Interest Income"). Other factors include management's ongoingeffort to maintain other income at adequate levels (see "Net Income ‐Noninterest Income") and to control other expenses (see "Net Income -Noninterest Expenses").  Earnings, coupled with a moderatedividend policy, have supplied the necessary capital funds to support bank operations.Total assets were $940,641 at December 31, 2009 as compared to $874,625 atDecember 31, 2008 and $865,638 at December 31, 2007.  The followingtable sets forth the financial highlights for fiscal years 2009, 2008, and 2007.

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

** **

**December 31,  2009  **

** 2008   to   2009  Percent  Increase(Decrease)**

**December 31,  2008  **

** 2007   to   2008  Percent  Increase(Decrease)**

**December 31,  2007  **

**Net interest income**

 

 

 

 

 

 
**     after provision for  loan losses**

$  23,070

(21.4)% 

$  29,365

(1.3)% 

$  29,752

 
**Income before income taxes**

7,180

(46.6)    

13,445

( 8.8)    

14,735

 
**Net Income**

5,067

(43.4)    

8,957

(7.8)    

9,720

 
** **

 

 

 

 

 

 
**Per Share (1)**

 

 

 

 

 

 
**(weighted average of shares outstanding)**

$      3.03

(43.5)    

$      5.36

(5.1)    

$    5.65

 
** **

 

 

 

 

 

 
**Cash dividends declared**

2,096

(51.9)    

4,355

(2.7)    

4,475

 
** **

 

 

 

 

 

 
**  Per Share (1)**

$      1.25

(52.5)    

$      2.63

-      

$      2.63

 
** **

 

 

 

 

 

 
**Total assets**

$920,641

5.3%  

$874,625

1.0%  

$865,638

 
**Total deposits**

705,270

3.8     

679,219

(1.9)    

692,289

 
**Total loans**

579,796

(3.1)    

598,281

4.3     

573,751

 
**Investment securities**

232,605

12.4     

206,996

(4.2)    

216,177

 
**Stockholders' equity**

87,429

4.7     

83,527

1.7     

82,112

 
**    Book value per share (1)**

$    52.13

3.5     

$    50.35

4.5     

$    48.18

 
** **

 

 

 

 

 

 
**Ratios (2):**

 

 

 

 

 

 
**Return on average total assets**

.56%

(46.2)    

1.04%

( 9.6)    

1.15%

 
**Return on average stockholders' equity**

5.91%

(44.5)    

10.65%

(10.7)    

11.93%

 
** **

 

 

 

 

 

 
  (1) Adjusted for the effect of two-for-one stock split issued during  2009.

 
 

 

 

 

 

 
(2)  For  the fiscal years ended December 31, 2009, 2008, and 2007 average total assets  amounted to $904,866,         $860,612, and $847,601,  respectively, with average stockholders' equity totaling $85,771, $84,138,  and         $81,442, for the same periods.

31
**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 borrowed funds.  Netinterest income is affected by the interest rates earned or paid and by volumechanges in loans, investment securities, deposits, and borrowed funds.

The Bank maintained net interest margins in 2009, 2008, and 2007 of 3.78%, 3.99%,and 3.96%, respectively, as compared to management's long-term target of 4.20%.Net interest margins have been compressed at the Bank and industry-wide, as aresult of strong competition for deposits, competitive lending practices, andthe historically low and prolonged market interest rate environment.  Netinterest margins have also been impacted by softening loan demand.  Loan demandremained strong throughout 2005 and 2006, declined in 2007, was moderate in2008, and declined in 2009.   Fully-tax-equivalent net interestincome increased from $31,361 in 2007 to $32,454 in 2008, and decreased slightlyto $32,446 in 2009.  During the three-year period, totalfully-tax-equivalent interest income decreased by 6.5% from $54,219 in 2007 to$50,675 in 2008, and decreased 12.0% in 2009 to $44,575.  Over thesame period, total interest expense decreased 20.3% from $22,858 in 2007 to $18,221in 2008, and decreased 33.4% to $12,129 in 2009. Fully-tax-equivalent netinterest income as a percentage of average total earning assets was 3.96% in2007, 3.99% in 2008, and 3.78% in 2009.

Interest rates paid on deposits and borrowed funds and earned on loans andinvestments have generally followed the fluctuations in market interest ratesin 2009, 2008, and 2007.  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 repriced up or down ininterest rate within a certain time interval.  A rate sensitiveliability (RSL) is an interest paying deposit or other liability that can be repricedeither up or down in interest rate within a certain time interval. When aproper balance between RSA and RSL exists, market interest rate fluctuationsshould not have a significant impact on earnings.  The larger theimbalance, the greater the interest rate risk assumed by the Bank and thegreater the positive or negative impact of interest rate fluctuations onearnings.  When RSAs exceed RSLs for a specific repricing period, apositive interest sensitivity gap results.  The gap is negative wheninterest-sensitive liabilities exceed interest-sensitive assets.  Fora bank with a positive gap, rising interest rates would be expected to have apositive effect on net interest income and falling rates would be expected tohave the opposite effect.  However, gap analysis, such as set forthin the table below, does not take into account actions a bank or its customers maytake during periods of changing rates, which could significantly change theeffects of rate changes that would otherwise be expected.  The Bankseeks to manage its assets and liabilities in a manner that will limit interestrate risk and thus stabilize long-term earning power. The following table setsforth the Bank's static gap rate sensitivity position at each of the timeintervals indicated.  The table illustrates the Bank's ratesensitivity position on specific dates and may not be indicative of theposition at other points in time. Management believes that a 200 basis pointrise or fall in interest rates will have less than a 10 percent effect onbefore-tax net interest income over a one-year period, which is within bankguidelines.
Interest Rate Sensitivity AnalysisDecember 31, 2009(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**

$  14,000

$            -  

$         -  

$           - 

$            -

$           -

**  Interest  Bearing Due From**

36,765

-  

-  

- 

-

-

**    Federal  Reserve**

 

 

 

 

 

 

**  Investment  Securities (net of  FRB and      FHLB stock in the amount of $3,041      and other investments of $827)**

-

1,215 

372 

452 

145,893

80,805

**  Loans (net of non-accruals of  $12,678)**

    90,829

     57,956 

   43,292 

    46,685 

  267,226

    61,130

**Total, RSA**

$141,594

$   59,171 

$ 43,664 

$  47,137 

$413,119

$141,935

** **

 

 

 

 

 

 

**Rate Sensitive  Liabilities (RSL)**

 

 

 

 

 

 

**Deposits:**

 

 

 

 

 

 

**Certificates of  Deposit of $100,000      or more**

$           -

$   92,335 

49,851 

59,800 

28,018

-

**All Other Time  Deposits**

-

45,763 

44,944 

53,216 

12,703

-

**Securities Sold  under Repurchase    Agreements**

78,308

24,011 

292 

2,043 

-

-

**Federal Home Loan  Bank Advances**

             -

       5,000 

            - 

     5,000 

       5,000

               -

**Total RSL**

$  78,308

$ 167,109 

$ 95,087 

$120,059 

$   45,721

$              -

**RSA-RSL**

$  63,286

$(107,938)

$(51,423)

$(72,922)

$ 367,398

$  141,935

**Cumulative  RSA-RSL**

$  63,286

$  (44,652)

$(96,075)

$(168,997)

$ 198,401

$  340,336

**Cumulative  RSA/RSL**

1.81 

.82  

.72  

.63  

1.39

1.67

32

**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 and deemedappropriate by management to cover estimated losses inherent in the portfolio.  TheCompany complies with the provisions of ASC 310-10, "Accounting byCreditors for Impairment of a Loan," in connection with the allowance forloan losses (see NOTE 1 to the Consolidated Financial Statements - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES).  The provision for loan losses was $8,748in 2009, $2,533 in 2008, and $1,145 in 2007.  Net loan charge-offs totaled$6,697 in 2009, $1,949 in 2008, and $1,114 in 2007, with net charge-offs beingcentered in consumer purpose, commercial and industrial loans, and real estateloans in 2009 and 2008, and in consumer purpose loans in 2007.   Theallowance for loan losses as a percentage of net loans was 1.60% at December31, 2009, 1.20% at December 31, 2008, and 1.15% at December 31, 2007. 

**Securities Transactions**

Netunrealized gains in the investment securities portfolio were $1,891 at December31, 2009, $2,310 at December 31, 2008, and $1,728 at December 31, 2007.  Themarket value of investment securities increased during 2007 and 2008 due to thedeclines in market interest rates, increased demand for bonds, and theconsequent increase in prices. This trend leveled in 2009 as market interestrates leveled. The net unrealized gains on investment securities decreasedduring 2009 primarily due to the realization of gains from sales of investmentsecurities.  Security gains of $1,576 were realized on sales of $55,192 inshort and mid-term available-for-sale securities during 2009.  No security gains/losseswere realized in 2008.  Security gains of $9 were realized in 2007 onsales of $2,315 in short-term available-for-sale securities.

**Noninterest Income**

Otherincome, net of any securities gains, increased by 2.8% from $6,993 in 2007 to $7,188in 2008, and decreased 8.7% from $7,188 in 2008 to $6,580 in 2009.   During2008, service charge income on deposit accounts increased due to increased servicecharges as a result of declines in demand deposit balances and increasednon-sufficient funds and overdraft charges.  Other noninterest incomeremained stable.  During 2009, service charge income on deposit accountsdecreased due to decreased non-sufficient funds and overdraft charges.  Othernoninterest income also decreased due primarily to declines in credit cardmerchant discount income, mortgage negotiation fees, and other miscellaneousnoninterest income.  

**NoninterestExpenses**

Noninterestexpenses increased by 4.9% from $22,019 in 2007 to $23,108 in 2008, and increased4.1% from $23,108 in 2008 to $24,030 in 2009.  The components ofother expenses are salaries and employee benefits of $14,044, $14,865, and $14,005;occupancy and furniture and equipment expenses of $3,338, $3,047, and $3,313; andother operating expenses of $4,637, $5,196, and $6,712 for 2007, 2008, and 2009,respectively.  

The decrease in salary and employee benefits during 2009 reflects declines inthe number of employees and the consequent reduction in salaries and benefits expense.

The increase in occupancy expense during 2009 was attributable to the Company'sinstallation of a new core application system and branch office renovations.

The increase in other operating expenses during 2009 is primarily attributableto increased FDIC insurance premiums which increased 589.5% from $239 in 2008to $1,648 in 2009.

**Income Taxes**

Provisionsfor income taxes decreased 10.5% from $5,015 in 2007 to $4,488 in 2008, and decreased52.9% from $4,488 in 2008 to $2,113 in 2009.  Income tax liabilitydecreased in both of 2008 and 2009, as income before income taxes decreased 8.8%and 46.6%, respectively.

**Liquidity**

The Bank's liquidity position isprimarily dependent on short-term demands for funds caused by customer creditneeds and deposit withdrawals and upon the liquidity of bank assets to meetthese needs.  The Bank's liquidity sources include cash and due frombanks, federal funds sold, and short-term investments.  In addition,the Bank has established federal funds lines of credit from correspondentbanks; has the ability, on a short-term basis, to borrow funds from the FederalReserve System; and has a line of credit from the Federal Home Loan Bank ofAtlanta (see NOTE 9 to the Consolidated Financial Statements-LINES OF CREDIT).  TheCompany had cash balances on hand of $3,259, $5,142, and $5,836 at December 31,2009, 2008, and 2007, respectively.  At December 31, 2009, the Company hadliabilities, consisting of cash dividends payable totaling $2,096.  At December31, 2008 the Company had liabilities, consisting of cash dividends payable, a short-termnote payable, and accrued interest payable in the amounts of $4,355 and $1,132,respectively. At December 31, 2007, the Company had liabilities, consisting ofcash dividends payable, totaling $4,475.  Management believes that liquiditysources are more than adequate to meet funding needs.

****33

**Off Balance Sheet Arrangementsand Contractual Obligations**

The Company, through the operations of the Bank, makescontractual commitments to extend credit in the ordinary course of business.  Thesecommitments are legally binding agreements to lend money to customers of theBank at predetermined 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, 2009, the Bank had issued commitments toextend credit of $44.7 million, standby letters of credit of $2.4 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, 2009, 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, 2009**
**(Dollars in  Thousands)**
 
 
 
 
 
 
 
**Less than**
**1 to 3  **
**3 to 5     **

**Total   **
**One Year**
**Years  **
**Years     **
**Contractual Cash  Obligations**

  Operating leases
$         10
$           2
$         4
$       4    
  Time  deposits
  386,630
  345,909
  33,983
  6,738    
  Securities  sold under agreement to repurchase
104,654
104,654
-
-    
  United  States treasury demand notes
650
650
-
-    
  Federal  Home Loan Bank Advances
    15,000
    10,000
    5,000
          -    
     Total  contractual cash obligations
$506,944
$461,215
$38,987
$6,742    
Obligations under non-cancelable operating lease agreements totaled $10 atDecember 31, 2009.  These obligations are payable over five years 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.  At December 31, 2009 securities sold under agreement to repurchasetotaled $104,654 and are due and payable within one year.  Further informationon securities sold under agreement to repurchase is outlined in NOTE 8 to theConsolidated Financial Statements - SECURITIES SOLD UNDER REPURCHASEAGREEMENTS.  At December 31, 2009 the Company had $650 of United Statestreasury notes payable on demand.  At December 31, 2009 the Company had $15,000in Federal Home Loan Bank advances.  Further information on the United Statestreasury notes payable and the Federal Home Loan Bank advances is outlined inNOTE 9 to the Consolidated Financial Statements - LINES OF CREDIT.

**Capital Resources**

Total stockholders' equity was $87,429,$83,527, and $82,112 at December 31, 2009, 2008, and 2007, representing 9.50%, 9.55%,and 9.49% of total assets, respectively.  The increases reflect netearnings retained during each year.  At December 31, 2009, theCompany and the Bank exceeded quantitative measures established by regulationto ensure capital adequacy (see NOTE 16 to the Consolidated FinancialStatements - REGULATORY MATTERS).  Capital is considered sufficientby management to meet current and prospective capital requirements and,together with anticipated retained earnings, to support anticipated growth inbank operations.
Effects of Inflation
Inflation normally has the effectof accelerating the growth of both a bank's assets and liabilities.  Oneresult of this inflationary effect is an increased need for equity capital.  Incomeis also affected by inflation.  While interest rates havetraditionally moved with inflation, the effect on net income is diminishedbecause both interest earned on assets and interest paid on liabilities varydirectly with each other.  In some cases, however, rate increases aredelayed on fixed-rate instruments.  Loan demand normally declinesduring periods of high inflation. Inflation has a direct impact on the Bank'snoninterest expense. The Bank responds to inflation changes throughre-adjusting noninterest income by repricing services.

**Accounting Issues**

Accounting standards that havebeen issued or proposed by the Financial Accounting Standards Board that do notrequire adoption until a future date are not expected to have a material impacton the consolidated financial statements upon adoption.  (See NOTE 1to the Consolidated Financial Statements - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND ACTIVITIES).

34

**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 market risk.  TheCompany is subject to interest rate risk to the degree that itsinterest-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 from borrowers'inability or unwillingness to make contractually required payments.  Marketrisk, in regard to lending, reflects changes in the value of collateralunderlying loans receivable and the valuation of real estate held by theCompany.

The Company is subject to the regulations of various governmental agencies.  Theseregulations can and do change significantly from period to period.  TheCompany also undergoes periodic examinations by the regulatory agencies, whichmay subject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions from the regulators'judgments based on information available to them at the time of theirexamination.

**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 significant marketrisk that could potentially have a material effect on the Company's financialcondition and results of operations (See Item 7 - MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Net Income - NetInterest Income).  Other types of market risks, such as foreigncurrency risk and commodity price risk, do not arise in the normal course ofthe Company's business activities.

35

**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**CNB CORPORATION AND SUBSIDIARYREPORT ON CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDDECEMBER 31, 2009, 2008 and 2007**36** **

***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**

38 - 40  41  42  43  44  45  46 - 70

****37

**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 CNBCorporation and subsidiary as of December 31, 2009 and 2008, and the relatedconsolidated statements of income, stockholders' equity, comprehensive incomeand cash flows for each of the three years in the period ended December 31,2009.  These consolidated financial statements are the responsibilityof the Company's management.  Our responsibility is to express an opinion onthese consolidated 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 require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management as well asevaluating the overall financial statement presentation.  We believe that ouraudits 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, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009 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, 2009, based oncriteria established in "Internal Control-Integrated Framework" issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated March 9, 2010 expressed an unqualified opinion on theeffectiveness of CNB Corporation and subsidiary's internal control overfinancial reporting.

***/s/Elliott Davis, LLC***Columbia, South CarolinaMarch 9, 2010

****38

**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, 2009, based on criteria established in"Internal Control-Integrated Framework," issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO)*.*  CNB Corporation'smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management'sReport on Internal Control Over Financial Reporting.  Our responsibility is toexpress an opinion on the effectiveness of the company's internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Our audit also included performing suchother procedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable basis for 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 internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary 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 any evaluationof effectiveness 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.

39

In our opinion, CNB Corporation maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2009, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidatedbalance sheets of CNB Corporation and subsidiary as of December 31, 2009 and2008, 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, 2009, and our report dated March 9, 2010 expressed an unqualifiedopinion thereon.

***/s/Elliott Davis, LLC***Columbia, South CarolinaMarch 9, 2010

40

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

** **

**              December 31,          **

**                                                     *ASSETS*  CASH AND DUE FROM BANKS  DUE FROM FEDERAL RESERVE BANK, BALANCE IN EXCESS OF REQUIREMENT  FEDERAL FUNDS SOLD  INVESTMENT SECURITIES AVAILABLE FOR SALE  INVESTMENT SECURITIES HELD TO MATURITY**   (Fair value $15,165 in 2009 and  $9,570 in 2008)**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 - $5 par value and $10 par value in 2009 and 2008,  respectively;        authorized 3,000,000 shares and 1,500,000  shares in 2009 and 2008, respectively;        issued 1,677,233 and 829,518 shares in  2009 and 2008, respectively     Capital in excess of par value of stock     Retained earnings     Accumulated other comprehensive income           Total stockholders'  equity           

**     2009    **  $   25,879  36,765  14,000  214,615  14,949  3,041  579,796        9,142570,654  23,251  5,498       11,989**$ 920,641******  $   96,834   608,436705,270  104,654  650  15,000  -  2,096       5,542     833,212  8,386  51,418  26,620       1,005       87,429**$ 920,641**

**    2008    **  $   19,259  -  21,000  194,214  9,758  3,024  598,281        7,091591,190  23,403  7,000         5,777**$ 874,625******  $  100,560   578,659679,219  67,415  2,672  30,000  1,120  4,355       6,317     791,098  8,295  50,085  23,649       1,498       83,527**$ 874,625**

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

***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     Federal Reserve Bank balances in excess of requirement           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     Gain/(loss) on sale of other real estate owned           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     FDIC deposit insurance assessments     Other operating expenses           Total noninterest  expenses           Income before provision  for income taxes**PROVISION FOR INCOME TAXES**         Net income**NET INCOME PER SHARE***  *Adjusted for the effect of a two-for-one stock split issued during 2009.

**    2009    **$   37,170  5,432       1,2196,651  11                92032              74       43,947  10,668  1,121  -  332              8       12,129  31,818        8,748      23,070  3,530  3,073        1,576           (39)        8,140  11,027  2,978  1,069  2,244  778  467  793  1,648         3,026       24,030  7,180         2,113**$    5,067  $      3.03**

**    2008    **$   40,431  7,939       1,0809,019  3              8588581                 -       50,119  16,539  1,420  22  205            35       18,221  31,898        2,533      29,365  3,810  3,372  -               6        7,188  11,337  3,528  1,021  2,026  655  460  824  239       3,018       23,108  13,445         4,488**$    8,957  $      5.36**

**    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  80       2,452       22,019  14,735         5,015**$    9,720  $      5.65**

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

***CNB CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the years ended December 31, 2009, 2008, and 2007(amounts, except share data, in thousands)***

** **

   ** Common stock      Shares     Amount**

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

**Retained earnings **

**Accumulated  other  comprehensive income/(loss) **

**Total    stockholders'  equity  **

**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**   Net income     Cash dividend declared, $1.25 per share     Two-for-one stock split     Common shares repurchased, at an        average per share price of $157.57,        prior to the two-for-one stock split        declared in October 2009     Common shares sold, at an average        per share price of $158.07 prior to the        two-for-one stock split declared in        October 2009     Net change in unrealized holding         gain, net of income tax benefit of $328**BALANCE, DECEMBER 31, 2009**

  785,279   -   -   77,848   -   (11,325)304                -     852,106   -    -    (22,929)  341                    -   

829,518   -     -     838,741   (10,080)  19,054   -                   **1,677,233**

  $7,853   -    -    778   -    (113)  3            -    8,521   -     -     (229)  3         -     8,295   -     -     -     (99)  190   -                 **$8,386 **

  $42,913      -      -      12,376     -    (1,823)    53                -        53,519     -      -      (3,485)       51              -      50,085     -     -     -     (1,489)   2,822    -                    **$51,418  **
  $27,017   9,720   (4,475)    (13,154)    (61)  -    -             -    19,047   8,957   (4,355)  -      -             -  23,649   5,067   (2,096)  -  -    -    -                  **$26,620 **

  $(1,120)  -    -    -    -  -         2,145    1,025    -    -    -        -            473     1,498 -    -  -    -    -    (493)                  **$   1,005 **

  $76,663   9,720   (4,475)  -    (61)  (1,936)56          2,145    82,112   8,957   (4,355)  (3,714)  54          473 83,527   5,067 (2,096)  -  (1,588)  3,012    (493)                  **$87,429 **

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

43

***CNB CORPORATION 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**

**    2009   **$  5,067500      (993)**$  4,574**

**    2008   **$  8,957473             -**$  9,426**

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

** **

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

44

***CNB CORPORATION AND SUBSIDIARYCONSOLIDATED 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/(benefit) for deferred income  taxes        Discount accretion and premium  amortization on investment securities        Gain on sale of investment securities  available for sale        (Gain)/Loss 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 foreclosed assets     Net (increase)/decrease in loans     Purchase of equity securities     Net premises and equipment expenditures              Net  cash used for investing activities**FINANCING  ACTIVITIES**   Dividends paid     Net increase/(decrease) in deposits     Net increase/(decrease) in securities sold under repurchase  agreements     Net increase/(decrease) in United States Treasury demand  notes     Net increase/(decrease)  in Federal Home Loan Bank advances     Net increase/(decrease)  in other short-term borrowings     Cash paid for fractional shares     Common shares purchased     Common shares sold              Net  cash provided by financing activities                 Net  increase/(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**SUPPLEMENTAL  DISCLOSURE FOR NON-CASH****INVESTING     AND FINANCING ACTIVITIES**     Change in unrealized gain/(loss) on  securities available for sale, net of taxes     Real estate acquired through foreclosure     Change in dividends payable

**   2009    **  $  5,067 1,538   8,748 (880)  1,001   (1,576)  39   137   1,502   (4,020)    (775) 10,781 55,192   795   144,732   (6,003)  (220,555)  1,501   9,128   (17)   (1,386)   (16,613)  (4,355)  26,051   37,239   (2,022)  (15,000)  (1,120)  -   (1,588)    3,012     42,217 36,385    40,259 **$ 76,644****   $ 13,009 $   2,113 $    (822)  $   2,660   $ (2,259)**

**   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  $      789  $      672  $      119**

**    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  $   3,575  $        64  $      352**

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

45

***CNBCORPORATION AND SUBSIDIARYNOTES TOCONSOLIDATED 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 its wholly-ownedsubsidiary, The Conway National Bank (the "Bank").  The Company operates as onebusiness segment.  All significant intercompany balances and transactions havebeen eliminated.  The Bank operates under a national bank charter and providesfull banking services to customers.  The Bank is subject to regulation by theOffice of the Comptroller of the Currency and the Federal Deposit InsuranceCorporation.  The Company is subject to regulation by the Federal ReserveBoard.

**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 theconsolidated statements of income for the periods covered.  Actual resultscould differ 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.  The Company'sloan portfolio is not concentrated in loans to any single borrower or arelatively 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, 2009, the Company had concentrationsof loans to the following classes of borrowers or industries: land subdivisionand development, lessors of residential buildings, and lessors ofnon-residential buildings.  The amount of commercial purpose loans outstandingto these groups of borrowers as of December 31, 2009 was $25,114,000,$30,251,000, and $29,803,000, respectively.  These amounts represented 26.75%,32.22%, and 31.74% of Total Capital, as defined for regulatory purposes, forthe same period, respectively.

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 provide forplanned 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 no concentrationof credit risk in its investment portfolio.  The Company places its deposits andcorrespondent accounts with and sells its federal funds to high qualityinstitutions.  Management believes credit risk associated with correspondentaccounts is not significant.

46

*Continued*

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

**Cash and cash equivalents**

Cash and cash equivalents include cash and due from banks, due fromFederal Reserve, and federal funds sold.  Generally, both cash and cashequivalents are considered to have maturities of three months or less, andaccordingly, the carrying amount of such instruments is deemed to be areasonable estimate of fair value.

**Investment securities**

The Company accounts for investment securities in accordance withFinancialAccounting Standards Board Accounting Standards Codification320-10 (ASC 320-10)*, "Investments in Debt Securities."*  Thisstatement requires that the Company classify debt securities upon purchase asavailable for sale, held to maturity or trading.  Such assets classified asavailable for sale are carried at fair value.  Unrealized holding gains orlosses are reported as a component of stockholders' equity (accumulated othercomprehensive income) net of deferred income taxes.  Securities classified asheld to maturity are carried at cost, adjusted for the amortization of premiumsand the accretion of discounts into interest income using a method whichapproximates a level yield. To qualify as held to maturity the Company musthave the intent and ability to hold the securities to maturity. Trading securitiesare carried at market value.  The Company has no trading securities.  Gains orlosses on disposition of securities are based on the difference between the netproceeds and the adjusted carrying amount of the securities sold, using thespecific identification method.

**Loans and interest income**

Loans are recorded at their unpaid principal balance.  Interest on loansis accrued and recognized based upon the interest method.

The Company accounts for nonrefundable fees and certain direct costs associatedwith the origination of loans in accordance with ASC 310-20, "*NonrefundableFees and Other Costs*."  Under ASC 310-20 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 for impaired loans in accordance with ASC 310-10, "*Receivables."* This standard requires that all creditors value loans at the lesser of therecorded balance or the loan's fair value if it is probable that the creditorwill be unable to collect all amounts due according to the terms of the loanagreement. Fair value may be determined based upon the present value ofexpected cash flows, market price of the loan, if available, or value of theunderlying collateral.  Expected cash flows are required to be discounted atthe loan's effective interest rate.  The standard also requires creditors toprovide additional disclosures for the recognition of interest income on animpaired loan.

Under ASC 310-10, 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 applied under thecontractual terms of the loan agreement. Once the reported principal balancehas been reduced to zero, future cash receipts are applied to interest income,to the extent that any interest has been foregone. Further cash receipts arerecorded as recoveries of any amounts previously charged off.

A loan is also considered impaired if its terms are modified in a troubled debtrestructuring.  For these accruing impaired loans, cash receipts are typicallyapplied to principal and interest receivable in accordance with the terms ofthe restructured loan agreement.  Interest income is recognized on these loansusing the accrual method of accounting.

47

*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.  In evaluatingthe portfolio, management takes into consideration numerous factors, includingcurrent economic conditions, prior loan loss experience, the composition of theloan portfolio, and management's estimate of anticipated credit losses.  Loansare charged against the allowance at such time as they are determined to belosses.  Subsequent recoveries are credited to the allowance.  Managementconsiders the year-end allowance adequate to cover losses in the loanportfolio; however, management's judgment is based upon a number of assumptionsabout future events, which are believed to be reasonable, but which may or maynot prove valid. Thus, there can be no assurance that charge-offs in futureperiods will not exceed the allowance for loan losses or that additionalincreases in the allowance for loan losses will not be required.

**Non-performing assets**

Non-performing assets include real estate acquired through foreclosureor deed taken in lieu of foreclosure, loans on non-accrual status, andrestructured loans.  Loans are placed on non-accrual status when, in theopinion of management, the collection of additional principal and interest isquestionable.  Thereafter no interest is taken into income unless received incash or until such time as the borrower demonstrates the ability to pay principaland interest.

**Other Real Estate Owned**

Other real estate owned includes real estate acquired throughforeclosure.  Other real estate owned is initially recorded at the lower ofcost (principal balance of the former loan plus costs of improvements) or estimatedfair value.  Any write-downs at the dates of foreclosure are charged to theallowance for loan losses.  Expenses to maintain such assets and subsequentwrite-downs are included in noninterest expenses - other operating expenses. Gains and losses on disposal are included in noninterest income - gains andlosses on disposition of other real estate owned.

**Premises and equipment**

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 expensed whenincurred.  Gains and losses on routine dispositions are reflected in currentoperations.

**Stock Split**

During 2009, the Corporation effected a two-for-one common stock split,which resulted in the reduction of the par value of its common stock from $10 pershare to $5 per share and the issuance of 838,741 additional shares. Net incomeper share for the years ended December 31, 2008 and 2007 has been adjusted forcomparable presentation.

**Advertising expense**

Advertising,promotional and other business development costs are generally expensed asincurred.  External costs incurred in producing media advertising are expensedthe first time the advertising takes place. External costs relating to directmailing costs are expensed in the period in which the direct mailings are sent.Advertising, promotional and other business development costs of $448,000,$537,000 and $508,000, were included in the Company's results of operations for2009, 2008, and 2007, respectively.

****

48                                                                         *Continued*

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

**Securitiessold under agreements to repurchase**

The Bank entersinto sales of securities under agreements to repurchase.  Fixed-couponrepurchase agreements are treated as financing, with the obligation torepurchase securities sold being reflected as a liability and the securitiesunderlying the agreements remaining as assets.

**Income taxes**

Income taxes are accounted for in accordance with ASC 740-10, *"IncomeTaxes." *Under ASC 740-10, deferred tax liabilities are recognized on alltaxable temporary differences (reversing differences where tax deductionsinitially exceed financial statement expense, or income is reported forfinancial statement purposes prior to being reported for tax purposes).  Inaddition, deferred tax assets are recognized on all deductible temporarydifferences (reversing differences where financial statements expense initiallyexceeds tax deductions, or income is reported for tax purposes prior to beingreported for financial statement purposes). Valuation allowances areestablished to reduce deferred tax assets if it is determined to be *"*morelikely than not*"* that all or some portion of the potential deferredtax assets will not be realized.  ASC 740-10 also clarifiesaccounting for uncertainty in income taxes recognized in an enterprise'sfinancial statements and prescribes a recognition threshold and measurement ofa tax position taken or expected to be taken in an enterprise's tax return.

**Reclassifications**

Certain amounts in the financial statements for the years ended December31, 2008 and 2007 have been reclassified, with no effect on net income orstockholder's equity, to be consistent with the classifications adopted for theyear ended December 31, 2009.

**Net income per share**

The Company computes net income per share in accordance with ASC 260-10,*"Earnings Per Share."*  Net income per share is computed on thebasis of the weighted average number of common shares outstanding: 1,672,527 in2009, 1,672,566 in 2008 and 1,722,130 in 2007.  The Company does not have anydilutive instruments and therefore only basic net income per share ispresented.  Net income per share and the weighted average common shares outstandinghave been adjusted for 2008 and 2007 to reflect the two-for-one stock splitissued in 2009.

**Fair values of financial instruments**

ASC 820, *"Fair Value Measurements and Disclosures,"*requires disclosure of fair value information for financial instruments,whether or not recognized in the balance sheet, when it is practicable toestimate the fair value.  ASC 820 defines a financial instrument as cash,evidence of an ownership interest in an entity or contractual obligations whichrequire the exchange of cash or other financial instruments.  Certain items arespecifically excluded from the disclosure requirements, including the Company'scommon stock.  In addition, other nonfinancial instruments such as premises andequipment and other assets and liabilities are not subject to the disclosurerequirements.

******49

*Continued*

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

**Fair values of financial instruments - continued**

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 carrying amounts of cashand due from banks (cash on hand, due from banks, due from the                 FederalReserve,  and interest bearing deposits with other banks) approximate theirfair 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 market       prices.

***       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 at par value.

***       Loans*** - For variable rate loans that reprice frequently andfor loans that mature within one year, fair values are based on carrying       values.  Fair values for all other loans are estimated using discounted cashflow analyses, with interest rates currently being offered for        loans withsimilar terms to borrowers of similar credit quality.  Fair values for impairedloans are estimated using discounted cash flow        analyses or underlyingcollateral values, 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 for long-termfixed-rate certificates of deposit are estimated using a discounted cash flowcalculation that applies        interest rates currently being offered on certificatesto a schedule of aggregated expected monthly maturities.

***       Short-term borrowings*** - The carrying amounts ofborrowings under repurchase agreements and U. S. Treasury demand notes.

***       Advances from the Federal Home Loan Bank -***The fair values of fixed rate borrowings are estimated using adiscounted cash        flow calculation that applies the Company's current borrowingrate from the FHLB.

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

**Recently issued accounting standards**

The following is a summary of recent authoritative pronouncements that mayaffect accounting, reporting, and disclosure of financial information by theCompany:

ASU 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable RevenueArrangements - a consensus of the FASB Emerging Issues Task Force" was issuedin October, 2009 and provides guidance on accounting for products or services(deliverables) separately rather than as a combined unit utilizing a sellingprice hierarchy to determine the selling price of a deliverable.  The sellingprice is based on vendor-specific evidence, third-party evidence or estimatedselling price.  The amendments in the Update are effective prospectively forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010 with early adoption permitted.  The Companydoes not expect the update to have an impact on its financial statements.

50                                                                          *Continued*

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

**Recently issued accounting standards - continued**

ASU 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation ofConvertible Debt Issuance or Other Financing - a consensus of the FASB EmergingIssues Task Force," was issued in October, 2009 to provide for accounting andreporting for own-share lending arrangements issued in contemplation of aconvertible debt issuance.  At the date of issuance, a share-lendingarrangement entered into on an entity's own shares should be measured at fairvalue in accordance with prior guidance and recognized as an issuance cost,with an offset to additional paid-in capital.  Loaned shares are excluded frombasic and diluted earnings per share unless default of the share-lendingarrangement occurs.  The amendment also requires several disclosures includinga description and the terms of the arrangement and the reason for entering intothe arrangement.  The effective dates of the amendment are dependent upon thedate the share-lending arrangement was entered into and include retrospectiveapplication for arrangements outstanding as of the beginning of fiscal yearsbeginning on or after December 15, 2009.   The Company has no plans to issueconvertible debt and, therefore, does not expect the update to have an impacton its financial statements.

ASU 2010-01, "Equity (Topic 505):  Accountingfor Distributions to Shareholders with Components of Stock and Cash - aconsensus of the FASB Emerging Issues Task Force," was issued in January, 2010to alleviate diversity in the accounting for distributions to shareholders thatallow the shareholder to elect to receive their entire distribution in cash orshares but with a limit on the aggregate amount of cash to be paid.  Theamendment states that the stock portion of a distribution to shareholders thatallows them to elect to receive cash or shares with a potential limitation onthe total amount of cash that all shareholders can elect to receive in theaggregate is considered a share issuance.  The amendment is effective forinterim and annual periods ending on or after December 15, 2009 and had noimpact on the Company's financial statements.

ASU 2010-2, "Consolidation (Topic 810):  Accounting and Reporting for Decreasesin Ownership of a Subsidiary - a Scope Clarification," was issued in January,2010, as an amendment to clarify the scope of subsidiaries for consolidationpurposes.  The amendment provides that the decrease in ownership guidanceshould apply to (1) a subsidiary or group of assets that is a business ornonprofit activity, (2) a subsidiary that is a business or nonprofit activitythat is transferred to an equity method investee or joint venture, and (3) anexchange of a group of assets that constitutes a business or nonprofit activityfor a noncontrolling interest in an entity.  The guidance does not apply to adecrease in ownership in transactions related to sales of in substance real estateor conveyances of oil and gas mineral rights.  The update is effective for theinterim or annual reporting periods ending on or after December 15, 2009 andhad no impact on the Company's financial statements.

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.

51                                                                        C*ontinued*

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

**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 Company is subjectto interest rate risk to the degree that its interest-bearing liabilitiesmature or reprice at different speeds, or on different basis, than its interest-earningassets.  Credit risk is the risk of default on the Company's loan portfoliothat results from borrower's inability or unwillingness to make contractuallyrequired payments.  Market risk, as it relates to lending and real estate heldfor operating locations, reflects changes in the value of collateral underlyingloans receivable and the valuation of real estate held by the Company. 

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period.  TheCompany also undergoes periodic examinations by the regulatory agencies, whichmay subject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions from the regulators'judgments based on information available to them at the time of theirexamination.

***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 Reserve Bank.  Theaverage amounts of these reserve balances for the years ended December 31, 2009and 2008 were approximately $2,001,000 and $2,638,000, respectively.

52                                                                         *Continued*

***NOTE 3 -INVESTMENT SECURITIES***

     The amortized cost and fairvalue of investment securities 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.  The amortizedcost, approximate fair value, and expected maturities of investment securitiesare summarized as follows (tabular amounts in thousands):

****

**                            December  31,  2009                            Amortized            Unrealized  Holding              Fair     **

**AVAILABLE FOR SALE**     Government sponsored enterprises        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        Other          Total available for sale**HELD TO MATURITY**     Government sponsored enterprises        One to five years     State, county and municipal        Within one year        One to five years        Six to ten years        Over ten years        Total held to maturity

**     Cost      **  $   135,494      42,907      178,401  1,381  2,543  16,563        4,010        24,497  2,240        6,975          9,215  780  11               36             827**$ 212,940**$     6,003       6,003  645  826  6,232       1,243         8,946**$  14,949**

**  Gains   **  $         945       116      1,061  13  93  442         62         610  63       165         228  -     -              -              -   **$  1,899**$        -             -     5  26  161          69          261**$     261**

** Losses **  $      11      144        155  -     -     68        -             68  1          -             1   -     -             -             -   **$    224******$       17         17  -     -     28         -              28**$       45**

**  Value   **  $  136,428     42,879     179,307  1,394  2,636  16,937       4,072       25,039  2,302       7,140         9,442  780  11              36            827**$ 214,615**$      5,986        5,986  650  852  6,365        1,312          9,179**$   15,165**

53

*Continued*

***NOTE 3 -INVESTMENT SECURITIES***

** **

**                            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        Other       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              36            768**$ 191,716**  $         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               36             768**$ 194,214**  $        806  1,482  4,531       2,751**$     9,570**

54                                                                       *Continued*

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

     The following tables show gross unrealized lossesand fair value, aggregated by investment category, and length of time thatindividual securities have been in a continuous unrealized loss position, atDecember 31, 2009 and 2008 (tabular amounts in thousands):

**                    2009**

**            Less  than                        twelve  months         **

**Twelve  months                    or  more              **

**              Total                  **

**Available for Sale**

**Fair value**

**Unrealized     losses  **

**Fair value**

**Unrealized      losses  **

**Fair value**

**Unrealized    losses    **

  Government sponsored enterprises  State, county, and municipal  Mortgage backed securities            Total

$    24,224  1,405             88

$          155  68                1

$             -  -               -

$              -  -                -

$    24,224  1,405             88

$          155  68                1

**$    25,717**

**$          224**

**$             -**

**$              -**

**$    25,717**

**$          224**

**Held to Maturity******  Government sponsored enterprises  State, county, and municipal                   Total

** **

$     1,985          726

$            17              15

$             -         503

$              -             13

$      1,985        1,229

$            17              28

**$     2,711**

**$            32**

**$        503**

**$           13**

**$      3,214**

**$            45**

**                    2008**

**            Less  than                        twelve  months         **

**Twelve  months                   or  more              **

**             Total                  **

**Available for Sale**

**Fair value**

**Unrealized     losses  **

**Fair value**

**Unrealized      losses  **

**Fair value**

**Unrealized    losses    **

  State, county, and municipal            Total

  $    10,926

  $          401

  $             -

  $              -

  $    10,926

  $          401

**$    10,926**

**$          401**

**$             -**

**$              -**

**$    10,926**

**$          401**

**Held to Maturity**  State, county, and municipal            Total

** **

        $      5,200

$         219

    $          -

  $             -

     $      5,200

  $          219

**        $      5,200**

**$         219**

**    $          -**

**$             -**

**     $      5,200**

**$          219**

     Securities classified as available-for-sale arerecorded at fair market value.  There were no unrealized losses consisting ofsecurities in a continuous loss position for twelve months or more at December31, 2009 and 2008.

     Securities classified as held-to-maturity arerecorded at cost.  The Company owned one $516,000 par value municipal bondwhich had been in an unrealized loss position for twelve months or more atDecember 31, 2009. The Company does not intend to sell this security and it ismore likely than not that the Company will not be required to sell thissecurity before recovery of its amortized costs.  There were no securitiesclassified as held-to-maturity in an unrealized loss position for twelve monthsor more at December 31, 2008.

     Investment securities with an aggregate par valueof $207,233,000 ($210,905,000 fair value) at December 31, 2009 and $174,673,000($177,212,000 fair value) at December 31, 2008 were pledged to secure publicdeposits and for other purposes.

** **

55                                                                         *Continued*

***NOTE 3 - INVESTMENT SECURITIES, Continued***

     During 2009, $53,560,000 par value ofavailable-for-sale securities were sold for a gain of $1,576,000.  There wereno sales of securities available-for-sale in 2008.  During 2007, $2,315,000 ofavailable-for-sale securities were sold for a gain of $9,000.

     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 the extent towhich the fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.

**Other Investments, at Cost**

     The Bank, as a member institution, is required toown certain stock investments in the Federal Home Loan Bank of Atlanta("FHLB") and the Federal Reserve Bank.  The stock is generallypledged against any borrowings from these institutions (see Note 8).  Noready market exists for the stock and it has no quoted market value.  However,redemption of these stocks has historically been at par value.  

     The Company's investments in stock are summarizedbelow (tabular amounts in thousands):

**              December 31,     **

  Federal Reserve Bank  FHLB

**   2009   **  $     116   2,925**$ 3,041**

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

*** ***

56

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

     Followingis a summary of loans by major category (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

**     2009   **  $  375,741  81,311  74,565  44,865  2,930  328             56**$ 579,796**

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

     The Bank's loan portfolio consisted of $488,967,000and $476,885,000 in fixed rate loans as of December 31, 2009 and 2008,respectively.  Fixed rate loans with maturities in excess of one year amountedto $328,356,000 and $316,519,000 at December 31, 2009 and 2008, respectively.

      Changes in the allowance for loan lossesare summarized as follows (tabular amounts in thousands):

** **

** For  the years ended December 31, **

** **

**     2009  **

**     2008  **

**     2007   **

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

$   7,091        1,078      8,748   (7,775)**$ 9,142 **

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

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

As of December 31, 2009, 2008, and 2007 loans individually evaluated andconsidered impaired under ASC 310-10 "Receivables" were as follows (tabularamounts in thousands):

**       December  31,**

**  2009  **

**  2008  **

**  2007  **

Total  loans considered impaired

$13,578

$ 4,182

$    886

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

 

 

 

Outstanding  loan balance

491

3,082

-

Related  allowance established

176

572

-

Loans considered impaired and previously written       down to fair value

13,065

1,075

861

Loans considered impaired and which are classified as       troubled debt restructurings.

22

24

25

Average  annual investment in impaired loans

6,412

1,613

780

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

7

2

5

57                                                                            *Continued*

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

     At December 31, 2009 and 2008, non-accrual loanstotaled $12,678,000 and $2,990,000, respectively.  The total amount of interestearned on non-accrual loans was $318,000 in 2009, $103,000 in 2008 and $33,000in 2007.  The gross interest income which would have been recorded under theoriginal terms of the non-accrual loans amounted to $953,000 in 2009, $288,000in 2008, and $94,000 in 2007.  Foregone interest on non-accrual loans totaled$635,000 in 2009, $185,000 in 2008, and $61,000 in 2007.  The Companywrites down any potential losses associated with non-accrual loans at the timesuch loans are placed in a non-accrual status.  Accrued and unpaid currentperiod interest income on non-accrual loans is reversed to current periodincome at the time a loan is placed in non-accrual status. Accrued and unpaidprior period interest income on non-accrual loans is charged to the Allowancefor Loan Losses at the time the loan is placed in non-accrual status.  Anypayments received on loans placed in non-accrual status are applied first toprincipal.  The Company does not recognize interest income on non-accrual loanson a cash basis.

     At December 31, 2009 and 2008 the amount of loansninety days or more past due and still accruing interest totaled $960,770 and$607,199, respectively.  Loans ninety days or more past due and still accruinginterest consist of consumer loans which are placed in non-accrual status atone hundred twenty days or more past due.

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

** **

**   2009   **

**   2008   **

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

$ 26,315      9,642 35,957  (12,706)23,251             - **$ 23,251**** **

$ 26,262      8,811 35,073  (11,789)23,284         119 **$ 23,403**** **

     Depreciation andamortization of premises and equipment charged to operating expense totaled$1,538,000 in 2009, $1,330,000 in 2008, and $1,285,000 in 2007.

     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 five years.  Estimatedlives of Bank automobiles are typically five years. Estimating the useful livesof premises and equipment includes a component of management judgment.

***NOTE 6 - OTHER REAL ESTATE OWNED***

The following summarizes the activity in the other real estate owned for theyears ended December 31, 2009 and 2008.  Other real estate owned is included in"other assets."

** **

**   2009   **

**   2008   **

Balance, beginning of year  Additions - foreclosures  Proceeds from sales  Net gain/(loss) on sales  Write downs  Balance, end of year

$      639   2,660   (1,501)  (39)      (137)**$ 1,622  **

$        64   672   (103)  6             - **$     639 **

58

***NOTE 7 - DEPOSITS***

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

** **

**    2009    **

**    2008    **

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

$188,237  54,564  75,839  230,004   156,626**$705,270**

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

     Interest paid on certificates of depositof $100,000 or more totaled $5,359,000 in 2009, $8,110,000 in 2008 and$8,944,000 in 2007.
     At December 31, 2009, the scheduled maturities oftime deposits are as follows (dollar amounts in thousands):
             2010               2011               2012               2013               2014  and after

$345,909  25,797  8,186  3,782       2,956**$386,630**

Theamount of overdrafts classified as loans at December 31, 2009 and 2008 were$328,000 and $411,000, respectively. 

***NOTE8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS***

     Securities sold under repurchase agreements aresummarized as follows (tabular dollar amounts in thousands):

**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

**     2009      **$ 104,654       101,286       114,267    .94%    1.11%  

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

     The Bank enters into salesof securities under agreements to repurchase. These obligations to repurchasesecurities sold are reflected as liabilities in the consolidated balancesheets.  The dollar amount of securities underlying the agreements are bookentry securities maintained with an independent third party safekeeping agent. Government sponsored enterprise and municipal securities with a book value of $110,865,000($111,556,000 fair value) and $71,752,000 ($72,845,000 fair value) at December31, 2009 and 2008, respectively, are pledged as collateral for the agreements.

******59

***NOTE 9 - LINES OF CREDIT***

     At December 31, 2009, theBank had unused short-term lines of credit totaling $30,500,000 to purchaseFederal Funds from unrelated banks.  These lines of credit are available on aone to seven day basis for general corporate purposes of the Bank.  All of thelenders 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 at varying rates setweekly by the FRB.  The average rate paid by the Company under the arrangementwas 0.00% for 2009.  The note is secured by Federal agency securities with amarket value of $3,018,000 at December 31, 2009.  The amount outstanding underthe note totaled $650,000 and $2,672,000 at December 31, 2009 and 2008,respectively.

     The Bank also has a line of credit from theFederal Home Loan Bank (FHLB) for $50,734,000 secured by a lien on the Bank'squalifying 1-4 family mortgages and the Bank's investment in FHLB stock.  Allowableterms range from overnight to 20 years at varying rates set daily by the FHLB. The amount outstanding under the agreement totaled $15,000,000 and $30,000,000at December 31, 2009 and 2008, respectively.  The $15,000,000 outstanding atDecember 31, 2009 consists of three advances in the amounts of $5,000,000each.  Each $5,000,000 advance is due and payable in one payment on March 4,2010, September 7, 2010, and March 4, 2011, respectively.  Interest on theseadvances is payable monthly at 1.30%, 1.65%, and 2.07%, respectively.

***NOTE10 - INCOME TAXES***

     The provision for income taxes is reconciled tothe amount of income tax computed at the federal statutory rate on incomebefore income taxes as follows (dollar amounts in thousands):

** **

**                   For  the years ended December  31,           **

** **

**             2009              **

**            2008             **

**               2007               **

****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**$ 2,441 ****(386)****122 ****      (64)**$ 2,113**** **

**   %       **34.00%  (5.38)    1.70       (.89)   ** 29.43%**

**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%**

60

*Continued*

***NOTE 10 - INCOME TAXES -Continued***     The sources and tax effects of temporarydifferences that give rise to significant portions of the deferred tax assetsand deferred 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     Interest on nonaccrual loans     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

**  2009  **  $ 3,108   543   162   216        165   4,194          -   4,194   (330)  (670)    (140) (1,140)**$ 3,054**

**  2008  **  $ 2,411   548   152   63      124   3,298           -   3,298     (523)  (998)    (186) (1,707)**$ 1,591**

**     **The net deferred tax asset is included in other assets at December 31,2009 and 2008.

     A portion of the change in net deferred taxesrelates to the change in unrealized net gains and losses on securitiesavailable for sale.  The related 2009 tax benefit of $328,000 and the 2008 taxexpense of $315,000 have been recorded directly to stockholders' equity.  Thebalance of the change in net deferred taxes results from the current perioddeferred 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

**    2009   **  $ 3,063       185   3,248   (1,135)**$ 2,113 **

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

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

61

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

     The Bank is a party tofinancial instruments with off balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financialinstruments include commitments to extend credit and standby letters ofcredit.  Those instruments involve, to varying degrees, elements of credit andinterest rate risk in excess of the amount recognized in the accompanyingconsolidated balance sheets.  The contractual amounts of those instrumentsreflect the extent of involvement the Bank has in particular classes offinancial instruments.  The Bank uses the same credit policies in makingcommitments and conditional obligations as it does for on balance sheet instruments.

     The contractual value of the Bank's off balancesheet financial instruments is as follows as of December 31, 2009 (amounts inthousands):

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

**Contract amount **  $   44,732  $     2,369

     Commitmentsto extend credit are agreements to lend as long as there is no violation of anycondition established in the contract.  Commitments generally have fixedexpiration dates or other termination clauses and may require payment of afee.  Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The Bank evaluates each customer's creditworthiness on acase-by-case basis.  The amount of collateral obtained if deemed necessary bythe Bank upon extension of credit is based on management's credit evaluation.

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

     At December 31, 2009, 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 under thisagreement at December 31, 2009 were (tabular amounts in thousands):

**Payable in  year ending**      2010        2011         2012        2013 and thereafter           Total future minimum  payments required

**  Amount   **  $     2  2  2      4**$  10**

     Leasepayments under all operating leases charged to expense totaled $2,000 in 2009,$5,000 in 2008 and $6,000 in 2007.  The leases provide that the lessee pay propertytaxes, insurance and maintenance cost.

     The Company is party to litigation and claimsarising in the normal course of business.  Management, after consultation withlegal counsel, believes that the liabilities, if any, arising from suchlitigation and claims will not be material to the Company's financial positionor results of operations.

62

* *

***NOTE 13 - RESTRICTION ON DIVIDENDS***

     Payment of dividends iswithin the discretion of the Board of Directors, and the ability of the Companyto pay cash dividends is dependent upon receiving cash in the form of dividendsfrom the Bank.  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, 2009, the Bank's retained earnings were$81,308,000.

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

     Directors and executiveofficers of the Company and the Bank and associates of such persons arecustomers of and have loan and deposit transactions with the Bank in theordinary course of business.  Additional transactions may be expected to takeplace in the 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**

**  2009   **  $   1,624  631        255**$  2,000**

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

     Deposits by directors and executiveofficers of the Company and the Bank, and associates of such persons, totaled$10,168,000 and $12,478,000 at December 31, 2009 and 2008, respectively.

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

     The Bank has a definedcontribution pension plan covering all employees who have attained agetwenty-one and have a minimum of one year of service.  Upon ongoing approval ofthe Board of Directors, the Bank matches one hundred percent of employee contributionsup to three 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 discretionary contributions tothe Plan.  For the years ended December 31, 2009, 2008 and 2007, $380,000,$579,000 and $712,000, respectively, were charged to operations 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 are notqualified under the Internal Revenue Code.  The plans are unfunded.  However,certain benefits under the ESI Plan are informally and indirectly funded byinsurance policies on the lives of the covered employees.

      The ESI plan provides a life insurancebenefit on the life of the covered officer payable to the officer'sbeneficiary. The plan also provides a retirement stipend to certain officers. For the years ended December 31, 2009, 2008, and 2007, the Bank had $290,518,$51,888 and $96,056 in income and $53,678, $50,436 and $111,256 of expenseassociated with this plan, respectively.  The LTDC plan provides cash awards tocertain officers payable upon death, retirement, or separation from service. The awards are made in dollar increments equivalent to the value of theCompany's stock at the time of the award.  The Bank maintains the value ofawards in amounts equal to the current market value of the Company's stock plusany cash dividends paid.  Such plans are commonly referred to as phantom stockplans.  For the years ended December 31, 2009, 2008 and 2007, $81,947, $179,493and $223,630, respectively, was charged to operations under the plan.

63

* *

***NOTE 16 - REGULATORY MATTERS***

     The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies. Failure to meet minimum capital requirements caninitiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theCompany and Bank.  Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Company and the Bank must meetspecific capital guidelines that involve quantitative measures of assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Company 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 average assets.  Managementbelieves, as of December 31, 2009, the Company and the Bank meet all capitaladequacy 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, 2009**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)**As of December 31, 2008**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)

**   Amount  **   $   93,892        86,424        86,424   $   89,119        82,028        82,028

**  Ratio   **** **15.76%   14.51     9.37** **14.67%   13.50     9.56

**      Amount****  **$   47,663         23,831         36,906    $   48,607         24,304         34,312

**  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, 2009**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)**As of December 31, 2008**    Total Capital (to risk      weighted assets)    Tier 1 Capital (to risk      weighted assets)    Tier 1 Capital (to average assets)

**   Amount  **    $   92,647         85,179         85,179    $   89,428         82,337         82,337

**  Ratio   **** **15.55%   14.30     9.23** **14.72%   13.55     9.60

**    Amount ****   **$   47,660          23,830          36,905     $   48,604          24,302          34,311

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

**    Amount        **$   59,575          35,745          46,130     $   60,755          36,453          42,889

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

64

***NOTE 17 - ESTIMATED FAIR VALUEOF FINANCIAL INSTRUMENTS***

         The estimated fair valuesof the Company's financial instruments were as follows at December 31 (amountsin thousands):

** **

**                2009 **    **            **** Carrying       **    **Fair      **

**                2008                    Carrying      **  **Fair     **

**FINANCIAL ASSETS**    Cash and due from banks and Federal Reserve         balance in excess of requirement      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   **  $  62,644    14,000    214,615    14,949    3,041    570,654    705,270    104,654    15,000    650    -  

**   Value   **$  62,644   14,000   214,615   15,165   3,041   582,536   706,013   104,654   15,012   650   - 

**  Amount   **  $  19,259    21,000    194,214    9,758    3,024    591,190    679,219    67,415    30,000    2,672    1,120  

**   Value   **$  19,259   21,000   194,214   9,570   3,024   605,602   680,172   67,415   30,000   2,672   1,120 

** **

**Notional  **

** **

**Notional  **

** **

** **

**Amount   **

** **

**Amount  **

** **

**OFF BALANCE SHEET INSTRUMENTS**

** **

** **

** **

** **

Commitments to extend credit

$  44,732  

 

$  53,838  

 

Standby letters of credit

2,369  

 

2,111  

 

     Accountingstandards require disclosures about the fair value of assets and liabilitiesrecognized in the balance sheet in periods subsequent to initial recognition,whether the measurements are made on a recurring basis (for example,available-for-sale investment securities) or on a nonrecurring basis (forexample, impaired loans).

        The accounting standard definesfair value as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date.  It also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.  Thestandard describes three levels of inputs that may be used to measure fairvalue:

**Level 1**

  Quoted market 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.

65

***NOTE 17 - ESTIMATED FAIR VALUEOF 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.

        Followingis a description of valuation methodologies used for assets and liabilitiesrecorded at fair value on a recurring or non-recurring basis:

**Investment Securities Available for Sale**

Measurement is on a recurring basis based upon quoted market prices, ifavailable.  If quoted market prices are not available, fair values are measuredusing independent pricing models or other model-based valuation techniques suchas the present value of future cash flows, adjusted for prepayment assumptions,projected credit losses, and liquidity.  Level 1 securities include thosetraded on an active exchange or by dealers or brokers in activeover-the-counter markets.  Level 2 securities include securities issued bygovernment sponsored enterprises, municipal securities, and mortgage-backedsecurities issued by government sponsored enterprises. Generally these fairvalues are priced from established pricing models.

**Loans**

Loansthat are considered impaired are recorded at fair value on a non-recurringbasis.  Once a loan is considered impaired, the fair value is measured usingone of several methods, including collateral liquidation value, market value ofsimilar debt and discounted cash flows.  Those impaired loans not requiring aspecific charge against the allowance represent loans for which the fair valueof the expected repayments or collateral meet or exceed the recorded investmentin the loan.  At December 31, 2009, substantially all of the total impairedloans were evaluated based on the fair value of the underlying collateral. When the Company records the fair value based upon a current appraisal, thefair value measurement is considered when a current appraisal is not availableor there is estimated further impairment the measurement is considered a Level3 measurement.

**OtherReal Estate Owned (OREO)**

Other real estate owned is adjusted to fair value upon transfer of the loans toforeclosed assets.  Subsequently, other real estate owned is carried at thelower of carrying value or fair value. Fair value is based upon independentmarket prices, appraised values of the collateral or management's estimation ofthe value of the collateral.  When the fair value of the collateral is based onan observable market price or a current appraised value, the Bank records theother real estate owned as nonrecurring Level 2.  When an appraised value isnot available or management determines the fair value of the collateral isfurther impaired below the appraised value and there is no observable marketprice, the Company records the other real estate owned as non-recurring Level3.

66

***NOTE 17 - ESTIMATED FAIR VALUEOF FINANCIAL INSTRUMENTS, Continued***

     Assets and liabilities measured at fair value ona recurring basis for December 31, 2009 and 2008 are presented in the followingtable (dollars in thousands):

**2009**

Quoted  market price  in active markets   (Level 1)   

  Significant other  observable inputs   (Level 2)   

Significant  unobservable  inputs   (Level 3)   

Available-for-sale  securities

$                    -    

$         214,615    

$                   -  

 

 

 

**2008**

 

 

 

 

 

 

Available-for-sale  securities

$                    -    

$         194,214    

$                   -  

     Certainassets and liabilities are measured at fair value on a nonrecurring basis; thatis, the instruments are not measured at fair value on an ongoing basis but aresubject to fair value adjustments in certain circumstances (for example, whenthere is evidence of impairment).  The following table presents the assets andliabilities carried on the balance sheet by caption and by level within thevaluation hierarchy (as described above) as of December 31, 2009 and 2008 forwhich a nonrecurring change in fair value was recorded during the years endedDecember 31, 2009 and 2008.

**2009**

Quoted  market price  in active markets   (Level 1)   

  Significant other  observable inputs   (Level 2)   

Significant  unobservable  inputs   (Level 3)   

Other  real estate owned

$                    -   

$             1,622   

$                   -   

Impaired  loans

$                    -   

$           13,556   

$                   -   

** **

$                    -   

$           15,178   

$                   -   

** **

 

 

 

**2008**

 

 

 

 

 

 

Other  real estate owned

$                    -   

$                639   

$                   -   

Impaired  loans

$                    -   

$             4,158   

$                   -   

$                    -   

$             4,797   

$                   -   

***NOTE18 - PARENT COMPANY INFORMATION***

      Following is condensed financialinformation of CNB Corporation (parent company only) (amounts in thousands):

***CONDENSED BALANCE SHEETS***

** **

**         December 31,      **

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

**    2009**     $     3,259  86,184           82  $  89,525  $     2,096  -              -       87,429  $   89,525

**    2008**     $     5,142  83,835           37  $  89,014  $     4,355  1,120              12       83,527  $   89,014

67                                                                                       *Continued*

***NOTE 18 - 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

**      2009    **$      2,322  46  7  43  31             62  2,225          2,842**$     5,067**

**      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**

** **

***CONDENSEDSTATEMENTS 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 change in other assets                                  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 (decrease) in cash**CASH, BEGINNING OF THE YEAR  CASH, END OF THE YEAR**

**    2009    **$    5,067   (2,842)           (12)         (45)       2,168              -                -        (4,355) (1,588)  3,012              -       (1,120)      (4,051)  (1,883)        5,142   $    3,259** **

**        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 

****68

*Continued*

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

      Unauditedcondensed financial data by quarter for 2009 and 2008 is as follows (amounts,except per share data, in thousands):

** **

**                                    Quarter  ended                                             **

**2009**

**   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

  Weighted average shares outstanding

  $      11,254          3,386  7,868          1,231  6,637  1,892          5,671  2,858             920**$       1,938  $         1.17   1,657,784**

  $      11,163          3,053  8,110          3,095  5,015  2,484          6,333  1,166             325**$           841  $            .50    1,673,194 **

  $       10,821           2,897  7,924           2,221  5,703  1,902           5,699  1,906              614**$        1,292  $            .77    1,680,612**

  $       10,709          2,793  7,916          2,201  5,715  1,862          6,327  1,250             254**$          996  $           .59   1,678,514**

** **

**                                   Quarter  ended                                             **

**2008**

**  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)

  $    13,680       5,694  7,986          359  7,627  1,845       5,637  3,835       1,295**$     2,540  $       1.50  1,697,872**

  $    12,428        4,660   7,768           495   7,273   1,728        5,824   3,177        1,040 **$     2,137   $       1.28   1,668,528 **

  $    12,050       4,050  8,000          500  7,500  2,047       5,917  3,630       1,245**$     2,385  $       1.43  1,665,794**

  $    11,961       3,817  8,144        1,179  6,965  1,568        5,730  2,803           908**$     1,895  $       1.14  1,660,070**

 (1)  Adjustedfor the effect of a two-for-one stock split issued during 2009.

69

***NOTE 20 - SUBSEQUENT EVENTS***

     Subsequent events are events or transactions thatoccur after the balance sheet date but before financial statements are issued.Recognized subsequent events are events or transactions that provide additionalevidence about conditions that existed at the date of the balance sheet,including the estimates inherent in the process of preparing financialstatements.  Nonrecognized subsequent events are events that provideevidence about conditions that did not exist at the date of the balance sheetbut arose after that date.  Management has reviewed events occurringthrough the date the financial statements were available to be issued and nosubsequent events occurred requiring accrual or disclosure.

70

**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)or 240.15d-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 concluded thatsuch 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, 2009.  Inmaking our assessment, management has utilized the framework published by theCommittee of Sponsoring Organizations ("COSO") of the TreadwayCommission "Internal Control-Integrated Framework."  Basedon our assessment, management has concluded that, as of December 31, 2009,internal control over financial reporting was effective.

     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 9, 2010 

* /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. 

71

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

The information set forth under the captions "Informationabout Nominees, Directors Whose Terms will Continue after the Annual Meeting ofShareholders and Executive Officers," "Section 16(a) BeneficialOwnership Reporting Compliance" and "Governance Matters - -Committeesof the Board of Directors - - Audit Committee" set forth in the Company'sProxy Statement filed in connection with the Company's 2010 Annual Meeting ofthe Shareholders (the "2010 Proxy Statement") is incorporated hereinby reference.

**Audit Committee Financial Expert**

The Company'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 "auditcommittee financial expert."  Therefore, it would be necessaryto find a qualified individual willing to serve as both a director and memberof the audit committee and have that person elected by the shareholders inorder to have an "audit committee financial expert" serving on theCompany's audit committee.  The Company's audit committee 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.

**ITEM 11.  EXECUTIVE COMPENSATION**

          The information setforth in the 2010 Proxy Statement under the caption "Compensation ofDirectors and Executive Officers" is incorporated herein by reference;provided, however, the information set forth under the caption "CompensationCommittee Report" shall be deemed to be "furnished" and not "filed"and will not be deemed incorporated by reference into any filing under theSecurities Act of 1933 or the Securities Exchange Act of 1934 as a result of beingso furnished.

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGMEENT AND RELATED STOCKHOLDER MATTERS**

          The information setforth in the 2010 Proxy Statement under the captions "Security Ownershipof Certain Beneficial Owners" and "Security Ownership of Management"is incorporated herein by reference.

          The Company doesnot have any equity compensation plans pursuant to which securities may beissued.  Accordingly, no disclosure is required pursuant toRegulation S-K, Item 201(d).

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE**

          The information setforth in the 2010 Proxy Statement under the caption "Transactions withRelated Persons" and "Governance Matters -- Director Independence"is incorporated herein by reference. The members of the Company's Audit andGovernance (nominating and compensation) Committees are independent as definedin the Nasdaq Global Market Rules.

**ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

          The information setforth in the 2010 Proxy Statement under the caption "Ratification ofAppointment of Independent Registered Public Accounting Firm - Fees Billed byIndependent Auditors" and "Audit Committee Pre-Approval of Audit andPermissible Non-Audit Services of Independent Auditors" is incorporatedherein by reference.

72 

**PART IV.ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

The following exhibits, financial statements and financial statement schedulesare filed as part of this report:**(a) FINANCIAL STATEMENTS**Reports of Independent Registered Public Accounting FirmConsolidated Statements of Condition - December 31, 2009 and 2008Consolidated Statements of Income - Years ended December 31, 2009, 2008, and 2007Consolidated Statements of Stockholders' Equity - Years ended December 31, 2009,  2008,and 2007Consolidated Statements of Comprehensive Income - Years ended December 31, 2009,2008, and 2007.Consolidated Statements of Cash Flows - Years Ended December 31, 2009, 2008,and 2007Notes 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.

73 

**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.

**  CNB Corporation                                                                  **/s/W. Jennings Duncan                                                             W. Jennings Duncan, President and Chief Executive Officer      

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 9, 2010.

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*                                                             DirectorLynn G. Stevens*/s/John C. Thompson*                                                         DirectorJohn C. Thompson

74

**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 which was  filedwith 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. |