| **UNITED  STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **SECURITIES  AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Washington,  D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **FORM  10-Q**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the quarterly period ended**                             March  31, 2011                                             **                                                                                                                                                                  |
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| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                    For  the transition period from                                                    to                                                        |
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| Commission file number:  ** 000-24523 **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| ***                              CNB  Corporation                            ***                                                                                                                                                                                                                                                                                                                                                                                                                |
| (Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **                                    South Carolina                              **                                                                                                                                                                                                                                                                                                                                                                    | **                 57-0792402                  ** |
| (State or  other jurisdiction of incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (I.R.S.  Employer Identification No.) |
| **                   1400 Third Avenue, Conway, S.C.                **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | **                     29526                       ** |
| (Address of  principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (Zip Code)                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| (Registrant's telephone number, including area  code):  **(843)  248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       Indicate by check  mark whether the registrant (1) has filed all reports required to be filed by  Section 13 or 15(d) of the Securities Exchange Act of 1934 during the  preceding 12 months (or for such shorter period that the registrant was  required to file such reports), and (2) has been subject to such filing  requirements for the past 90 days.  Yes   X  .   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 during the  preceding 12 months (or for such shorter period that the registrant was  required to submit and post such files).  Yes  [   ]     No  [   ]  (Not yet applicable to Registrant)                                                                                                                                                                                                                                                      |
|      Indicate by check mark  whether the registrant is a large accelerated filer, an accelerated filer, a  non-accelerated filer, or a smaller reporting company.  See the definitions  of "large accelerated filer," "accelerated filer" and "smaller reporting  company" in Rule 12b-2 of the Exchange Act. (Check one):                                                                                                                                                                                                                                                                                                                                                                                                       |
|      Large accelerated  filer [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Accelerated filer [**X**] |
|      Non-accelerated  filer [  ](Do not check if a  smaller reporting company)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      State the number of shares  outstanding of each of the issuer's classes of common equity as of the latest  practical date:  1,664,614 shares of common stock, par value $5 per share, May  2, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |

----

| **CNB  Corporation**                                                                                                                                                                                                                     |            |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                               | **Page**   |
| ** **                                                                                                                                                                                                                               |       |
| **Forward-Looking  Statements**                                                                                                                                                                                                          | 1          |
| ** **                                                                                                                                                                                                                               |            |
| **PART  I.    FINANCIAL INFORMATION **                                                                                                                                                                          |            |
| ** **                                                                                                                                                                                                                               |            |
| **Item  1.       Financial Statements:**                                                                                                                                                              | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** |
| **Condensed  Consolidated Balance Sheets as of  March 31, 2011,  December 31, 2010, and March 31, 2010**                                                                                                                            | 2          |
| ** **                                                                                                                                                                                                                               |       |
| **Condensed  Consolidated Statements of Income/(Loss) for the Three   Months Ended March 31, 2011 and 2010**                                                                                                                             | 3          |
| ** **                                                                                                                                                                                                                               |       |
| **Condensed  Consolidated Statements of Comprehensive Income  for the Three Months Ended March 31, 2011 and 2010**                                                                                                                       | 4          |
| ** **                                                                                                                                                                                                                               |       |
| **Condensed  Consolidated Statements of Changes in Stockholders' Equity  for the Three Months Ended March 31, 2011 and 2010**                                                                                                            | 5          |
| ** **                                                                                                                                                                                                                               |       |
| **Condensed  Consolidated Statements of Cash Flows for the Three Months  Ended March 31, 2011 and 2010**                                                                                                                                 | 6          |
| ** **                                                                                                                                                                                                                               |       |
| **Notes  to Consolidated Financial Statements**                                                                                                                                                                                          | 7-26       |
| ** **                                                                                                                                                                                                                               |       |
| **Item  2.     Management's Discussion and Analysis of  Financial                   Condition  and Results of Operations** | 27-34      |
| ** **                                                                                                                                                                                                                               |       |
| **Item  3.     Quantitative and Qualitative Disclosures  About Market Risk**                                                                                                                                    | 35         |
| ** **                                                                                                                                                                                                                               |       |
| **Item  4.     Controls and Procedures**                                                                                                                                                                        | 35         |
| ** **                                                                                                                                                                                                                               |       |
| **PART  II.   OTHER INFORMATION**                                                                                                                                                                                         |       |
| ** **                                                                                                                                                                                                                               |       |
| **Item  2.     Unregistered Sales of Equity Securities and  Use of Proceeds**                                                                                                                                   | 36         |
| ** **                                                                                                                                                                                                                               |       |
| **Item  6.    Exhibits**                                                                                                                                                                                             | 36         |
| **SIGNATURE**                                                                                                                                                                                                                            | 36         |

----

**CAUTIONARYNOTICE WITH RESPECT TOFORWARD LOOKING STATEMENTS**

This report contains"forward-looking statements" within the meaning of the securitieslaws.  The Private Securities Litigation Reform Act of 1995 providesa safe harbor for forward-looking statements.  In order to complywith the terms of the safe harbor, the Company notes that a variety of factorscould cause the Company's actual results and experience to differ materiallyfrom the anticipated results or other expectations expressed in the Company'sforwarding-looking statements.

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

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

| ● | future  economic and business conditions;                                                                                                                                                                                                                                                                                                   |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ● | 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;                                                                                                                                                                                                                                                                                       |
| ● | the  effect of agreements with regulatory authorities, which restrict various  activities and impose additional administrative requirements without  commensurate benefits;                                                                                                                                                                 |
| ● | changes  in requirements of regulatory authorities;                                                                                                                                                                                                                                                                                         |
| ● | 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.                                                                                                                                               |

All forward-looking statementsare expressly qualified in their entirety by this cautionarynotice.  The Company has no obligation, and does not undertake, toupdate, revise or correct any of the forward-looking statements after the dateof this report.  The Company has expressed its expectations, beliefsand projections in good faith and believes they have a reasonablebasis.  However, there is no assurance that these expectations,beliefs or projections will result or be achieved or accomplished.

-1-

----

 

| **PART  I.**                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                           |
| **Item  1. Financial Statements**                                                                                                    |
| **CNB Corporation and Subsidiary  Condensed Consolidated Balance Sheets  (All Dollar Amounts, Except Per Share Data, in Thousands)** |
| **ASSETS:**                                                                                                                          | **March 31,** | **December 31,** | **March 31,** |
| ** **                                                                                                                           | **2011** | **2010** | **2010** |
| ** **                                                                                                                           | (Unaudited) |   | (Unaudited) |
| ** **                                                                                                                           |   |   |   |
| **    Cash  and cash equivalents:**                                                                              |   |   |   |
|       Cash  and due from banks                                                                         | $  23,241  | $  20,699  | $  22,305  |
|       Due  from Federal Reserve Bank, balance in excess of requirement                                 | 39,580  | 11,818  | 43,661  |
|       Federal  funds sold                                                                              |    32,000  |    14,000  |    14,000  |
| **        Total  cash and cash equivalents**                                                 |    94,821  |    46,517  |    79,966  |
| **    Investment  securities available for sale**                                                                | 269,421  | 275,381  | 227,417  |
|       (Amortized  cost of  $268,999 at March 31, 2011, $275,606 at                                |   |   |   |
|       December  31, 2010, and $225,669 at March 31, 2010)                                              |   |   |   |
| **    Investment  securities held to maturity**                                                                  | 19,203  | 20,678  | 22,468  |
|       (Fair  values of  $19,431 at March 31, 2011, $20,784 at December                            |   |   |   |
|       31,  2010, and  $22,826 at March 31, 2010)                                             |   |   |   |
| **    Other  investments**                                                                                       | 2,729  | 2,729  | 3,041  |
| **    Loans:**                                                                                                   |   |   |   |
| **       Total  loans**                                                                           | 523,745  | 534,186  | 567,702  |
| **       Less  allowance for possible loan losses**                                               |   (11,803) |   (11,627) |   (10,310) |
| **         Net  loans**                                                                 |   511,942  |   522,559  |   557,392  |
| **    Bank  premises and equipment**                                                                             | 21,922  | 22,088  | 23,045  |
| **    Other  real estate owned**                                                                                 | 6,446  | 5,476  | 2,387  |
| **    Accrued  interest receivable**                                                                             | 4,377  | 4,650  | 5,376  |
| **    Other  assets**                                                                                            |     10,671  |     11,193  |     10,040  |
| **Total  assets**                                                                                                                    | $941,532  | $911,271  | $931,132  |
| ** **                                                                                                                           |   |   |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY:**                                                                                            |   |   |   |
| ** **                                                                                                                           |   |   |   |
| **    Deposits:**                                                                                                |   |   |   |
| **       Noninterest-bearing**                                                                    | $111,146  | $ 108,031  | $104,072  |
| **       Interest-bearing**                                                                       |    625,801  |    610,109  |   620,196  |
| **          Total  deposits**                                                      |    736,947  |    718,140  |   724,268  |
| **    Securities sold under  agreement to repurchase**                                                           | 111,274  | 99,153  | 103,498  |
| **    United  States Treasury demand notes**                                                                     | 1,336  | 2,324  | 678  |
| **    Federal  Home Loan Bank advances**                                                                         | -  | -  | 10,000  |
| **    Other  liabilities**                                                                                       |       4,872  |       5,321  |       5,315  |
| ** Total  liabilities**                                                                                                         |   854,429  |   824,938  |   843,759  |
| ** **                                                                                                                           |   |   |   |
| **   Stockholders'  equity:**                                                                                         |   |   |   |
|       **Common  stock**, par value $5 per share; authorized 3,000,000;                                 | 8,323  | 8,323  | 8,383  |
|         issued  1,664,614 at March 31, 2011, 1,664,622 at December                           |   |   |   |
|         31, 2010,  and 1,676,524 at March 31, 2010.                                     |   |   |   |
| **      Capital  in excess of par value of stock**                                                     | 50,485  | 50,486  | 51,364  |
| **      Retained  earnings**                                                                           | 28,042  | 27,660  | 26,577  |
| **      Accumulated  other comprehensive income**                                                      |          253  |       (136) |       1,049  |
| **   Total  stockholders' equity**                                                                                    |     87,103  |     86,333  |     87,373  |
| **Total  liabilities and stockholders' equity**                                                                                      | $941,532  | $911,271  | $931,132  |
| *** ***                                                                                                                         |

***See Notes to Consolidated Financial Statements***-2-

----

 

| **CNB Corporation and Subsidiary  Condensed Consolidated Statements of Income/(Loss)  (All Dollar Amounts, Except Per Share Data, in Thousands)  (Unaudited)** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                     |
| ** **                                                                                                                                                     | **Three Months Ended** | ** ** |
| ** **                                                                                                                                                     | **March 31,** | ** ** |
| **Interest  Income:**                                                                                                                                          | **2011** | **2010** | ** ** | ** ** |
|   Interest and fees on  loans                                                                                                                        | $    7,991   | $     8,935   |   |   |
|   Interest on  investment securities:                                                                                                                |   |   |   |   |
|     Taxable  investment securities                                                                                                         | 845   | 1,107   |   |   |
|     Nontaxable  investment securities                                                                                                      | 261   | 312   |   |   |
|   Interest on federal  funds sold and Federal Reserve Bank                                                                                           | 7   | 8   |   |   |
|     balances  in excess of required balance                                                                                                |   |   |   |   |
|   Other interest income                                                                                                                              |           19   |             28   |   |   |
| **      Total  interest income**                                                                                                 |       9,123  |       10,390  |   |   |
|                                                                                                                                                                | ** ** | ** ** | ** ** | ** ** |
| **Interest Expense:**                                                                                                                                          | ** ** | ** ** | ** ** | ** ** |
|   Interest on deposits                                                                                                                               | 1,552   | 2,417   |   |   |
|   Interest on  securities sold under agreement to repurchase                                                                                         | 96   | 249   |   |   |
|   Interest on other  short-term borrowings                                                                                                           |             -   |             57   |   |   |
| **      Total  interest expense**                                                                                                |       1,648  |        2,723   |   |   |
|                                                                                                                                                                |  |   |   |   |
| **  Net interest income**                                                                                                                            | 7,475   |     7,667   |   |   |
| **  Provision for loan  losses**                                                                                                                     |      2,112   |        3,763   |   |   |
| **  Net interest income  after provision for loan losses**                                                                                           |      5,363   |        3,904   |   |   |
|                                                                                                                                                                | ** ** | ** ** | ** ** | ** ** |
| **  Noninterest income:**                                                                                                                            | ** ** | ** ** | ** ** | ** ** |
|     Service  charges on deposit accounts                                                                                                   | 815   | 878   |   |   |
|     Other  operating income                                                                                                                |         576   |           553   |   |   |
| **        Total  noninterest income**                                                                                  |      1,391   |        1,431   |   |   |
| ** **                                                                                                                                                     | ** ** | ** ** | ** ** | ** ** |
| **  Noninterest expenses:**                                                                                                                          | ** ** | ** ** | ** ** | ** ** |
|     Salaries  and employee benefits                                                                                                        | 3,423   | 3,411   |   |   |
|     Occupancy  expense                                                                                                                     | 830   | 802   |   |   |
|     Examination  and professional fees                                                                                                     | 256   | 162   |   |   |
|     FDIC  deposit insurance assessments                                                                                                    | 356   | 287   |   |   |
|     Net cost  of operation of other real estate owned                                                                                      | 286   | 54   |   |   |
|     Other  operating expenses                                                                                                              |      1,117   |           889   |   |   |
| **        Total  noninterest expenses**                                                                                |      6,268   |        5,605   |   |   |
|                                                                                                                                                                |  |   |   |   |
| **  Income/(loss) before  income taxes**                                                                                                             | 486   |     (270)  |   |   |
| **    Income  tax provision/(benefit)**                                                                                                    |         104   |         (227)  |   |   |
| **  Net income/(loss)**                                                                                                                              | $      382   | $        (43)  |   |   |
| ** **                                                                                                                                                     | ** ** | ** ** | ** ** | ** ** |
| **Per Share Data**                                                                                                                                             | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                     | ** ** | ** ** | ** ** | ** ** |
| **   Net  income/(loss) per weighted average shares outstanding**                                                                               | $        .23   | $       (.03)  |   |   |
| ** **                                                                                                                                                     |   |   |   |   |
| **   Book value per  actual number of shares outstanding**                                                                                      | $     52.33  | $     52.12   |   |   |
| ** **                                                                                                                                                     |   |   |   |   |
| **   Weighted  average number of shares outstanding**                                                                                           | 1,664,620  | 1,676,890  |   |   |
| ** **                                                                                                                                                     |   |   |   |   |
| **   Actual number  of shares outstanding, end of period**                                                                                      | 1,664,614  | 1,676,524  |   |   |

***See Notes to Consolidated Financial Statements***-3-

----

 

| **CNB Corporation and Subsidiary  Condensed Consolidated Statements of Comprehensive Income  (All Dollar Amounts in Thousands)  (Unaudited)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                          | **Three Months EndedMarch 31,** |
|                                                                                                                                          | ** ** | ** ** |
|                                                                                                                                          | **  2011  ** | **   2010   ** |
| **Net  income/(loss)**                                                                                                                        | $  382  | $    (43)  |
| ** **                                                                                                                                    |   |   |
| **Other  comprehensive income, net of tax**                                                                                                   |   |  |
| ** **                                                                                                                                    |   |   |
|     Unrealized  gains on securities:                                                                                      |   |   |
|                                                                                                                                               |   |   |
|     Unrealized  holding gains during period, net                                                                          | 389  | 44   |
| ** **                                                                                                                                    |   |   |
|                                                                                                                                               | **            ** | **             ** |
| **Net  comprehensive income**                                                                                                                 | **$  77**1 ** ** | **$       **1 ** ** |

***See Notes to Consolidated Financial Statements***

-4-

----

 

| **CNB Corporation and Subsidiary  Condensed Consolidated Statements of Changes in Stockholders' Equity  (All Dollar Amounts in Thousands)  (Unaudited)** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                     | **Three Months Ended  March 31,** |
|                                                                                                                                                     | **2011** | **2010** |
| **Common  Stock:**                                                                                                                                       |   |   |
| ($5  par value, 3,000,000 shares authorized)                                                                                                             |   |   |
| Balance,  January 1                                                                                                                                      | $  8,323  | $  8,386  |
| Repurchase  of Common Stock                                                                                                                              |            -  |          (3) |
| Balance  at end of period                                                                                                                                |     8,323  |     8,383  |
|                                                                                                                                                          |   |   |
| **Capital  in excess of par value of stock**                                                                                                             |   |   |
| Balance,  January 1                                                                                                                                      | 50,486  | 51,418  |
| Repurchase  of Common Stock                                                                                                                              |          (1) |        (54) |
| Balance  at end of period                                                                                                                                |   50,485  |   51,364  |
|                                                                                                                                                          |   |   |
| **Retained  earnings:**                                                                                                                                  |   |   |
| Balance,  January 1                                                                                                                                      | 27,660  | 26,620  |
| Net  Income/(loss)                                                                                                                                       |        382  |        (43) |
| Balance  at end of period                                                                                                                                |   28,042  |   26,577  |
|                                                                                                                                                          |   |   |
| **Net  unrealized holding gains/(losses) on securities:**                                                                                                |   |   |
| Balance,  January 1                                                                                                                                      | (136) | 1,005  |
| Change  in net unrealized gains/(losses), net                                                                                                            |        389  |          44  |
| Balance  at end of period                                                                                                                                |        253  |     1,049  |
|                                                                                                                                                          |   |   |
|                                                                                                                                                          | **              ** | **              ** |
| **Total  stockholders' equity**                                                                                                                          | **$87,103 ** | **$87,373 ** |
| ** **                                                                                                                                               | ** ** | ** ** |
| Note:  Columns  may not add due to rounding.                                                                                                   | ** ** | ** ** |
| ** **                                                                                                                                               | ** ** | ** ** |
|                                                                                                                                                          | ** ** | ** ** |
| ** **                                                                                                                                               | ** ** | ** ** |
| ** **                                                                                                                                               | ** ** | ** ** |

***See Notes to Consolidated Financial Statements***-5-

----

| **CNB CORPORATION AND SUBSIDIARY  Condensed Consolidated Statements of Cash Flows  (All Dollar Amounts in Thousands)  (Unaudited)** |
|-------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                          | **For the Three months ended  March 31,** |
| ** **                                                                                                                          | **2011** | **2010** |
| **OPERATING  ACTIVITIES**                                                                                                           | ** ** | ** ** |
|   Net  Income/(Loss)                                                                                                      | $       382   | $        (43)  |
|   Adjustments  to reconcile net income to net cash provided by operating activities                                       | ** ** | ** ** |
|     Depreciation  and amortization                                                                              | 370   | 371   |
|     Provision  for loan losses                                                                                  | 2,112   | 3,763   |
|     Provision  for deferred income taxes                                                                        | (225)  | (301)  |
|     Net  discount accretion and premium amortization on investment securities                                   |    514   | 389   |
|     (Gain)/loss  on sale of foreclosed assets                                                                   | 39   | (32)  |
|     Write-down  of foreclosed assets                                                                            | 109   | -    |
|     Decrease  in accrued interest receivable                                                                    | 273   | 122   |
|     Decrease   in other assets                                                                             |  488   |  599   |
|     Decrease  in other liabilities                                                                              |       (449)  |         (227)  |
| ** **                                                                                                                          | ** ** | ** ** |
|         Net  cash provided by operating activities                                          |     3,613   |        4,641   |
|                                                                                                                                |   |   |
| **INVESTING  ACTIVITIES**                                                                                                           |   |   |
|   Proceeds  from maturities/calls of investment securities available for sale                                             |             55,135  | 31,049   |
|   Proceeds  from maturities/calls of investment securities held to maturity                                               | 2,000   | 485   |
|   Purchase  of investment securities available for sale                                                                   | (49,031)  | (44,161)  |
|   Purchase  of investment securities held to maturity                                                                     |              (535) | (8,010)  |
|   Proceeds  from sale of foreclosed assets                                                                                |  362    | 411   |
|   Net  increase in federal funds sold                                                                                     |          (18,000)  | -   |
|   Net  decrease in loans                                                                                                  | 7,025    | 8,355   |
|   Premises  and equipment expenditures                                                                                    |        (204)   |        (165)  |
|                                                                                                                                     |   |   |
|         Net  cash used for investing activities                                             |     (3,248)   |   (12,036)  |
|                                                                                                                                     |   |   |
| **FINANCING  ACTIVITIES**                                                                                                           |   |   |
|   Dividends  paid                                                                                                         | -    | (2,096)  |
|   Net  increase in deposits                                                                                               | 18,807   | 18,998   |
|   Net  increase/(decrease) in securities sold under repurchase agreement                                                  | 12,121   | (1,156)  |
|   Net  increase/(decrease) in United States Treasury demand notes                                                         | (988)  | 28   |
|   Net  decrease in Federal Home Loan Bank advances                                                                        | -    | (5,000)  |
|   Common  shares purchased                                                                                                |            (1)  |          (57)  |
|                                                                                                                                     |   |   |
|         Net  cash provided by financing activities                                          |    29,939   |    10,717   |
|                                                                                                                                     |   |   |
|         Net  increase in cash and due from banks                                            | 30,304   | 3,322   |
|                                                                                                                                     |   |   |
| **CASH  AND DUE FROM BANKS, BEGINNING OF PERIOD**                                                                                   |    32,517   |    62,644   |
|                                                                                                                                     |   |   |
| **CASH  AND DUE FROM BANKS, END OF PERIOD**                                                                                         | $ 62,821   | $ 65,966   |
|                                                                                                                                     |   |   |
| **CASH  PAID FOR:**                                                                                                                 |   |   |
|   Interest                                                                                                                | $   2,548   | $   3,104   |
|   Income  taxes                                                                                                           | $      178   | $        94   |
|                                                                                                                                     |   |   |
| **SUPPLEMENTAL  DISCLOSURE FOR NON-CASH INVESTING  AND FINANCIAL ACTIVITIES**                                                       |   |   |
|   Change  in unrealized gain/loss on securities available for sale                                                        | $     648   | $        73   |
|   Real  estate acquired through foreclosure                                                                               | $  1,480   | $   1,144   |
|   Change  in dividends payable                                                                                            |             -   | $   2,096   |
|                                                                                                                                     |   |   |

***See Notes to ConsolidatedFinancial Statements***-6-

----

**CNB CORPORATION AND SUBSIDIARY (The "Company")CNB CORPORATION (The "Parent")THE CONWAY NATIONAL BANK (The "Bank")NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(All Dollar Amounts in Thousands)NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

Net income per share - Net income per share is computed on the basis of theweighted average number of common shares outstanding resulting in 1,664,620 sharesfor the three-month period ended March 31, 2011 and 1,676,890 for the threemonth period ended March 31, 2010.

Fair values of financial instruments

Financial Accounting Standards Board Accounting Standards Codification820 (FASB ASC 820),*"Fair Value of Financial Instruments,*" requiresdisclosure of fair value information for financial instruments, whether or notrecognized in the balance sheet, when it is practicable to estimate the fairvalue.  FASB ASC 820 defines a financial instrument as cash, evidenceof an ownership interest in an entity or contractual obligations which requirethe exchange of cash or other financial instruments.  Certain itemsare specifically excluded from the disclosure requirements, including theCompany's common stock.  In addition, other nonfinancial instrumentssuch as premises and equipment and other assets and liabilities are not subjectto the disclosure requirements.

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

*Cash and due from banks* - The carrying amounts of cashand due from banks (cash on hand, due from banks and interest bearing depositswith other banks) approximate their fair value.

*Federal funds sold* - The carrying amounts of federal funds sold approximatetheir fair value.

*Investment securities available for sale and held to maturity* - Fairvalues 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 atpar value.  Management has determined it is not practicable toestimate the fair value and has not performed an impairment analysis.

*Loans* - For variable rate loans that reprice frequently and for loans thatmature within one year, fair values are based on carryingvalues.  Fair values for all other loans are estimated usingdiscounted cash flow analyses, with interest rates currently being offered forloans with similar terms to borrowers of similar creditquality.  Fair values for impaired loans are estimated usingdiscounted cash flow analyses or underlying collateral values, whereapplicable.

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

*Short-term borrowings* - The carrying amounts of borrowings under repurchaseagreements and U. S. Treasury demand notes approximate their fair values.

*Federal Home Loan Bank Advances***-**Fair valueis estimated based on discounted cash flows using current market rates forborrowings with similar terms.

*Off balance sheet instruments* - Fair values of off balance sheet lending commitmentsare based on fees currently charged to enter into similar agreements, takinginto account the remaining terms of the agreements and the counterparties'credit standing.

-7-

----

RecentlyIssued Accounting Pronouncements- The following is a summary of recent authoritative pronouncements that couldimpact the accounting, reporting, and/or disclosure of financial information bythe Company.

InJuly 2010, the Receivables topic of the Accounting Standards Codification("ASC") was amended by Accounting Standards Update ("ASU") 2010-20 to requireexpanded disclosures related to a company's allowance for credit losses and thecredit quality of its financing receivables. The amendments require theallowance disclosures to be provided on a disaggregated basis.  The Company isrequired to include these disclosures in its interim and annual financialstatements (See Note 4 to the financial statements - Loans and Allowance forLoan Losses).

Disclosures about Troubled DebtRestructurings ("TDRs") required by ASU 2010-20 were deferred by the FinancialAccounting Standards Board ("FASB") in ASU 2011-01 issued in January 2011. InApril 2011 FASB issued ASU 2011-02 to assist creditors with their determinationof when a restructuring is a TDR.   The determination is based on both whetherthe restructuring constitutes a concession and whether the debtor isexperiencing financial difficulties.

Disclosures related to TDRs under ASU2010-20 will be effective for reporting periods beginning after June 15, 2011.

Other accounting standards that havebeen issued or proposed by the FASB or other standards-setting bodies are notexpected to have a material impact on the Company's financial position, resultsof operations and cash flows.

**NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS**

The Bank is required to maintain average reserve balances either at the Bank oron deposit with the Federal Reserve Bank.  The average amounts of these reservebalances for the three-month period ended March 31, 2011 and for the year endedDecember 31, 2010 were approximately $1,199 and $2,001 respectively.

-8-

----

**NOTE 3- INVESTMENT SECURITIES**

The following summaries reflect the book value, unrealized gains and losses,approximate market value, and tax-equivalent yields of investment securities listedby type of issuer and maturity at March 31, 2011 and at December 31, 2010.

| ** **                                                   | **March 31, 2011**                                             |
|--------------------------------------------------------------|----------------------------------------------------------------|
| ** **                                                   | **Book**                                                       | **Unrealized Holding** | **Fair** | ** ** |
| ** **                                                   | **Value**                                                      | **Gains** | **Losses** | **Value** | **Yield(1)** |
|                                                         |                                                           |   |   |   |   |
| **AVAILABLE  FOR SALE**                                      |                                                           |   |   |   |   |
|                                                              |                                                           |   |   |   |   |
|   Government  Sponsored Enterprises                |                                                           |   |   |   |   |
|     Within  one year                     | $  15,057                                            | $        32 | $           4 | $  15,085 | .74%   |
|     One  to five years                   | 181,036                                                        | 330 | 349 | 181,017 | 1.19%   |
|     Six  to ten years                    |    41,382                                       |           71 |          216 |     41,237 | 1.77%   |
|                                                              |  237,475                                                  |         433 |          569 |   237,339 | 1.26%   |
|   Mortgage  Backed Securities                      |                                                           |   |   |   |   |
|     Six  to ten years                    | 2,296                                                          | 109 | - | 2,405 | 4.02%   |
|     Over  ten years                      |      9,110                            |         88 |           85 |       9,113 | 3.14%   |
|                                                              |    11,406                                       |        197 |           85 |     11,518 | 3.32%   |
|   State,  county and municipal                     |                                                           |   |   |   |   |
|     Within  one year                     | 465                                                            | 6 | - | 471 | 5.66%   |
|     One  to five years                   | 796                                                            | 29 | - | 825 | 5.78%   |
|     Six  to ten years                    | 14,171                                                         | 495 | 35 | 14,631 | 5.22%   |
|     Over  ten years                      |      3,593                            |           6 |           55 |       3,544 | 4.76%   |
|                                                              |    19,025                                       |         536 |           90 |     19,471 | 5.17%   |
|   Other  Investments                               |                                                           |   |   |   |   |
|      CRA  Qualified Investment Fund | 1,057                                                          | - | - | 1,057 | -%   |
|      Other                          |           36 |              - |             - |            36 |       -%   |
|                                                              |      1,093                            |              - |             - |       1,093 |       -%   |
|                                                              |                                                           |   |   |   |   |
|   Total  available for sale                        | $268,999                                                       | $   1,166 | $     744 | $269,421 | 1.62%   |
|                                                              |                                                           |   |   |   |   |
|                                                              |                                                           |   |   |   |   |
| **HELD  TO MATURITY**                                        |                                                           |   |   |   |   |
|                                                              |                                                           |   |   |   |   |
|   Government  Sponsored Enterprises                |                                                           |   |   |   |   |
|     One  to five years                   | $   8,000                                       | $        12 | $           - | $    8,012 | 1.47%   |
|                                                              |                                                           |   |   |   |   |
|   State,  county and municipal                     |                                                           |   |   |   |   |
|     One  to five years                   | $   1,100                                       | $        43 | $           - | $    1,143 | 4.62%   |
|     Six  to ten years                    | 5,845                                                          | 178 | 4 | 6,019 | 5.48%   |
|     Over  ten years                      |        4,258                |           27 |           28 |       4,257 | 4.71%   |
|                                                              |      11,203                           |         248 |           32 |     11,419 | 5.11%   |
|                                                              |                                                           |   |   |   |   |
|     Total  held to maturity              | $   19,203                                      | $      260 | $        32 | $  19,431 | 3.57%   |
|                                                              |                                                           |   |   |   |   |
| (1) Tax  equivalent adjustment based on a 34% tax rate. |
|                                                              |                                                                |  |  |  |  |  |  |  |

As of March 31, 2011, the Bank did not hold any securities of an issuer thatexceeded 10% of stockholders' equity. The net unrealized holding gains onavailable for sale securities component of capital was $253, net of deferred incometaxes, as of March 31, 2011.

-9-

----

**NOTE3 - INVESTMENT SECURITIES (Continued) **

|                        | **December 31, 2010** |
|------------------------|----------------------------|
| ** **             | **Book**                   | **Unrealized  Holding** | **Fair** | ** ** |
| ** **             | **Value**                  | **Gains** | **Losses** | **Value** | **Yield(1)** |
| **AVAILABLE FOR SALE** |                       |   |   |   |   |
|                        |                       |   |   |   |   |  
 Government Sponsored Enterprises

 

 

 

 

 

 
     Within one year

$      6,035

$       21

$         2

$      6,054

.98%

 
     One to five years

180,903

328

650

180,581

1.13%

 
     Six to ten years

      58,047

       137

       322

      57,862

    1.87%

 
    244,985

       486

       974

    244,497

    1.30%

 
  Mortgage Backed Securities

 

 

 

 

 

 
     Six to ten years

2,112

90

-

2,202

4.01%

 
     Over ten years

       8,090

       102

         86

        8,106

    3.31%

 
     10,202

       192

         86

      10,308

    3.46%

 
  State, county and municipal

 

 

 

 

 

 
    Within one year

950

4

-

954

6.14%

 
    One to five years

1,395

40

-

1,435

6.16%

 
    Six to ten years

12,531

332

82

12,781

5.29%

 
    Over ten years

       4,442

           5

       142

        4,305

    4.81%

 
     19,318

       381

       224

      19,475

    5.28%

 
  Other Investments

 

 

 

 

 

 
    CRA Qualified Investment  Fund

1,065

-

-

1,065

-%

 
    Other

            36

           -

           -

             36

         -%

 
       1,101

           -

           -

        1,101

         -%

 
 

 

 

 

 

 
  Total available for sale

$ 275,606

$ 1,059

$  1,284

$  275,381

   1.66%

 
 

 

 

 

 

 
 

 

 

 

 

 
**HELD TO MATURITY**

 

 

 

 

 

 
 

 

 

 

 

 
  Government Sponsored Enterprises

 

 

 

 

 

 
    One to five  years  

     10,000

        25

           4

     10,021

   1.33%

 
 

 

 

 

 

 
  State, county and municipal

 

 

 

 

 

 
    One to five years

$     1,103

$      46

$          -

$     1,149

4.62%

 
    Six to ten years

5,847

149

14

5,982

5.48%

 
    Over ten years

       3,728

           -

         96

       3,632

   4.72%

 
     10,678

      195

       110

     10,763

   5.13%

 
 
  Total held to maturity

$   20,678

$    220

$     114

$   20,784

  3.27%

 
 

 

 

 

 

 
 

 

 

 

 

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

As of the year ended December 31, 2010, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity. 

-10-

**NOTE 3 - INVESTMENT SECURITIES,Continued**

     Thefollowing table shows gross unrealized losses and fair value, aggregated byinvestment category, and length of time that individual securities have been ina continuous unrealized loss position at March 31, 2011 and December 31, 2010:

**March 31, 2011**

**AVAILABLE FOR SALE**  Government Sponsored Enterprises  State, county, and municipal            Mortgage backed securities           Total**HELD TO MATURITY**  State, county, and municipal

**            Less  than        twelve  months         **

**         Twelve  months                or  more           **

**             Total                  **

**Fair value**

**Unrealized     losses   **

**Fair value**

**Unrealized      losses  **

**Fair value**

**Unrealized    losses     **

$  105,361            3,430  

569                    80       

-            329    

-                   10    

105,361            3,759   

569                   90       

        6,815  

            85      

            -    

             -    

      6,815   

        85       

**$  115,606  **

**$        734      **

**$      329    **

**$         10    **

**$115,935   **

**$    744       **

 

 

 

 

 

                   

                     

                  

                   

                  

                   

**$      2,162  **

**$          32     **

**$           -   **

**$            -    **

**$     2,162  **

**$       32      **

** **

** **

** **

** **

** **

** **

** **

**December 31, 2010**

** **

**Less than          twelve  months        **

**Twelve months           or more              **

**              Total                 **

**AVAILABLE FOR SALE**  Government Sponsored Enterprises  State, county, and municipal                 Mortgage backed securities                           Total

**Fair value **

**Unrealized    losses     **

**Fair value**

**Unrealized    losses     **

**Fair value **

**Unrealized    losses     **

$132,747    5,882          5,005  

$        973         207               87    

$          -      323                -    

$            -     17                -    

$132,747    6,205        5,005  

$       973     224              87   

**$143,634  **

**$    1,267    **

**$     323    **

**$        17   **

**$143,957  **

**$    1,284   **

**HELD TO MATURITY               **  Government Sponsored Enterprises  State, county, and municipal

  $     1,996         4,534  

  $           4             110    

  $          -                -    

  $           -               -   

        1,996        4,534  

  $          4           110   

          Total

**$     6,530  **

**$       114    **

**$          -    **

**$           -    **

**$    6,530  **

**$      114   **

     Securitiesclassified as available for sale are recorded at fair market value.  AtMarch 2011, the Company owned $329 of available for sale securities in acontinuous loss position for twelve months or more with $10 of unrealizedlosses consisting of one municipal security.  At December 31, 2010, the Companyowned $323 of available for sale securities in a continuous loss position fortwelve months or more with $17 of unrealized losses consisting of one municipalsecurity.

     Securities classified as held to maturity are recordedat cost.  At March 31, 2011, and December 31, 2010 there were no held to maturitysecurities in a continuous loss position for twelve months or more.  

       Investmentsecurities with an aggregate par value of $201,399 ($203,255 fair value) atMarch 31, 2011 and $204,917 ($207,349 fair value) at December 31, 2010 werepledged to secure public deposits and for other purposes required by law.

     For the three-month period ended March 31,2011, there were no sales of available for sale securities. During 2010 $20,758of par value available for sale securities were sold for a gain of $993.

-11-

**NOTE 3 - INVESTMENT SECURITIES, Continued**

     During2010, the Company sold $2,255 par value ($2,370 fair value) of held to maturitysecurities, consisting of four securities, for a net gain of $73.  Two of theseheld to maturity securities, $770 par value ($785 fair value), were sold underexception "a." of ASC 320-10-25-6 as a result of both securities losing theirrating due to a downgrade of the insurer.  Two of these held to maturitysecurities, $1,485 par value ($1,585 fair value), were sold under exception"d." of ASC 320-10-25-6 because the primary regulator of the Company'ssubsidiary bank has increased scrutiny of capital and its components and,consequently, due to continued uncertainty in the municipal bond markets, theamount of investment in individual municipal securities issuers.  In responseto these regulatory concerns related to capital and its components, the Companysold all of its municipal securities of individual issuers in excess of $600,including all municipal securities in this size category classified held tomaturity as well as those classified available for sale.  We believe that thesale of these held to maturity securities should not be considered inconsistentwith the original classification and the remaining portfolio is not tainted.     Management reviews securities forother-than-temporary impairment on at least a quarterly basis, and morefrequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) the length of time and theextent to which the fair value has been less than cost, (2) the financialcondition and near-term prospects of the issuer, and (3) the fact that Company doesnot intend to sell these securities, and it is more likely than not that theCompany will not be required to sell these securities before recovery of theiramortized cost.

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES**

**     **The following is a summary of loansat March 31, 2011 and December 31, 2010 by major classification:

 

** March 31, **

**December 31,**

 

**     2011     **

**     2010     **

 

 

**Real  estate loans** -** mortgage**

$ 359,067   

$  362,998   

                              **- construction**

60,265   

63,080   

**Agricultural  loans**

2,825   

3,282   

**Commercial  and industrial loans**

58,675   

61,127   

**Loans  to individuals for household,**

 

 

**  family  and other consumer expenditures**

42,529   

43,350   

**All  other loans, including overdrafts and**

 

 

**  deferred  loan costs**

          384   

            349   

**     Gross  loans**

$ 523,745   

$  534,186   

**       Less  allowance for loan losses**

   (11,803)  

     (11,627)  

**         Net  loans**

$ 511,942   

$  522,559   
     Changesin the allowance for loan losses for the quarters ended March 31, 2011 and 2010,and the year ended December 31, 2010 are summarized as follows:
** **

**    Quarter  Ended  **

**Year  Ended**

**   March 31,**

**December 31,**

 

**    2011   **

**   2010   **

**    2010     **

 
**Balance,  beginning of period**

$ 11,627 

$  9,142 

$  9,142    

 
**Charge-offs:**

** **

** **

** **

 
   Commercial,  financial, and agricultural

280 

697 

3,273    

 
   Real  Estate - construction and mortgage

1,962 

1,862 

7,444    

 
   Loans  to individuals

       236 

       331 

       899    

 
**       Total  charge-offs**

$  2,478 

$  2,890 

$11,616    

 
**Recoveries:**

** **

** **

** **

 
   Commercial,  financial, and agricultural

$       62 

$     100 

$     259    

 
   Real  Estate - construction and mortgage

406 

11 

73    

 
   Loans  to individuals

         74 

       184 

       372    

 
       Total  recoveries

$     542 

$     295 

$     704    

 
**Net  charge-offs**

$  1,936 

$  2,595 

$10,912    

 
**Additions  charged to operations**

$  2,112 

$  3,763 

$13,397    

 
**Balance,  end of period**

$11,803 

$10,310 

$11,627    

 
 

** **

** **

** **

 
**Ratio  of net charge-offs during the period**

    .37%

    .45%

  1.90%    

 
**   to  average loans outstanding during the     period**

** **

 
** **

** **

** **

** **

 
The entire balance of theallowance for loan losses is available to absorb future loan losses.

-12-

**NOTE 4 - LOANS AND ALLOWANCE FORLOAN LOSSES, Continued**

     At March 31, 2011, December 31, 2010, and March31, 2010 loans on which no interest was being accrued totaled $26,393, $25,704,and 13,537, respectively.  All loans on which no interest was being accrued aswell as other loans identified by management as having weaknesses which resultin a determination of an inability on the part of the borrower to make full andtimely payment of principal and interest areclassified as impaired.  Impaired loans at March 31, 2011, December 31, 2010,and March 31, 2010 were $28,803, $29,074, and $21,029, respectively.  Theportion of the allowance for loan losses specifically allocated to impairedloans at March 31, 2011, December 31, 2010, and March 31, 2010 was $745, $709,and $0, respectively.  The Company had $6,446 of foreclosed real estate at March31, 2011, $5,476 at December 31, 2010, and $2,387 at March 31, 2010.  Loans 90days past due and still accruing interest totaled $1,431, $1,042, and $560 at March31, 2011, December 31, 2010, and March 31, 2010, respectively.

     At March 31, 2011, December 31, 2010, and March31, 2010 classified assets, the majority consisting of classified loans, were $73,548,$76,642, and $80,540, respectively.  At March 31, 2011,  December 31, 2010, andMarch 31, 2010 classified assets represented 74.90%, 78.24%, and 84.32% oftotal capital (the sum of Tier 1 Capital and the Allowance for Loan Losses),respectively.

    As of March 31, 2011 and December 31, 2010 loansindividually evaluated and considered impaired under ASC 310-10 "Receivables"were as follows (tabular amounts in thousands):

 
**March 31,        2011      **

**December  31,          2010       **

Total  loans considered impaired

$28,803

$ 29,074     

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

 

 

Outstanding  loan balance

8,026

8,620     

Related  allowance established

745

709     

Loans  considered impaired and previously written       down to fair value

  20,777

  20,454     

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

  20

  20     

Average  investment in impaired loans

29,356

25,241     

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

  52

  636     

 

-13-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

Thefollowing tables summarize (in thousands of dollars) commercial and consumercredit exposure by internally assigned grade, collateral, and purpose asindicators of credit quality existing in the Company's loan portfolios as of March31, 2011 and December 31, 2010.  The Company utilizes four "Pass" gradecategories and the regulatorily defined "Other Assets Especially Mentioned,""Substandard," and "Doubtful" grade categories to monitor credit risk existingin its loan portfolios on an on-going basis.  The four pass grades are definedas: Pass-1, loans that have minimal credit risk and are of excellent quality;Pass-2, loans with satisfactory credit risk; Pass-3, loans with reasonablecredit risk, however a degree of watchfulness is warranted; and Pass-4, loanswhich demonstrate some weakness and a higher degree of watchfulness iswarranted. "Other Assets Especially Mentioned (OAEM)" loans have weaknesses andwarrant management's close attention.  "Substandard" loans have a high degreeof credit risk and credit factors that indicate potential furtherdeterioration, which could result in a protracted workout or possible loss. "Doubtful" loans have a high degree of potential loss, in whole or in part.

**Commercial Credit ExposureCredit Risk Profile by Internally Assigned Grade****For the QuarterEnded March 31, 2011**

**        Commercial                Other     **

**Commercial Real Estate Construction**

**Commercial Real Estate - Other**

PASS 1

$    6,748  

              $         38

$            -            

PASS  2

    12,525

     8,900

   54,476

PASS  3

    15,264

   11,295

   36,051

PASS  4

    15,734

   17,118

   30,456

OAEM

      5,911

     9,588

   12,904

Substandard

      5,318

 

     13,326 

 

    18,476

Total

$  61,500

$ 60,265

 $152,363 

**Consumer Credit ExposureCredit Risk Profile by Internally Assigned GradeFor the Quarter Ended March 31, 2011**

**Consumer  Real Estate - Residential**

PASS  1

         $         813

PASS  2

               72,564

PASS  3

               47,621

PASS  4

               44,997

OAEM

               11,756

Substandard

               28,953

         Total

         $  206,704

The Company had no loans classified as doubtful at March 31, 2011.  The Companydoes not make loans defined as "sub-prime" loans.****

****-14-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

**Commercial Credit ExposureCredit Risk Profile by Internally Assigned Grade****For the Year EndedDecember 31, 2010**

**        Commercial                Other     **

**Commercial Real Estate Construction**

**Commercial Real Estate - Other**

PASS 1

$     7,524  

    $        39              

        $           -

PASS 2

     12,980

      8,590

   55,930

PASS 3

     15,859

    11,168

   31,521

PASS 4

     16,611

    18,377

   30,054

OAEM

       6,007

      9,283

   14,105

Substandard

       5,428

 

      15,623

 

     20,611

Total

$   64,409

  $ 63,080

         $152,221

**Consumer Credit ExposureCredit Risk Profile by Internally Assigned GradeFor the Year Ended December 31, 2010**

**Consumer  Real Estate-Residential**

PASS 1

            $         761

PASS 2

                  74,462

PASS 3

                  48,216

PASS 4

                  46,158

OAEM

                  12,687

Substandard

                  28,538

         Total

            $  210,822

The Company had no loans classified as doubtful at December 31, 2010.  TheCompany does not make loans defined as "sub-prime" loans.

The following table summarizes the Company's consumer credit card and all otherconsumer loans based on performance at March 31, 2011 and December 31, 2010 (tabularamounts in thousands).

**Consumer Credit ExposureCredit Risk Profile Based on Payment Activity**

**       March  31, 2011      **

**    **

**      December 31, 2010**

** Consumer**

**Consumer**

** Consumer**

**Consumer**

** **

**Credit Card **

**    Other   **

**Credit Card **

**    Other   **

** **

** **

** **

** **

** **

** **

Performing

$  3,081

$39,832

            Performing

$  3,225

$40,429

 

Non-Performing

-

-

            Non-Performing

-

-

 

            

           

            

           

 

         Total

$  3,081

$39,832

                    Total

$  3,225

$40,429

 

The Company had noconsumer credit card or other consumer loans classified as "Non-Performing" at March31, 2011 or December 31, 2010.

-15-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

The following tables outline the changes in the allowance for loan losses bycollateral type and purpose, the allowances for loans individually andcollectively evaluated for impairment, and the amount of loans individually andcollectively evaluated for impairment at March 31, 2011 and December 31, 2010(tabular amounts in thousands).

**Allowance for Loan Losses and Recorded Investment inLoans ReceivableFor the Quarter Ended March 31, 2011**

** **

**Commercial**

** **

** **

** **

**Commercial**

**Real Estate**

**Consumer**

**Residential**

**Unallocated**

**    Total     **

** **

**Allowance  for loan losses**:

Beginning  balance

$    2,776 

$    4,266

$     1,361

$       3,114

$        110

$     11,627

  Charge-offs

        (280)

        (929)

        (236)

        (1,033)

              -

       (2,478)

  Recoveries

           62

         377

           74

              29

              -

           542

  Provisions

        (218)  

      1,092  

          (18) 

         1,366

        (110) 

        2,112

        Ending  balance

$    2,340  

$    4,806  

$     1,181 

$       3,476

$            -  

$    11,803

 

 

 

 

 

 

Ending  balances:

 

 

 

 

 

 

  Individually  evaluated

  for  impairment

$            -  

$       500  

$            -  

$         245 

$            - 

$        745

 

 

 

 

 

 

  Collectively  evaluated

 

 

  for  impairment

$    2,340  

$    4,306  

$     1,181 

$      3,231 

$            - 

$    11,058

 

 

**Loans  receivable**:

Ending  balance - total

$  61,500  

$ 212,628 

$   42,913 

$  206,704 

$            - 

$ 523,745

 

 

 

 

 

 

Ending  balances:

 

 

 

 

 

 

  Individually  evaluated

  for  impairment

$        551  

$   18,704 

$            - 

$     9,548 

$            - 

$   28,803

 

 

 

 

 

 

  Collectively  evaluated

 

 

 

 

 

 

  for  impairment

$  60,949  

$ 193,924 

$   42,913 

$ 197,156 

$            - 

$ 494,942

**Allowancefor Loan Losses and Recorded Investment in Loans ReceivableFor the Year Ended December 31, 2010**

** **

**Commercial**

** **

** **

** **

**Commercial**

**Real Estate**

**Consumer**

**Residential**

**Unallocated**

**    Total     **

** **

**Allowance for loan losses**:

Beginning balance

$    3,309 

$    2,246

$     1,228

$       2,344

$          15

$      9,142

  Charge-offs

     (3,273)

     (4,639)

         (899)

        (2,805)

              -

     (11,616)

  Recoveries

         259

           14

          372

              59

              -

           704

  Provisions

      2,481  

      6,645  

          660 

         3,516

            95 

      13,397

        Ending  balance

$    2,776  

$    4,266  

$     1,361 

$       3,114

$        110 

$    11,627

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

  Individually evaluated

  for impairment

$            -  

$       506  

$            -  

$        203 

$            - 

$        709

 

 

 

 

 

 

  Collectively evaluated

 

 

  for impairment

$    2,776  

$    3,760  

$      1,361 

$     2,911 

$        110 

$    10,918

 

 

**Loans receivable**:

Ending balance - total

$  64,409  

$ 215,301 

$  43,654 

$ 210,822 

$            - 

$ 534,186

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

  Individually evaluated

  for impairment

$        315  

$   19,977 

$            - 

$     8,782 

$            - 

$   29,074

 

 

 

 

 

 

  Collectively evaluated

 

 

 

 

 

 

  for impairment

$  64,094  

$ 195,324 

$  43,654 

$ 202,040 

$            - 

$ 505,112

-16-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

Thefollowing tables outline the performance status of the Company's loan portfolioby collateral type and purpose at March 31, 2011 and December 31, 2010 (tabularamounts in thousands).

** **

** **

** **

** **

** **

** **

**Greater**

** **

** **

**Greater**

** **

** **

** **

**Than**

** **

** **

**Than**

** **

** **

** **

**90 Days**

**March 31, 2011**

**30-59 Days**

**60-89 Days**

**90 Days**

**   Total**

** **

**Total  Loans**

**Past Due**

**  Past Due  **

**Past Due  **

**Past Due**

**Past Due**

** Current **

** Receivable **

**Accruing**

Commercial

$     1,777

$        416

$           -

$     2,193

$   59,307 

$        61,500

$            -

Commercial  real estate:

    Commercial  real estate-       construction

       1,148

       1,010

      7,542

       9,700

     50,565 

          60,265

              -

    Commercial  real estate-         other

          632

          280

      5,449

       6,361

   146,002 

        152,363

              -

Consumer:

    Consumer-residential

      5,419

      1,659

      7,793

     14,871

   191,833 

        206,704

       1,284

    Consumer-credit  cards

           28

           21

           33

            82

       2,999 

            3,081

            33

    Consumer-other

         745   

         264  

         114

       1,123

     38,709 

          39,832

          114 

       Total

$    9,749   

$    3,650  

$  20,931

$   34,330 

$ 489,415

$      523,745

$     1,431 

 

** **

** **

** **

** **

** **

** **

**Greater**

** **

** **

**Greater**

** **

** **

** **

**Than**

** **

** **

**Than**

** **

** **

** **

**90 Days**

**December 31, 2010**

**30-59 Days**

**60-89 Days**

**90 Days**

**   Total**

** **

**Total  Loans**

**Past Due**

**  Past Due  **

**Past Due  **

**Past Due**

**Past Due**

** Current **

** Receivable **

**Accruing**

Commercial

$        877

$        564

$            -

$     1,441

$   62,968 

$        64,409

$             -

Commercial  real estate:

    Commercial  real estate-       construction

       1,838

          853

       7,630

     10,321

     52,759 

          63,080

            12

    Commercial  real estate-         other

       1,146

          591

       5,856

       7,593

   144,628 

        152,221

          161

Consumer:

    Consumer-residential

      3,297

      4,237

      5,487

     13,021

   197,801 

        210,822

          695

    Consumer-credit  cards

           36

           44

           26

          106

       3,119 

            3,225

            27

    Consumer-other

         829   

         373  

         147

       1,349

     39,080 

          40,429

          147 

       Total

$    8,023   

$    6,662  

$  19,146

$  33,831 

$ 500,355

$      534,186

$     1,042 

****-17-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

In addition to those loans placed in a nonaccrual status, there arecertain loans in the portfolio which are not yet 90 days past due but aboutwhich management has concerns regarding the ability of the borrower to complywith present loan repayment terms.  Such loans and nonaccrual loansare classified as impaired.  Problem loan identification includes areview of individual loans, the borrower's and guarantor's financial capacityand position, loss potential, and present economic conditions.  Aspecific allocation is provided for impaired loans not yet placed in nonaccrualstatus and not yet written down to fair value in management's determination ofthe allowance for loan losses.  Thefollowing table outlines Company's loans classified as impaired by collateraltype and purpose at March 31, 2011 and December 31, 2010 (tabular amounts inthousands).

**Impaired LoansFor the Quarter Ended March 31, 2011**

** **

** **

** **

** **

** **

** **

**Unpaid**

** **

**Average**

**Interest**

**Recorded**

**Principal**

**Related**

**Recorded**

**Income**

**Investment**

** Balance **

**Allowance**

**Investment**

**Recognized**

With  no related allowance recorded:

   Commercial  real estate-construction

$     6,726

$     8,290

$            -

$     6,727

$             10

   Commercial  real estate-other

7,952

7,975

-

7,885

6

   Commercial  and industrial

551

551

-

393

3

   Consumer-residential

5,548

5,582

-

5,624

33

 

 

 

 

 

With  an allowance recorded:

 

 

 

 

 

   Commercial  real estate-construction

$     3,481

$     5,231

$       459

$     3,601

$               -

   Commercial  real estate-other

545

777

41

894

-

   Commercial  and industrial

-

-

-

-

-

   Consumer-residential

4,000

5,190

245

4,232

-

 

 

 

 

 

Total:

 

 

 

 

 

   Commercial  real estate-construction

$   10,207

$   13,521

$       459

$   10,328

$           10

   Commercial  real estate-other

8,497

8,752

41

8,779

6

   Commercial  and industrial

551

551

-

393

3

   Consumer-residential

       9,548

     10,772

         245

       9,856

            33

$   28,803

$   33,596

$       745

$   29,356

$          52

**Impaired LoansFor the Year Ended December 31, 2010**

** **

** **

** **

** **

** **

** **

**Unpaid**

** **

**Average**

**Interest**

**Recorded**

**Principal**

**Related**

**Recorded**

**Income**

**Investment**

** Balance **

**Allowance**

**Investment**

**Recognized**

With no  related allowance recorded:

   Commercial  real estate-construction

$     6,563

$     7,977

$            -

$     8,210

$             27

   Commercial  real estate-other

7,952

7,975

-

4,495

294

   Commercial  and industrial

315

315

-

314

13

   Consumer-residential

4,455

4,743

-

4,648

211

 

 

 

 

 

With an  allowance recorded:

 

 

 

 

 

   Commercial  real estate-construction

$     4,138

$     6,175

$       419

$     3,799

$          32

   Commercial  real estate-other

1,324

1,705

87

729

23

   Commercial  and industrial

-

-

-

-

-

   Consumer-residential

4,327

4,947

203

3,046

36

 

 

 

 

 

Total:

 

 

 

 

 

   Commercial  real estate-construction

$   10,701

$   14,152

$       419

$   12,009

$          59

   Commercial  real estate-other

9,276

9,680

87

5,224

317

   Commercial  and industrial

315

315

-

314

13

   Consumer-residential

       8,782

       9,690

         203

       7,694

          247

$   29,074

$   33,837

$       709

$   25,241

$        636

-18-

**NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES - Continued**

The following table outlines theCompany's loans on nonaccrual status by collateral type and purpose at March31, 2011 and December 31, 2010 (tabular amounts in thousands).

**Loans on Nonaccrual Status**

**March 31,**

**December 31,**

 
**2011**

**2010**

 
Commercial

$      551      

$      315      

 
Commercial real estate:

 

 
    Commercial  real estate construction

9,116      

9,711      

 
    Commercial  real estate - other

8,954      

9,250      

 
 

 
Consumer:

 

 
    Consumer-credit  card

-      

-      

 
    Consumer-other

-      

-      

 
 

 
Residential:

 

 
    Residential

     7,772      

     6,428      

 
 
              Total

$ 26,393      

$ 25,704       

     The total amount of interest earned on nonaccrualloans was $33 for the three-month period ended March 31, 2011 and $408 in 2010. The gross interest income which would have been recorded under the originalterms of the nonaccrual loans amounted to $768 for the three-month period endedMarch 31, 2011 and $1,847 in 2010.  Foregone interest on nonaccrualloans totaled $735 for the three-month period ended March 31, 2011 and$1,439 in 2010.  TheCompany writes down any confirmed losses associated with nonaccrual loans atthe time such loans are placed in a nonaccrual status.  Accrued andunpaid current period interest income on nonaccrual loans is reversed tocurrent period income at the time a loan is placed in nonaccrualstatus.  Accrued and unpaid prior period interest income onnonaccrual loans is charged to the Allowance for Loan Losses at the time theloan is placed in nonaccrual status.  Any payments received on loansplaced in nonaccrual status are applied first to principal.  TheCompany recognized $33 of interest on a cash basis on one loan relationshipconsisting of four nonaccrual loans totaling $1,962 during the three-monthperiod ended March 31, 2011.  The Company did not recognize interest income onnonaccrual loans on a cash basis during any of 2010.

     At March 31, 2011 and December 31, 2010 theamount of loans ninety days or more past due and still accruing interesttotaled $1,431 and $1,042, respectively.  Loans ninety days or more past dueand still accruing interest consist of consumer loans which are placed innonaccrual status at one hundred twenty days or more past due.

     At March 31, 2011 and December 31, 2010classified assets, the majority consisting of classified loans, were $73,548and $76,642, respectively.  At March 31, 2011 and December 31, 2010 classifiedassets represented 74.90% and 78.24% of total capital (the sum of Tier 1Capital and the Allowance for Loan Losses), respectively.

-19-

**NOTE5 - PREMISES AND EQUIPMENT******     Property at March 31, 2011 and December 31, 2010is summarized as follows:

**March 31,**

**December 31,**

**2011**

**2010**

**Land  and buildings**

$ 26,386    

$ 26,386       

**Furniture,  fixtures and equipment**

8,921    

8,897       

**Construction  in progress**

        134    

            -       

** **

$ 35,441    

$ 35,283       

**Less  accumulated depreciation and amortization**

   13,519    

   13,195       

$ 21,922    

$ 22,088       

     Depreciation and amortization of bank premisesand equipment charged to operating expense was $370 and $371 for the three-monthperiod ended March 31, 2011 and 2010, respectively, and $1,493 for the yearended December 31, 2010.  The construction in progress is primarily related to anAutomated Teller Machine (ATM) kiosk and equipment replacement program atvarious branch offices and a minor renovation at the Company's Operations andAdministration Center.  There is approximately $118 of remaining costsassociated with the Company's ATM replacement program.  There are no additionalremaining costs for the minor Operations and Administration Center renovation.

**NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100**

     At March 31, 2011 and December 31, 2010, certificatesof deposit of $100 or more included in time deposits totaled approximately $219,781and $215,935, respectively.  Interest expense on these deposits wasapproximately $819 and $1,225 for the three-month periods ended March 31, 2011and 2010, respectively, and $4,362 for the year ended December 31, 2010. 

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

     At March 31, 2011 and December 31, 2010,securities sold under repurchase agreements totaled $111,274 and $99,153,respectively.  Securities with a book value of $116,969 ($117,417 fair value)and $117,386 ($117,549 fair value), respectively, were used as collateral forthe agreements.  The weighted-average interest rate of these agreements was .26percent and .46 percent at March 31, 2011 and December 31, 2010, respectively.

**NOTE 8 - LINES OF CREDIT**

     At March 31, 2011, the Bank had unused short-termlines of credit to purchase Federal Funds from unrelated banks totaling $35,500. These lines of credit are available on a one to seven day basis for generalcorporate purposes of the Bank.  All of the lenders have reserved the right towithdraw 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.  TheBank may borrow up to $7,000 under the arrangement at a variable interestrate.  The note is secured by bonds with a market value of $3,023 at March 31, 2011. The amount outstanding under the note totaled $1,336 and $2,324 at March31, 2011 and December 31, 2010, respectively.

     The Bank also has a line of credit from theFederal Home Loan Bank of Atlanta for $57,018 secured by a lien on the Bank's1-4 family mortgage loans. Allowable terms range from overnight to twenty yearsat varying rates set daily by the FHLB.  There were no borrowings under theagreement at March 31, 2011 or at December 31, 2010.

-20-

**NOTE 9 - INCOME TAXES**

     Income tax expense/(benefit) for the three monthsended March 31, 2011 and March 31, 2010 on pretax income/(loss) of $486 and $(270)totaled $104 and $(227), respectively.   The provision for federal income taxesis calculated by applying the 34% statutory federal income tax rate andincreasing or reducing this amount due to any tax-exempt interest, state banktax (net of federal benefit), business credits, surtax exemption, taxpreferences, alternative minimum tax calculations, or other factors.  A summaryof income tax components and a reconciliation of income taxes to the federalstatutory rate are included in fiscal year-end reports.

     The Company accounts for income taxes inaccordance with FASB ASC 740 "Income Taxes."**NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES**

     Fromtime to time the Bank is a party to various litigation matters, both asplaintiff and as defendant, arising from its normal operations.  No materiallosses are anticipated in connection with any of these matters at March 31,2011.

     In the normal course of business, the Bank is a partyto financial instruments with off-balance-sheet risk including commitments toextend credit and standby letters of credit.  Such instruments have elements ofcredit risk in excess of the amount recognized in the balance sheet.  Theexposure to credit loss in the event of nonperformance by the other parties tothe financial instruments for commitments to extend credit and standby lettersof credit is represented by the contractual notional amount of thoseinstruments.  Generally, the same credit policies used for on-balance-sheetinstruments, such as loans, are used in extending loan commitments and standbyletters of credit.

     Following are the off-balance-sheet financialinstruments whose contract amounts represent credit risk:** **

** **

**March  31, 2011**

**           Loan  Commitments                   **

    $ 37,804

**           Standby  letters of credit         **

         1,517

     Loan commitments involve agreements to lend to acustomer as long as there is no violation of any condition established in thecontract.  Commitments generally have fixed expiration dates or other terminationclauses and some involve payment of a fee.  Many of the commitments areexpected to expire without being fully drawn.  Therefore, the total amount ofloan commitments does not necessarily represent future cash requirements.  Eachcustomer's creditworthiness is evaluated on a case-by-case basis.  The amountof collateral obtained, if any, upon extension of credit is based onmanagement's credit evaluation of the borrower.  Collateral held varies but mayinclude certificates of deposit or other negotiable collateral, commercial andresidential real properties, accounts receivable, inventory and equipment.

     Standby letters of credit are conditionalcommitments to guarantee the performance of a customer to a third party.  Thecredit risk involved in issuing standby letters of credit is the same as thatinvolved in making loan commitments to customers. Many letters of credit willexpire without being drawn upon and do not necessarily represent future cashrequirements.

     Management believes that its various sources ofliquidity provide the resources necessary for the Bank to fund the loancommitments and to perform under standby letters of credit, if the needarises.  Neither the Company nor the Bank are involved in other off-balancesheet contractual relationships or transactions that could result in liquidityneeds or other commitments or significantly impact earnings.

**NOTE 11 - EMPLOYEE BENEFIT PLAN**

     The Bank has a defined contribution pension plancovering all employees who have attained age twenty-one and have a minimum ofone year of service.  Upon ongoing approval of the Board of Directors, the Bankmatches one-hundred percent of employee contributions up to three percent ofemployee salary deferred and fifty percent of employee contributions in excessof three percent and up to five percent of salary deferred.  The Board ofDirectors may also make discretionary contributions to the Plan.  For the three-monthperiod ended March 31, 2011 and the year ended December 31, 2010, $92, and $388,respectively, was charged to operations under the plan.

-21-

**NOTE12 - REGULATORY MATTERS**

     TheBank and the Company are subject to various regulatory capital requirementsadministered by the federal banking agencies.  Failure to meet minimum capitalrequirements can initiate certain mandatory - and possibly additionaldiscretionary - actions by regulators that, if undertaken, could have a directmaterial effect on the financial statements.  The regulations require the Bank andthe Company to meet specific capital adequacy guidelines that involvequantitative measures of assets, liabilities, and certain off-balance-sheetitems as calculated under regulatory accounting practices.  The capitalclassification is also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.

     Quantitative measures established by regulationto ensure capital adequacy require the maintenance of minimum amounts andratios (set forth in the tables below) of Tier 1 capital to adjusted totalassets (Leverage Capital ratio) and minimum ratios of Tier 1 and total capitalto risk-weighted assets.  To be considered adequately capitalized under theregulatory framework for prompt corrective action, the Company and the Bankmust maintain minimum Tier 1 leverage, Tier 1 risk-based and total risked-basedratios as set forth in the tables below.  The Company's and the Bank's actualcapital ratios are presented in the tables below as of March 31, 2011:

**Company**

 

 

 

 

 

**For**

 

**Capital adequacy**

**                                   **

**         Purposes          **

**            Actual            **

**         Minimum         **

**Amount**

**Ratio**

**Amount**

** Ratio **

 

 

 

 

**Total  Capital (to risk weighted assets)**

$93,881

16.83% 

$44,619

8.0%     

** **

 

 

 

 

**Tier  1 Capital (to risk weighted assets)**

86,850

15.57    

22,309

4.0        

** **

 

 

 

 

**Tier  1 Capital (to average assets)**

86,850

9.35    

37,137

4.0        

 

**Bank**

 

 

**To be**

 

 

**Well capitalized**

 

**For**

**under prompt**

 

**Capital adequacy**

**corrective action**

**                                   **

**         Purposes          **

**         provisions         **

**            Actual            **

**         Minimum         **

**          Minimum         **

**Amount**

**Ratio**

**Amount**

** Ratio **

**Amount**

** Ratio **

 

 

 

 

 

 

**Total  Capital (to risk weighted assets)**

$93,424

16.75% 

$44,616

8.0%     

$55,770

10.0%   

** **

 

 

 

 

 

 

**Tier  1 Capital (to risk weighted assets)**

86,393

15.49   

22,308

4.0        

33,462

6.0      

** **

 

 

 

 

 

 

**Tier  1 Capital (to average assets)**

86,393

9.31    

37,136

4.0        

46,420

5.0      

     Althoughthe Bank has experienced a leveling of impaired loans and improved income inthe three-month period ended March 31, 2011 and the fourth quarter of 2010, becausethe Bank had increasing trends in the level of impaired loans and a decliningtrend in net income during 2010, the Bank's primary regulator (the OCC) may exerciseits authority to require the Bank to maintain capital ratios in excess of thoseshown to be well capitalized in the table above.  The OCC may also seek theBank's agreement to take other specified actions intended to reduce the risksfaced by the Bank.  The OCC has the authority to enforce such an agreement withvarious regulatory actions.

****-22-

**NOTE 13 - ESTIMATED FAIR VALUEOF FINANCIAL INSTRUMENTS**

     Theestimated fair values of the Company's financial instruments were as follows atMarch 31, 2011 and December 31, 2010 (amounts in thousands):

** **

**    March  31, 2011       Carrying      **    **Fair      **

**  December  31, 2010    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      U.S. Treasury demand notes

**  Amount   **  $  62,821    32,000    269,421    19,203    2,729    511,942    736,947    111,274    1,336  

**   Value   **$  62,821    32,000    269,421    19,431    2,729    516,816    735,775    111,274    1,336  

**  Amount   **  $  32,517    14,000    275,381    20,678    2,729    522,559    718,140    99,153    2,324     

**   Value   **$  32,517    14,000    275,381    20,784    2,729    527,787    716,733    99,153    2,324  

** **

**Notional  **

** **

**Notional  **

** **

** **

**Amount   **

** **

**Amount  **

** **

**OFF BALANCE SHEET INSTRUMENTS**

** **

** **

** **

** **

Commitments to extend credit

$  37,804  

 

$  38,343  

 

Standby letters of credit

1,517  

 

1,577  

 

     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 forsale investment securities) or on a nonrecurring basis (for example, impairedloans).

     The accounting standard defines fair value as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date.  It also establishes a fair value hierarchy which requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value.  The standard describes threelevels of inputs that may be used to measure fair value:

****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.

-23-

**NOTE 13 - 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 by the Company for assets andliabilities recorded on the balance sheet at fair value on a recurring ornon-recurring basis:

**InvestmentSecurities Available for Sale**

     Measurement is on a recurring basis based uponquoted market prices, if available.  If quoted market prices are not available,fair values are measured using independent pricing models or other model-basedvaluation techniques such as the present value of future cash flows, adjustedfor prepayment assumptions, projected credit losses, and liquidity.  Level 1securities include those traded on an active exchange or by dealers or brokersin active over-the-counter markets.  Level 2 securities include securitiesissued by government sponsored enterprises, municipal securities, andmortgage-backed securities issued by government sponsored enterprises.Generally these fair values are priced from established pricing models.

**Impaired 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 March 31, 2011, substantially all of the total impaired loanswere evaluated based on the fair value of the underlying collateral.  When theCompany records the fair value based upon a current appraisal, the fair valuemeasurement is considered a non-recurring Level 2 measurement.  When a currentappraisal is not available or there is estimated further impairment, themeasurement is considered a non-recurring Level 3 measurement.

**Other Real Estate Owned (OREO)**

     Other real estate owned is adjusted to fair valueupon transfer of the loans to other real estate owned by foreclosure ordeed-in-lieu of foreclosure.  Subsequently, other real estate owned is carriedat the lower of carrying value or fair value. Fair value is based uponindependent market prices, appraised values of the collateral or management'sestimation of the value of the collateral.  When the fair value of thecollateral is based on an observable market price or a current appraised value,the Bank records the other real estate owned as nonrecurring Level 2.  When anappraised value is not available or management determines the fair value of thecollateral is further impaired below the appraised value and there is noobservable market price, the Company records the other real estate owned asnon-recurring Level 3.

-24-

***NOTE 13 - ESTIMATED FAIR VALUEOF FINANCIAL INSTRUMENTS, Continued***

     Assets and liabilities measured at fair value ona recurring basis for March 31, 2011 and December 31, 2010 are presented in thefollowing table (dollars in thousands):

**March 31, 2011**

Quoted  market price  in active markets   (Level 1)   

  Significant other  observable inputs   (Level 2)   

Significant  unobservable  inputs   (Level 3)   

Available  for sale securities

 

 

 

     Government  Sponsored Enterprises

$                    -    

$        237,339

$                   -

     State,  County, and Municipal

-    

19,471

-

     Mortgage  backed securities

-    

11,518

-

     Other

                      -    

              1,093

                     -

          Total

$                    -    

$        269,421

$                   -

 

 

 

**December 31, 2010**

 

 

 

 

 

 

Available  for sale securities

 

 

 

     Government  Sponsored Enterprises

$                     -    

$        244,497

$                  -

     State,  County, and Municipal

-    

19,475

-

     Mortgage  backed securities

-    

10,308

-

     Other

                      -    

              1,101

                    -

          Total

$                    -    

$        275,381

$                  -

     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 March 31, 2011 and December 31,2010 for which a non-recurring change in fair value was recorded during the threemonths and year ended March 31, 2011 and December 31, 2010.

**March 31, 2011**

Quoted  market price  in active markets   (Level 1)   

  Significant other  observable inputs   (Level 2)   

Significant  unobservable  inputs   (Level 3)   

Other  real estate owned

$                    -    

$             6,446

$                   -

Impaired  loans

                      -    

             28,058

                     -

** **

$                    -    

$           34,504

$                   -

** **

 

 

 

**December 31, 2010**

 

 

 

 

 

 

Other  real estate owned

$                    -    

$             5,476

$                   -

Impaired  loans

                      -    

             28,385

                     -

$                    -    

$           33,861

$                   -

****-25-

**NOTE 14 - CONDENSED FINANCIAL INFORMATION**

     Following is condensed financial information ofCNB Corporation (parent company only):

**CONDENSED  BALANCE SHEETS  (Unaudited)**

** **

**   March  31,**

**ASSETS**

**   2011    **

**    2010    **

   Cash

$       421

  $   1,084

   Investment in subsidiary

86,646

    86,252

   Other assets

           36

           37

$  87,103

  $ 87,373

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

   Stockholders' equity

$ 87,103

    $ 87,373  

$ 87,103

    $ 87,373  

 

 

 

 

**CONDENSED  STATEMENTS OF INCOME/(LOSS)  (Unaudited)**

**For the three-month   period ended March 31,**

**    2011         **

**     2010   **

   Equity in net income/(loss) of  subsidiary

$  444   

  $    24               

   Other expenses

      (62)   

       (67)              

**      NET INCOME/(LOSS)**

$  382   

  $   (43)              

** **

 

 

** **

**NOTE 15 - SUBSEQUENT EVENTS**

     Subsequentevents are events or transactions that occur after the balance sheet date butbefore financial statements are issued. Recognized subsequent events are eventsor transactions that provide additional evidence about conditions that existedat the date of the balance sheet, including the estimates inherent in theprocess of preparing financial statements.  Non-recognized subsequent events areevents that provide evidence about conditions that did not exist at the date ofthe balance sheet but arose after that date.  Management has reviewedevents occurring through the date the financial statements were available to beissued and no subsequent events occurred requiring accrual or disclosure.

-26-

**Item2.**

**MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

(All dollar amounts in thousands, except per share data.)

Management's Discussionand Analysis is provided to afford a clearer understanding of the majorelements of the Company's results of operations, financial condition,liquidity, and capital resources. The following discussion should be read inconjunction with the Company's financial statements and notes thereto and otherdetailed information appearing elsewhere in this report.  In addition, theresults of operations for the interim periods shown in this report are notnecessarily indicative of results to be expected for the fiscal year.  Theaccompanying consolidated financial statements include all accounts of theCompany and the Bank.  All significant intercompany accounts and transactionshave been eliminated in consolidation.  The accompanying unaudited consolidatedfinancial statements for the three-month period ending March 31, 2011 and 2010and the year ended December 31, 2010 have been prepared in accordance withgenerally accepted accounting principles ("GAAP") for interimfinancial information and with the instructions to Form 10-Q of the Securitiesand Exchange Commission.  Accordingly, they do not include all information andfootnotes required by GAAP for complete financial statements.  However, in theopinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.

**DISTRIBUTION OF ASSETS AND LIABILITIES**

The Company has historically maintained a conservative approach in determiningthe distribution of assets and liabilities.  Loans decreased 7.7% from $567,702at March 31, 2010 to $523,745 at March 31, 2011, and decreased 2.0%, from $534,186at December 31, 2010 to $523,745 at March 31, 2011.  Loans decreased as apercentage of total assets from 61.0% to 55.6% from March 31, 2010 to March 31,2011 and decreased from 58.6% to 55.6% from December 31, 2010 to March 31, 2011. Loan demand in our market area has continued to soften during the period due tothe continuing subdued local real estate market.  Securities and federal fundssold increased as a percentage of total assets from 28.3% at March 31, 2010 to 34.1%at March 31, 2011, and increased from 34.0% of total assets at December 31, 2010to 34.1% at March 31, 2011, a reflection of continued soft loan demand coupledwith higher levels of deposits.  The level of investments and excess FederalReserve deposits provide for a more than adequate supply of liquidity.

Management has sought to build the deposit base with stable, relativelynon-interest-sensitive deposits by offering the small to medium deposit accountholders a wide array of deposit instruments at competitive rates.Non-interest-bearing demand deposits increased as a percentage of total assetsfrom 11.2% at March 31, 2010 to 11.8% at March 31, 2011, and remained flat at11.8% at December 31, 2010 and 11.8% at March 31, 2011.  As more customers,both business and personal, are attracted to interest-bearing deposit accounts,we expect the percentage of non-interest bearing demand deposits to declineover the long-term.  Interest-bearing deposits, as a percent of total assets,remained relatively stable from 66.6% of total assets at March 31, 2010 to 66.5%at March 31, 2011, and decreased slightly from 66.9% at December 31, 2010 to 66.5%at March 31, 2011.  Securities sold under agreement to repurchase increasedfrom 11.1% of total assets at March 31, 2010 to 11.8% at March 31, 2011, and increasedfrom 10.9% of total assets at December 31, 2010 to 11.8% at March 31, 2011.  Managementanticipates that securities sold under agreement to repurchase will declineover time as a percent of total assets due, in part to new wholesale fundinglimitations scheduled to be implemented by the Company during the secondquarter of 2011.  Other short-term borrowings decreased from .3% of totalassets at December 31, 2010 to .1% at March 31, 2011 and decreased from 1.1% atMarch 31, 2010 to .1% at March 31, 2011.

The following table sets forth the percentage relationship to total assets ofsignificant components of the Company's balance sheets as of March 31, 2011 andMarch 31, 2010 and December 31, 2010:

 

**         March  31,   **

**December 31,**

**Assets:**

**   2011 **

**   2010**

**2010**

   Earning  assets:

** **

** **

** **

   Loans

55.6%

61.0%

58.6%       

   Securities  held to maturity

2.1   

2.4   

2.3          

   Securities  available for sale

28.6   

24.4   

30.2          

   Federal  funds sold and securities purchased under agreement to resell

    3.4   

    1.5   

    1.5          

   Other  earning assets

    4.5   

    5.0   

    1.6          

      Total  earning assets

  94.2   

  94.3   

  94.2          

   Other  assets

    5.8   

    5.7   

    5.8          

      Total  assets

100.0%

100.0%

100.0%       

** **

** **

 

**Liabilities  and stockholder's equity:**

** **

** **

 

  Interest-bearing  liabilities:

** **

** **

 

    Interest-bearing  deposits

66.5%

66.6%

66.9%       

    Federal  funds purchased and securities sold under agreement to repurchase

11.8   

11.1   

10.9          

    Other  short-term borrowings

      .1   

   1.1   

      .3          

        Total  interest-bearing liabilities

  78.4   

 78.8   

  78.1          

    Noninterest-bearing  deposits

11.8   

11.2   

 11.8          

    Other  liabilities

.5   

.6   

.6          

    Stockholders'  equity

    9.3   

    9.4   

    9.5          

        Total  liabilities and stockholders' equity

100.0%

100.0%

100.0%       

-27-

**RESULTSOF OPERATIONS**

Earnings/(losses) for the three-month periods ended March 31, 2011 and 2010were $382 and $(43) respectively, resulting in a return on average assets of .16%and (.02)% and a return on average stockholders' equity of 1.75% and (.20)%,respectively. 

The increase in earnings for the three-month period ended March 31, 2011 isprimarily attributable to a decrease in provision for loan losses, partiallyoffset by small declines in net interest income and noninterest income,increased noninterest expenses, and increased income taxes. (See Net Income -Net Interest Income, Net Income - Provision for Loan Losses,  Net Income -Noninterest Expenses, and Net Income-Income Taxes).  The losses for the three-monthperiod ended March 31, 2010 were primarily attributable to a decline in netinterest income and increased provision for loan losses. (See Net Income-NetInterest Income and Net Income - Provision for Loan Losses).  Managementanticipates, but cannot assure, that earnings will remain well below historicallevels through 2011, but above the level of income experienced for 2010.  Totalassets increased $10,400 or 1.1% to $941,532 at March 31, 2011 from $931,132 atMarch 31, 2010. The following table sets forth the financial highlights for thethree month periods ended at March 31, 2011 and March 31, 2010:

**CNB Corporation and Subsidiary**

**FINANCIAL HIGHLIGHTS**

** **

 
**       Three-Month  Period              Ended  March 31,**

 
 
** **

**  2011     **

**  2010      **

**Percent     Increase  (Decrease)**

 
**Net  interest income**

$ 7,475    

$  7,667    

     (2.5)% 

 
**Provision  for loan losses**

2,112    

3,763    

(43.9)    

 
**Net  interest income after provision for loan losses**

5,363    

3,904    

37.4     

 
**Income/(loss)  before income taxes**

486    

     (270)   

276.3     

 
**Net  income/(loss)**

382    

       (43)   

988.4     

 
**     Per  share**

  .23    

      (.03)   

   866.7     

 
**Cash  dividends declared**

 -    

          -    

   -     

 
**     Per  share**

-    

          -    

   -     

 
**Total  assets**

941,532     

931,132    

1.1     

 
**Total  deposits**

736,947     

724,268    

1.8     

 
**Loans**

523,745    

567,702    

 (7.7)    

 
**Investment securities and  securities available  for sale**

288,624    

249,885    

 15.5     

 
**Stockholders' equity**

87,103    

87,373    

(.3)    

 
**    Book value per share**

52.33    

52.12    

.4     

 
**Ratios:**

 

 

 

 
**Annualized return on average total assets(1)**

.16% 

(.02)%

900.0 %

 
**Annualized return on average stockholders' equity(1)**

1.75% 

(.20)%

975.0 %

 
 

 

 

(1)       For the three-month period ended March31, 2011, average total assets amounted to $928,437 with average stockholders'equity            totaling $87,202for the same period.

-28-

**NET INCOME/(LOSS)**

Net Interest Income - Earnings are dependent to a large degree on netinterest income, defined as the difference between gross interest and feesearned on earning assets, primarily loans and securities, and interest paid ondeposits and borrowed funds.  Net interest income is affected by the interestrates earned or paid and by volume changes in accruing loans, securities,deposits, and borrowed funds.

Interestrates paid on deposits and borrowed funds and earned on loans and investmentshave generally followed the fluctuations in market interest rates.  However,fluctuations in market interest rates do not necessarily have a significantimpact on net interest income, depending on the bank's interest ratesensitivity position.  A rate sensitive asset (RSA) is any loan or investmenton which the interest rate can be repriced either up or down within a certaintime interval. A rate sensitive liability (RSL) is an interest paying depositor other liability on which the interest rate can be repriced either up or downwithin a certain time interval.  When a proper balance between RSA and RSLexists, market interest rate fluctuations should not have a significant impacton earnings. The larger the imbalance, the greater the interest rate risk assumedby the Bank and the greater the positive or negative impact of interest ratefluctuations on earnings.  The Bank seeks to manage its assets and liabilitiesin a manner that will limit interest rate risk and thus stabilize long-termearning power. Management believes that a 200 basis point rise or fall ininterest rates will have less than a 10 percent effect on before-tax netinterest income over a one-year period, which is within Bank guidelines.

TheBank maintained net interest margins for the three-month periods ended March 31,2011 and 2010, of 3.50% and 3.57%, respectively, as compared to management'slong-term target of 4.20%.  Net interest margins have been compressed for theBank and industry-wide for several years for a variety of reasons.  Dramaticdecreases in market interest rates by the Federal Reserve during the firstquarter of 2008 and additional decreases in market rates during the remainderof 2008 placed further significant pressure on net interest margins for theindustry as a whole.  The resulting more historically typical upward-slopingyield curve would generally enhance the Bank's net interest margin.  However,market interest rates have been reduced to historically low levels, which donot enhance net interest margin.  Further, the persistence of an extremely lowinterest rate environment places increasing pressure on net interest margin asmore and more earning assets re-price.  Additionally, competition in the Bank'sspecific market remains significant, as new competitors seek market share andother competitors attempt to reduce their dependence on wholesale funding. These factors tend to compress margins by keeping the cost of deposits high inrelation to established national benchmark rates without increasing yields onloans due to softened loan demand.  Moreover, the Bank is experiencing ahistorically high level of non-performing assets. The loss of interest incomefrom these assets has negatively impacted net interest margin.  The impact ofthese assets on net interest margin should diminish as the level of theseassets declines over time.

Fully-tax-equivalent net interest income for the three-month period ended March31, 2011 was $7,609, a decrease of 2.8% from the $7,828 attained for thethree-month period ended March 31, 2010.  For the same periods, totalfully-tax-equivalent interest income decreased by 12.3% to $9,257 from $10,551and total interest expense decreased by 39.5% to $1,648 from $2,723. Fully-tax-equivalent net interest income as a percentage of average totalearning assets decreased 2.0% to 3.50% for the three-month period ended March31, 2011 from 3.57% for the three-month period ended March 31, 2010.

The tables on the following two pages present an analysis of average balances,yields and rates for the interest sensitive segments of the Company's balancesheets for the three-month periods ended March 31, 2011 and 2010, and a summaryof changes in net interest income resulting from changes in volume and changesin rate between the three-month periods ended March 31, 2011 and 2010.

-29-

 
**CNB Corporation and    Subsidiary    Average Balances, Yields, and Rates** 

 
**Three Months Ended 3/31/11**

**Three Months Ended 3/31/10** 

** **

**Interest**

**Avg. Annual**

** **

**Interest**

**Avg. Annual** 

**Avg.**

**Income/**

**Yield or**

**Avg.**

**Income/**

**Yield or** 

**Balance**

**Expense**

**Rate**

**Balance**

**Expense**

**Rate** 

**Assets:**

** **

** **

** **

** **

** **

** **

   Earning    assets:

** **

** **

** **

** **

** **

** **

      Loans,    net of unearned income (1)

$530,042

$ 7,991

6.03%

$575,028

$  8,935

6.22%

      Securities:

** **

** **

** **

** **

** **

** **

        Taxable

249,655

845

1.35   

200,488

1,107

2.21   

        Tax-exempt

30,048

395

(2)       5.26   

33,558

473

(2)   5.64   

      Federal    funds sold

12,733

7

.22   

    14,000

       8

.23   

      Other    earning assets

    47,309

         19

.16   

    53,509

         28

.21   

          Total    earning assets

  869,787

    9,257

4.26   

  876,583

  10,551

4.81   

    Other    assets

    58,650

** **

** **

    56,171

** **

** **

          Total    assets

$928,437

** **

** **

$932,754

** **

** **

** **

** **

** **

** **

** **

** **

**Liabilities    and stockholders' equity**

** **

** **

** **

** **

** **

** **

    Interest-bearing    liabilities:

** **

** **

** **

** **

** **

** **

      Interest-bearing    deposits

$618,135

1,552

1.00   

$612,900

2,417

1.58   

      Fed    funds purchased and securities sold             under agreement to    repurchase

****105,909

    96

****.36   

****110,216

    249

    .90   

      Other    short-term borrowings

         968

             -

-   

     14,387

          57

1.58   

          Total    interest-bearing liabilities

$725,012

$   1,648

.91   

$737,503

$   2,723

1.48   

    Noninterest-bearing    deposits

110,836

** **

** **

101,218

** **

** **

    Other    liabilities

5,387

** **

** **

5,926

** **

** **

    Stockholders'    equity

    87,202

** **

** **

    88,107

** **

** **

          Total    liabilities and stockholders' equity

$928,437

** **

** **

$932,754

** **

** **

    Net    interest income as a percent of total

** **

** **

** **

** **

** **

** **

       earning    assets

$869,787

$   7,609

3.50   

$876,583

$   7,828

3.57   

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Ratios:**

** **

** **

** **

** **

** **

** **

Annualized    return on average total assets

** **

** **

.16   

** **

** **

(.02) 

Annualized    return on average stockholders' equity

** **

** **

1.75   

** **

** **

(.20) 

Cash    dividends declared as a percent of net income

** **

** **

-   

** **

** **

-   

Average    stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

  Average    total assets

** **

** **

9.39   

** **

** **

9.45   

  Average    total deposits

** **

** **

11.96   

** **

** **

12.34   

  Average    loans

** **

** **

16.45   

** **

** **

15.32   

Average    earning assets as a percent of

** **

** **

** **

** **

** **

** **

   average    total assets

** **

** **

93.68  

** **

** **

93.98   

** **

** **

 

** **

** **

 

(1)  The Company had no out-of-period    adjustments or foreign activities.  Loan fees of $126 and $156 are included    in the above interest income for March 31, 2011 and 2010, respectively.     Loans on a non-accrual basis for the recognition of interest income    totaling $26,393 and $13,539 for March 31, 2011 and 2010, respectively, are    included in loans for the purpose of this analysis. 

** **

** **

 

** **

** **

 

(2)  Tax-exempt income is presented on    a tax-equivalent basis using a 34% tax rate.  The amounts shown include tax-equivalent    adjustments of $134 and $161 for March 31, 2011 and 2010, respectively. 

** **

** **

 

** **

** **

 

-30-

 

The   tables "Rate/Volume Variance Analysis" provide a summary of changes in net   interest income resulting from changes in rate and changes in volume.  The   changes due to rate are calculated as the difference between the current and   prior year's rates multiplied by the prior year's volume.  The changes due   to volume are calculated as the difference between the current and prior   year's volume multiplied by the current rates earned or paid (this   calculation effectively allocates all rate/volume variances to volume   variances).

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Three Months Ended March 31, 2011 and 2010**

 

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 

**Volume**

**Volume**

**Yield/Rate**

** Yield/Rate**

** Earned/Paid**

** Earned/Paid**

** **

**Due to**

**Due to**

** **

 

**2011**

**2010**

**2011(3)**

**2010(3)**

**2011**

**2010**

**Variance**

**Rate**

**Volume**

** **

**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

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

$530,042

$575,028

6.03%

6.22%

$  7,991

$8,935

$    (944)

$   (266)   

$   (678)  

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

249,655

200,488

1.35%

2.21%

845

1,107

(262)

(428)   

166   

 

**    Tax-exempt   (2)**

30,048

33,558

5.26%

5.64%

395

473

(78)

(32)   

(46)  

 

**  Federal   funds sold**

12,733

14,000

.22%

.23%

7

8

(1)

-    

(1)  

 

** Other   Earning Assets**

    47,309

    53,509

.16%

.21%

         19

         28

           (9)

          (7)   

         (2)  

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$869,787

$876,583

4.26%

4.81%

$  9,257

$10,551

$  (1,294)

$   (733)   

$   (561)  

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$618,135

$612,900

1.00%

1.58%

$  1,552

$  2,417

$    (865)

$   (878)   

$      13   

 

**  Fed   funds purchased and securities**

 

 

 

 

 

 

 

 

 

 

**    sold   under agreement to repurchase**

105,909

110,216

.36%

.90%

96

249

 (153)

(149)   

(4)  

 

**  Other   short-term borrowings**

         968

    14,387

-%

1.58%

            -

         57

        (57)

       (57)   

          -   

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  725,012

  737,503

.91%

1.48%

    1,648

    2,723

      (1,075)

  (1,084)   

         9   

 

**Interest-free    Funds Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

  144,775

  139,080

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Funds Supporting Earning Assets**

$869,787

$876,583

.76%

1.24%

$  1,648

$  2,723

$    (1,075)

$ (1,084)   

$        9   

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest   Rate Spread**

 

 

3.35%

3.33%

 

 

 

 

 

 

**Impact   of Non-interest-bearing Funds**

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

  .15%

  .36%

             

             

 

 

 

 

**Net   Yield on Earning Assets**

 

 

3.50%

3.57%

$  7,609

$  7,828

 

 

 

 

(1)  Includes non-accruing loans which does not have a materialeffect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate.(3)  Annualized

 

-31**-**

**NET INCOME/(LOSS) (continued)**

Provision for Loan Losses - The allowance for loan losses is maintained atan amount based on considerations of classified and internally-identifiedproblem loans, the current trend in delinquencies, the volume of past-due loans,historical loss experience, current economic conditions, the levels ofhigher-risk loans, declines in collateral value, the effects of changes in riskselection or underwriting practices, the experience, ability and depth oflending management and staff, industry conditions, the effect of changes inconcentrations of credit, loan administration risks, and levels of policy,collateral, and documentation exceptions.

The level of the allowance for loan losses is determined through theutilization of both quantitative and qualitative measures.  Loans areidentified as impaired as a result of management's determination of aninability on the part of the borrower to make full and timely payment ofprincipal and interest, a decline in project performance, loan structuring issueswhich evolve in the course of deterioration, and past due status.  Quantifiedlosses associated with such loans are segregated as a component in thedetermination of the allowance for loan losses.

The Company employs migration analysis to determine the levels of risks andassociated losses with homogenous pools of loans.  This analysis determineslevels of loss associated with pools of loans based on risk grade andhistorical loss factors by risk grades.  Risk grading procedures incorporate areview of various loan attributes, the deterioration of which would result in aloan being downgraded to a higher risk pool.  These loan attributes are:demonstrated financial capacity and position, the borrower's demonstratedwillingness to pay, loan structure, lien perfection on collateral,documentation, conformance to loan agreement covenants, and adherence to loanpolicy, among others.  Quantified losses associated with pools of loans frommigration analysis are segregated as a component in the determination of theallowance for loan losses.

The Company utilizes various qualitative factors to quantify additional risksand potential inherent losses existing in the Company's loan portfolios.  Theseinclude the consideration of levels and trends in delinquencies, changes in theloan grading mix, trends in the volume and terms of loans, over-margined realestate loans, national and local economic trends and conditions, changes inrisk selection and underwriting practices, the experience, ability and depth oflending management and staff, industry conditions, loan concentrations,geographic concentrations, regulatory considerations, various loanadministration risks, and levels of policy, collateral and documentationexceptions.  Quantified losses associated with these qualitative factors aresegregated as a component in the determination of the allowance for loanlosses.

When the amount necessary to maintain the allowance for loan losses at anadequate level has been determined and that amount is greater than the existingallowance for loan losses after accounting for loan charge-offs and recoveriesduring the period, the allowance is increased to the amount determined to benecessary by a provision for loan losses which is charged to operating income.  Theprovision for loan losses was $2,112 for the three-month period ended March 31,2011 and $3,763 for the three-month period ended March 31, 2010.  This declinein the provision for loan losses is due to declining total classified assetsand lower net loan charge-offs for the first quarter of 2011 as compared to thefirst quarter of 2010.  Net loan charge-offs totaled $1,936 for the three-monthperiod ended March 31, 2011 and $2,595 for the same period in 2010.  Althoughthe provision for loan losses and net loan charge-offs decreased for thethree-month period ended March 31, 2011 as compared to the same period in 2010,both the provision for loan losses and net loan charge-offs remain historicallyhigh and reflect continued difficulties in local real estate markets.  TheMyrtle Beach-Conway-North Myrtle Beach South Carolina Metropolitan StatisticalArea, wherein the majority of the Company's operations are situated, hasexperienced significant declines in various sectors of its economy, primarilyin the real estate sectors.  The allowance for loan losses as a percentage ofnet loans was 2.31% at March 31, 2011 and was 1.85% at March 31, 2010.

The levels of loans on which no interest was being accrued, impaired loans,foreclosed real estate, and classified assets at March 31, 2011 and 2010 areoutlined in the notes to the consolidated unaudited financial statements (SeeNOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES).  All of these measurementsincreased during 2010, some markedly. During the fourth quarter of 2010 theincreasing trend in impaired loans leveled while classified assets, as apercent of capital, declined, and foreclosed real estate increased.  Thesetrends continued during the three-month period ended March 31, 2011.  Althoughincreased, management considers all such levels manageable and the currenttrends positive.  One factor which contributes, in part, to higher levels ofclassified assets is the local market's high number of foreclosure actions inprocess, which has placed a substantial burden on the judiciary and courts andconsequently significantly lengthened the time necessary to accomplish aforeclosure action.  Additionally, the judiciary imposes sanctions andadditional procedural requirements related to foreclosure proceedings from timeto time.  Management recognizes the potential for continued difficult economicconditions in the Company's market areas in the short-term, especially withrespect to real estate related activities and real property values.  However,management believes, but cannot assure, that substantially all of the Company'scredit risks associated with the current real estate market decline have beenidentified.  Nonetheless, management anticipates the Company will continue toneed to make above average provisions through 2011.

-32-

**NET INCOME/(LOSS) (continued)**

Securities Transactions - At March 31, 2011, December 31, 2010, and March 31,2010 total market value appreciation in the investment portfolio totaled $651,$(119), and $2,106, respectively.  As indicated, the market values of theCompany's investment portfolio decreased from March 31, 2010 to December 31, 2010,and increased from December 31, 2010 to March 31, 2011.  The yield curve has generallynormalized during the period commencing with the first reduction in interestrates in October 2007 through March 31, 2011, although the current yield curvein total and particularly short-term interest rates remain at historically lowlevels.

The Company had no sales of investment securities during the three-month periodsending March 31, 2011 or 2010.  In 2010, the Company sold securities primarilyto restructure its investment in longer-term municipal securities in order toremove from the portfolio municipal securities which had lost their rating, andto reduce the level of exposure to individual municipal securities issuers inresponse to increased regulatory scrutiny related to capital and its components(See Note 3 to the financial statements - Investment Securities).  The increasein the total market value of the investment portfolio during the three-month periodended March 31, 2011 is attributable to general fluctuations in bond prices. The changes in market value appreciation/(depreciation) in the investmentportfolio do not generally directly affect operating results since the Companydoes not acquire investment securities for trading.  However, the changes inthe market value appreciation in the investment portfolio for the three-monthperiods ended March 31, 2011 and 2010 are a component of Comprehensive Incomeand are set forth in the Condensed Consolidated Statements of ComprehensiveIncome contained herein.

Noninterest Income - Noninterest income decreased by 2.8% to $1,391 for thethree-month period ended March 31, 2011 from $1,431 for the three-month periodended March 31, 2010.  This decline was primarily attributable to a decline of servicecharges on deposit accounts.

Noninterest Expenses - Noninterest expenses increased by 11.8% to $6,268 forthe three-month period ended March 31, 2011 from $5,605 for the three-monthperiod ended March 31, 2010.  The major components of noninterest expenses aresalaries and employee benefits, which increased .4% to $3,423 from $3,411;occupancy expense which increased 3.5% to $830 from $802; examination and professionalfees which increased 58.0% to $256 from $162; FDIC deposit insuranceassessments which increased 24.0% to $356 from $287; net cost of operation ofother real estate owned which increased 429.6% to $286 from $54; and otheroperating expenses which increased by 25.6% to $1,117 from $889.  Otheroperating expenses increased due to expenses associated with non-performingloans.  

Income Taxes -Provisions for income taxes increased 145.8% to $104 for the three-month periodended March 31, 2011 from a benefit of $(227) for the three-month period ended March31, 2010.  Income before income taxes less interest on tax-exempt investmentsecurities increased 138.7% to $225 for the three-month period ended March 31,2011 from $(582) for the same period in 2010. 

**LIQUIDITY**

The Bank's liquidity position is primarily dependent on short-term demands forfunds caused by customer credit needs and deposit withdrawals and upon theliquidation of bank assets to meet these needs.  The Bank's liquidity sourcesinclude cash and due from banks, federal funds sold, and short-terminvestments. In addition, the Bank has established federal funds lines ofcredit from correspondent banks and has the ability to borrow funds from theFederal Home Loan Bank of Atlanta. Management believes that short-term andlong-term liquidity sources are adequate to meet funding needs, including thefunding of off-balance sheet loan commitments and standby letters of credit, ifthe need arises.  Although the Bank has not experienced liquidity pressures,there can be no assurance that such pressures will not be felt in the future. Neither the Company nor the Bank is involved in other off-balance sheetcontractual relationships or other commitments that could result in liquidityneeds or significantly impact earnings.

-33-

**LIQUIDITY (continued)**The table below summarizes future contractual obligations as of March 31, 2011(in thousands).

**At March 31, 2011**

**Payments Due by Period**

**Within One   Year  **

**Over One to Two Years**

**Over Two to Three Years**

**Over Three to Five  Years**

**Over Five Years**

**Total**

**Certificates of Deposit**

$328,940     

$30,728      

$8,071      

$12,727      

$     -        

$ 380,466     

**Borrowings**

  112,610     

            -      

         -      

            -      

       -        

  112,610    

 

 

 

 

 

 

**     Total**

$441,550     

$30,728      

$8,071      

$12,727      

$     -        

$493,076     

**CAPITAL RESOURCES**

Total stockholders' equity was $87,103 and $86,333 at March 31, 2011 andDecember 31, 2010, representing 9.25% and 9.47% of total assets, respectively. At March 31, 2011, the Company and the Bank exceeded quantitative measuresestablished by regulation to ensure capital adequacy (see NOTE 12 to theconsolidated unaudited financial statements - REGULATORY MATTERS).  Capital isconsidered sufficient by management to meet current and prospective capitalrequirements.

**CRITICAL ACCOUNTING POLICIES**

We have adopted various accounting policies which govern the application ofaccounting principles generally accepted in the United States of America in thepreparation of our financial statements.  Our significant accounting policiesare described in the notes to the consolidated financial statements at December31, 2010 as filed in our Annual Report on Form 10-K.  Certain accountingpolicies involve significant judgments and assumptions by us which have amaterial impact on the carrying value of certain assets and liabilities.  Weconsider these accounting policies to be critical accounting policies.  The judgmentsand assumptions we use are based on historical experience and other factors,which we believe to be reasonable under the circumstances.  Because of thenature of the judgments and assumptions we make, actual results could differfrom these judgments and estimates that could have a major impact on ourcarrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy thatrequires the most significant judgments and estimates used in preparation ofour consolidated financial statements.  Refer to the portions of our 2010Annual Report on Form 10-K and this Form 10-Q that address our allowance forloan losses for description of our processes and methodology for determiningour allowance for loan losses. 

**RISKS AND UNCERTAINTIES**

In the normal course of its business, the Company encounters two significanttypes of risks: economic and regulatory.  There are three main components ofeconomic risk: interest rate risk, credit risk, and market risk.  The Companyis subject to interest rate risk to the degree that its interest-bearingliabilities mature or re-price at different speeds, or on a different basis,than its interest-earning assets.  Credit risk is the risk of default on theCompany's loan portfolio that results from borrowers' inability orunwillingness to make contractually required payments. Market risk, as itrelates to lending and real estate held for operating locations, results frompotential changes in the value of collateral underlying loans receivable andthe market value 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 capital, and operating restrictions from theregulators' judgments based on information available to them at the time oftheir examination.

-34-

**Item3.  QUANTITATIVE 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 its interestrate risk exposure.  In addition to other risks which the Company manages inthe normal course of business, such as credit quality and liquidity risk,management considers interest rate risk to be a significant market risk thatcould potentially have a material effect on the Company's financial conditionand results of operations (See MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS - Net Income - Net InterestIncome).  Other types of market risks, such as foreign currency risk andcommodity price risk, do not arise in the normal course of the Company'sbusiness activities.

**Item 4.  CONTROLS AND PROCEDURES**

Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or240.15d-15(b) of the Company's disclosure controls and procedures (as definedin 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e), the Company's chiefexecutive officer and chief financial officer concluded that such controls andprocedures, as of the end of the period covered by this quarterly report, wereeffective.

There has been no change in the Company's internal control over financialreporting during the most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlover financial reporting.

****-35-
 
**PART II**

**Item2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

**ISSUER  PURCHASES OF EQUITY SECURITIES**

**Period**

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

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

**(c) Total Number  of Shares   Purchased as  Part of Publicly  Announced  Program**

**(d) Maximum  Number of  Shares that May  Yet Be Purchased  Under the  Program**

January 1 - January 31, 2011

-           

$       - 

-

-

February 1 - February 28, 2011

1           

 61.00

-

-

March 1 - March 31, 2011

        7           

 61.00

-

-

Total

8           

$61.00

-

-

(1) During the period covered by this report, the Company purchased 8 shares ofstock from shareholders, at the request of the shareholders, which are held bythe Company as authorized and unissued shares.  These shares were purchased ona case-by-case basis and not pursuant to any formal program.

 

**Item 6.  EXHIBITS**

 

All  exhibits, the filing of which are required with this Form, are listed below

 

31.1

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

** **

** **

31.2

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

** **

** **

32.1

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

 

 

32.2

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

**SIGNATURE**Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

**CNB Corporation**

 

(Registrant)

 

 

 

/s/L. Ford Sanders, II                            

 

L. Ford Sanders, II

 

Executive Vice President, 

 

Treasurer, and Chief Financial  Officer

Date:  May10, 2011

 

-36-

**EXHIBIT INDEX**

 

31.1

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

** **

** **

31.2

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

** **

** **

32.1

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

 

 

32.2

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

  |