| **UNITED STATES**
**SECURITIES  AND EXCHANGE COMMISSION**

**Washington,  D.C.  20549**

**FORM  10-Q**

(Mark One)

 

[**X**]

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

 

                   For  the quarterly period ended**                             June  30, 2010                                             **

 

OR

[  ]

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

 

                   For  the transition period from                                                    to                                                       

 

 

                                                                 

 

Commission file number:   000-24523 

***                              CNB  Corporation                            ***

(Exact name of registrant as specified in its charter)

 

**                                South Carolina                                **

**                       57-0792402                  **

(State or  other jurisdiction of incorporation or organization)

(I.R.S.  Employer Identification No.)

 

 

**                 1400 Third Avenue, 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:  1,667,906 shares of common stock, par value $5 per share, August  2, 2010. 

**CNB  Corporation**

** **

**Page  **

** **

 

**Forward-Looking  Statements**

1  

** **

**PART  I.    FINANCIAL INFORMATION **

** **

**Item  1.       Financial Statements:**

** **

** **

** **

**Condensed  Consolidated Balance Sheets as of  June 30, 2010,  December 31, 2009, and June 30, 2009**

2  

** **

 

**Condensed  Consolidated Statements of Income/(Loss) for the Three and  Six Months Ended June 30, 2010 and 2009**

3  

** **

 

**Condensed  Consolidated Statements of Comprehensive Income/(Loss)  for the Three and Six Months Ended June 30, 2010 and 2009**

4  

** **

 

**Condensed  Consolidated Statements of Changes in Stockholders' Equity  for the Six Months Ended June 30,  2010 and 2009**

5  

** **

 

**Condensed  Consolidated Statements of Cash Flows for the Six Months  Ended June 30, 2010 and 2009**

6  

** **

 

**Notes  to Consolidated Financial Statements**

7-19  

** **

 

**Item  2.     Management's Discussion and Analysis of  Financial                   Condition  and Results of Operations**

20-29  

** **

 

**Item  3.     Quantitative and Qualitative Disclosures  About Market Risk**

30  

** **

 

**Item  4.     Controls and Procedures**

30  

** **

 

**PART  II.   OTHER INFORMATION**

 

** **

 

**Item  2.     Unregistered Sales of Equity Securities and  Use of Proceeds**

31  

** **

 

**Item  6.    Exhibits**

31  

**SIGNATURE**

  31  

 
 
**CAUTIONARYNOTICE WITH RESPECT TOFORWARD LOOKING STATEMENTS**

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

             Allstatements that are not historical facts are statements that could be"forward-looking statements." You can identify these forward-lookingstatements through the use of words such as "may," "will,""should," "could," "would," "expect,""anticipate," "assume," "indicate,""contemplate," "seek," "plan,""predict," "target," "potential,""believe," "intend," "estimate,""project," "continue," or other 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.

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

●

future  economic and business conditions;

●

lack  of sustained growth and disruptions 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 the requirements of regulatory agencies;

●

changes  in accounting policies, rules and practices;

●

changes  in technology or products may be more difficult or costly, or less effective,  than anticipated;

●

the  effects of war or other conflicts, acts of terrorism or  other  catastrophic events that may affect general economic  conditions and  economic confidence; and

●

other  factors and information described in this report and in any of the other  reports that we file with the Securities and Exchange Commission under the  Securities Exchange Act of 1934.

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

****-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:**

**June 30,**

**December 31,**

**    June 30,**

** **

**2010**

**2009**

**2009**

** **

(Unaudited)

                         

(Unaudited)

** **

 

 

 

**    Cash  and due from banks**

$  24,973 

$   25,879 

$  15,380     

**    Due  from Federal Reserve Bank,**

 

 

 

**      balance  in excess of requirement**

37,646 

36,765 

41,493     

**    Investment  securities held to maturity**

33,831 

14,949 

  9,214     

      (Fair  values of  $34,227 at June 30, 2010,        $15,165 at December 31, 2009, and  $9,162  at         June 30, 2009)

 

 

 

**    Investment  securities available for sale**

226,046 

214,615  

200,834     

      (Amortized  cost of  $223,588 at June 30,         2010, $212,940 at December 31, 2009,  and 

 

 

 

       $200,527  at June 30, 2009)

 

 

 

**    Federal  funds sold**

14,000 

14,000  

-     

**    Other  investments**

3,041 

3,041  

3,041     

**    Loans:**

 

 

 

**       Total  loans**

564,004 

579,796  

596,426     

**       Less  allowance for possible loan losses**

  (11,506)

    (9,142) 

     (8,400)    

**         Net  loans**

552,498 

570,654  

588,026     

**    Bank  premises and equipment**

22,775 

23,251  

23,678     

**    Other  assets**

    19,308 

    17,487  

    13,881     

**Total  assets**

$934,118 

$920,641  

$895,547     

** **

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY:**

 

 

 

** **

 

 

 

**    Deposits:**

 

 

 

**       Non-interest  bearing**

$111,760 

$  96,834  

$106,799      

**       Interest-bearing**

   619,059 

   608,436  

  572,819      

**          Total  deposits**

   730,819 

   705,270  

  679,618      

**    Securities sold under**

 

 

 

**          agreement  to repurchase**

100,112 

104,654  

100,945      

**    United  States Treasury demand notes**

498 

650  

1,588      

**    Federal  Home Loan Bank advances**

10,000 

15,000  

20,000      

**    Other  liabilities**

      5,242 

      7,638  

      6,485      

** Total  liabilities**

  846,671 

  833,212  

  808,636      

** **

 

 

 

**   Stockholders'  equity:**

 

 

 

      **Common  stock**, par value $5 per share in 2010 and at           December 31, 2009, and  $10 per share at June 30,           2009; authorized  3,000,000 shares in 2010 and at           December 31, 2009, and  1,500,000 shares at June 30,           2009; issued 1,674,870  at June 30, 2010, 1,677,233 at           December 31, 2009,  and 841,654 at June 30, 2009.

8,374 

8,386  

8,417       

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

51,240 

51,418  

51,881      

**      Retained  earnings**

26,358 

26,620  

26,429      

**      Accumulated  other comprehensive income**

      1,475 

      1,005  

         184      

**   Total  stockholders' equity**

    87,447 

    87,429  

    86,911      

**Total  liabilities and stockholders' equity**

$934,118 

$920,641  

$893,547      

*** ***

***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**

**  Six Months Ended**

 
** **

**  June 30,**

**     June 30,**

 
**Interest  Income:**

**      2010   **

**  2009**

**   2010**

**        2009     **

  Interest and fees on  loans

$    8,621  

$    9,411  

$    17,556  

$    18,789       

  Interest on  investment securities:

 

 

 

 

    Taxable  investment securities

1,144  

1,441  

2,251  

3,010       

    Tax-exempt  investment securities

301  

296  

613  

581       

  Interest on federal  funds sold

          9  

          4  

        17  

        20       

  Other interest income

          40  

          11  

           68  

           17       

**      Total  interest income**

    10,115 

    11,163 

     20,505 

    22,417       

** **

** **

** **

** **

**Interest  Expense:**

** **

** **

** **

** **

  Interest on deposits

2,264  

2,673  

4,681  

5,663       

  Interest on  securities

 

 

 

 

     sold  under agreement to repurchase

221  

302  

470  

590       

  Interest on other  short-term borrowings

          47  

          78  

         104  

         186       

**      Total  interest expense**

     2,532  

     3,053  

      5,255  

      6,439       

 

 

 

**  Net  interest income**

    7,583  

    8,110  

    15,250  

    15,978       

**  Provision  for loan losses**

     3,806  

     3,095  

      7,569  

      4,326       

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

     3,777  

     5,015  

      7,681  

    11,652       

** **

** **

** **

** **

**  Noninterest  income:**

** **

** **

** **

** **

    Service  charges on deposit accounts

928  

881  

1,806  

1,700       

    Gains on  sale of securities

156  

875  

156  

1,352       

    Other  operating income

        738  

        728  

      1,272  

      1,324       

**        Total  noninterest income**

     1,822  

     2,484  

      3,234  

      4,376       

** **

** **

** **

** **

** **

**  Noninterest  expenses:**

** **

** **

** **

** **

    Salaries  and employee benefits

3,347  

3,525  

6,758  

7,093       

    Occupancy  expense

814  

812  

1,616  

1,602       

    Other  operating expenses

     1,828  

     1,996  

      3,201  

      3,309       

**        Total  noninterest expenses**

     5,989  

     6,333  

    11,575  

    12,004       

 

 

 

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

    (390) 

    1,166  

     (660) 

     4,024       

**    Income  tax provision/(benefit)**

       (170) 

        325  

       (397) 

      1,245       

**  Net  income/(loss)**

$     (220) 

$      841  

$     (263) 

$    2,779       

** **

** **

** **

** **

** **

**Per  Share Data***

** **

** **

** **

** **

** **

** **

** **

** **

** **

**   Net  income/(loss) per weighted average shares outstanding**

$       (.13) 

$        .50 

$       (.16)  

$       1.67       

** **

 

 

 

 

**   Cash  dividend paid per share**

$              -  

$            - 

$             -  

$             -       

** **

 

 

 

 

**   Book  value per actual number of shares outstanding**

$     52.21 

$     51.63

$     52.21  

$     51.63       

** **

 

 

 

 

**   Weighted  average number of shares outstanding**

1,675,492 

1,673,194

1,676,187  

1,665,784       

** **

 

 

 

 

**   Actual  number of shares outstanding**

1,674,870 

1,683,308

1,674,870  

1,683,308       

        ***Adjusted for the effect of  a two-for-one stock split during 2009.**

 
***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 EndedJune 30,**

**Six Months EndedJune 30,**

 

** **

** **

** **

 
 

**    2010    **

**   2009      **

**    2010 **

**   2009      **

**Net  income/(loss)**

$     (220) 

$     841    

$  (263)

$    2,779   

** **

 

 

 

 

**Other  comprehensive income/(loss), net of tax**

 

 

 

** **

 

 

 

 

    Unrealized  gains/(losses) on securities:

 

 

 

 

 

 

 

 

    Unrealized  holding gains/(losses) during period, net

525   

(251)    

569 

(449)  

** **

 

 

 

 

**    **Reclassification adjustment for  gains included in net        income, net

(99)  

(556)    

(99)

(865)  

**               **

**                  **

**             **

**                **

**Net  comprehensive income**

**$    206   **

**$      34      **

**$    207 **

**$  1,465   **

 

***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)**

 

**Six  Months Ended  June 30,**

 

**2010**

**2009**

**Common  Stock:**

 

 

($5  par value, 3,000,000 shares authorized*)

 

 

Balance,  January 1

$   8,386 

$  8,295 

Issuance  of Common Stock   

-  

188 

Repurchase  of Common Stock

         (12)

       (67)

Balance  at end of period

      8,374 

    8,417 

 

 

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

 

 

Balance,  January 1

51,418  

50,085  

Issuance  of Common Stock

-  

2,786  

Repurchase  of Common Stock

       (178)

      (990) 

Balance  at end of period

   51,240 

   51,881  

 

 

**Retained  earnings:**

 

 

Balance,  January 1

26,620 

23,648  

Net  Income/(loss)

       (263)

     2,779  

Balance  at end of period

    26,358 

   26,429  

 

 

**Net  unrealized holding gains/(losses) on securities:**

 

 

Balance,  January 1

1,005 

1,498  

Change  in net unrealized gains/(losses), net

        471 

    (1,314) 

Balance  at end of period

     1,475 

        184  

 

 

**              **

**               **

**Total  stockholders' equity**

**$87,447 **

**$86,911  **

** **

** **

** **

Note:  Columns  may not add due to rounding.

** **

** **

** **

** **

** **

*Adjusted  for the effect of a two-for-one stock split during 2009.

** **

** **

** **

** **

** **

** **

** **

** **

***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 Six months ended       June 30,**

** **

**2010     **

**2009      **

**OPERATING  ACTIVITIES**

** **

** **

  Net  Income/(Loss)

$       (263) 

$    2,779  

  Adjustments  to reconcile net income to net cash provided by operating activities

** **

** **

    Depreciation  and amortization

746  

750  

    Provision  for loan losses

7,569  

4,326  

    Provision  for deferred income taxes

(1,260) 

(339) 

    Net  discount accretion and premium amortization on investment securities

   736  

359  

    Gain  on sale of investment securities

(156) 

(1,352) 

    (Gain)/loss  on sale of foreclosed assets

(35) 

13  

    Write-down  of foreclosed assets

-  

137  

    Decrease  in accrued interest receivable

263  

962  

    (Increase)/decrease   in other assets

 466  

 (44) 

    Increase/(decrease)  in other liabilities

      (299) 

         171  

** **

** **

** **

        Net  cash provided by operating activities

     7,767  

      7,762  

 

 

 

**INVESTING  ACTIVITIES**

 

 

  Proceeds  from sale of investment securities available for sale

167  

46,951  

  Proceeds  from maturities/calls of investment securities held to maturity

2,645  

535  

  Proceeds  from maturities/calls of investment securities available for sale

80,338  

81,495  

  Purchase  of investment securities available for sale

(91,721)

(136,290) 

  Purchase  of investment securities held to maturity

           (21,538)

-   

  Proceeds  from sale of foreclosed assets

1,072  

675  

  Net  decrease in federal funds sold

-   

21,000  

  Net  (increase)/decrease in loans

7,946  

(2,758) 

  Net  proceeds from sales and purchases of equity securities

-   

(17) 

  Premises  and equipment expenditures

       (270) 

       (1,025) 

 

 

        Net  cash provided/(used) for investing activities

  (21,361) 

      10,566  

 

 

**FINANCING  ACTIVITIES**

 

 

  Dividends  paid

(2,096) 

(4,356) 

  Net  increase in deposits

25,549  

399  

  Net  increase/(decrease) in securities sold under repurchase agreement

(4,542) 

33,530  

  Net  decrease in United States Treasury demand notes

(152) 

(1,084) 

  Net  decrease in Federal Home Loan Bank advances

(5,000) 

(10,000) 

  Net  decrease in other short-term borrowings

-   

(1,120) 

  Common  shares purchased

(190) 

(1,057) 

  Common  shares sold

            -   

      2,974  

 

 

        Net  cash provided by financing activities

   13,569  

    19,286  

 

 

        Net  increase/(decrease) in cash and due from banks

(25) 

37,614  

 

 

**CASH  AND DUE FROM BANKS, BEGINNING OF YEAR**

   62,644  

  19,259  

 

 

**CASH  AND DUE FROM BANKS,  END OF PERIOD**

$ 62,619  

$56,873  

 

 

**CASH  PAID FOR:**

 

 

  Interest

$   5,632  

$  6,950  

  Income  taxes

$      789  

$  1,692  

***See Notes to Consolidated Financial 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 1,676,187 sharesfor the six-month period ended June 30, 2010 and 1,665,784 shares for the six-monthperiod ended June 30, 2009, adjusted for the effect of a two-for-one stocksplit in 2009.

Fair values of financial instruments

FinancialAccounting 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 using discountedcash flow analyses or underlying collateral values, where applicable.

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

InMarch 2010, guidance related to derivatives and hedging was amended to exemptembedded credit derivative features related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded creditderivative features are not exempt from potential bifurcation and separateaccounting.  The amendments were effective for the Company on July 1, 2010. These amendments will have no impact on the financial statements.

Income Tax guidance was amended in April 2010 to reflect an SEC StaffAnnouncement after the President signed the Health Care and EducationReconciliation Act of 2010 on March 30, 2010, which amended the PatientProtection and Affordable Care Act signed on March 23, 2010.  According to theannouncement, although the bills were signed on separate dates, regulatorybodies would not object if the two Acts were considered together for accountingpurposes.  This view is based on the SEC staff's understanding that the twoActs together represent the current health care reforms as passed by Congressand signed by the President.  The amendment had no immediate impact on thefinancial statements.  The Company is evaluating the amendment for anypotential impact on future periods. 

Stock compensation guidance was updated in April 2010 to address theclassification of employee share-based payment awards with exercise prices denominatedin the currency of a market in which a substantial portion of the entity'sequity securities trade.  The guidance states that these awards should not beconsidered to contain a condition that is not a market, performance, or servicecondition. Share based payments that contain conditions related to market,performance and service must be recorded as liabilities.  These awards shouldnot be classified as liabilities if they otherwise qualify to be classified asequity.  The amendments in this update are effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2010.  The update will to have no impact on the financial statements.

In April 2010, guidance was issuedrelated to accounting for acquired troubled loans that are subsequentlymodified.  The guidance provides that if these loans meet the criteria to beaccounted for within a pool, modifications to one or more of these loans doesnot result in the removal of the modified loan fromthe pool even if the modification would otherwise be considered a troubled debtrestructuring.  The pool of assets in which the loan is included will continueto be considered for impairment.  The guidance does not apply to loans notmeeting the criteria to be accounted for within a pool.  This guidance iseffective for modifications of loans accounted for within pools occurring inthe first interim or annual period ending on or after July 15, 2010.  Thisguidance had no impact on the financial statements.

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

**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 six-month period ended June 30, 2010 and for the year endedDecember 31, 2009 were approximately $1,141 and $1,406 respectively.

-8-

**NOTE 3- INVESTMENT SECURITIES**

Investment securities with an aggregate par value of $200,546 ($204,728 fairvalue) at June 30, 2010 and $207,233 ($210,905 fair value) at December 31, 2009were pledged to secure public deposits and for other purposes required by law.

The followingsummaries reflect the book value, unrealized gains and losses, approximatemarket value, and tax-equivalent yields of investment securities listed by typeof issuer and maturity at June 30, 2010 and at December 31, 2009.

** **

**June 30, 2010**
      
** **

**Book**

**Unrealized Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

 

 

 

 

 

 

**AVAILABLE  FOR SALE**

 

 

 

 

 

 

 

 

 

 

  Government  Sponsored Enterprises

 

 

 

 

 

    Within  one year

$    2,077

$         17

$            -

$     2,094

1.26%  

    One  to five years

140,311

       931

      -

 141,242

1.82     

    Six  to ten  years

   48,455

        428

             -

    48,883

2.39     

 190,843

     1,376

             -

  192,219

1.96     

  Mortgage  Backed Securities

 

 

 

 

 

    Six  to ten years

3,495

148

-

3,643

3.53%  

    Over  ten years

     4,496

        217

              -

      4,713

3.95     

     7,991

        365

             -

      8,356

3.77     

  State,  county and municipal

 

 

 

 

 

    Within  one year

1,395

19

-

1,414

6.54%  

    One  to five years

1,396

58

-

1,454

6.28     

    Six  to ten years

18,841

646

51

19,436

5.58     

    Over  ten years

     2,041

          45

             -

      2,086

5.30     

   23,673

        768

          51

    24,390

5.65     

  Other  Investments

 

 

 

 

 

     CRA  Qualified Investment Fund

1,044

-

-

1,044

-     

     Other

          37

             -

            -

           37

-     

     1,081

             -

            -

      1,081

-     

 

 

 

 

 

  Total  available for sale

$223,588

$   2,509

$        51

$226,046

2.41%  

 

 

 

 

 

 

 

 

 

 

**HELD  TO MATURITY**

 

 

 

 

 

 

 

 

 

 

  Government  Sponsored Enterprises

 

 

 

 

 

    One  to five years

$   25,011

$        98

$          -

$  25,109

1.58%  

 

 

 

 

 

  State,  county and municipal

 

 

 

 

 

    One  to five years

$     1,072

$        30

$           -

$    1,102

4.71%  

    Six  to ten years

5,977

196

9

6,164

5.81     

    Over  ten years

       1,771

          81

             -

      1,852

6.03     

       8,820

        307

            9

      9,118

5.72     

 

 

 

 

 

    Total  held to maturity

$   33,831

$      405

$          9

$  34,227

2.66%  

 

 

 

 

 

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

As of June 30, 2010, 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 $1,475 as of June 30, 2010.

-9-

**NOTE3 - INVESTMENT SECURITIES (Continued) **

   

**December 31, 2009**
      
** **

**Book**

**Unrealized  Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

**AVAILABLE FOR SALE**

 

 

 

 

 

 

 

 

 

 

 
 Government Sponsored Enterprises

 

 

 

 

 

 
     One to five years

$   135,494

$     945

$     11

$     136,428

2.18%

 
     Six to ten years

    42,907

      116

     144

    42,879

    2.61%

 
  178,401

   1,061

     155

  179,307

    2.28%

 
  Mortgage Backed Securities

 

 

 

 

 

 
     Six to ten years

2,240

63

1

2,302

3.87%

 
     Over ten years

      6,975

      165

          -

      7,140

    3.94%

 
      9,215

      228

          1

      9,442

    3.92%

 
  State, county and municipal

 

 

 

 

 

 
    Within one year

1,381

13

-

1,394

7.04%

 
    One to five years

2,543

93

-

2,636

6.64%

 
    Six to ten years

16,563

442

68

16,937

5.61%

 
    Over ten years

      4,010

        62

           -

      4,072

    5.39%

 
    24,497

      610

        68

    25,039

    5.77%

 
  Other Investments

 

 

 

 

 

 
    CRA Qualified Investment  Fund

780

-

-

780

-%

 
    MasterCard International  Stock

          11

          -

          -

           11

         -%

 
    Other

          36

          -

           -

           36

         -%

 
        827

          -

           -

         827

         -%

 
 

 

 

 

 

 
  Total available for sale

$212,940

$ 1,899

$     224

$214,615

   2.76%

 
 

 

 

 

 

 
 

 

 

 

 

 
**HELD TO MATURITY**

 

 

 

 

 

 
 

 

 

 

 

 
  Government Sponsored Enterprises

 

 

 

 

 

 
    One to five  years  

$    6,003

$         -

$      17

$    5,986

   1.29%

 
 

 

 

 

 

 
  State, county and municipal

 

 

 

 

 

 
    Within one year

$       645

$        5

$         -

$       650

6.98%

 
    One to five years

826

26

-

852

4.41%

 
    Six to ten years

6,232

161

28

6,365

5.80%

 
    Over ten years

      1,243

        69

           -

      1,312

   6.44%

 
      8,946

      261

        28

      9,179

   5.85%

 
 
  Total held to maturity

$  14,949

$    261

$      45

$  15,165

   4.01%

 
 

 

 

 

 

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

As of the year ended December 31, 2009, 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 June 30, 2010 and December 31, 2009(tabular amounts in thousands):

**June 30, 2010**

**AVAILABLE FOR SALE**  State, county, and municipal**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    **

                   

                    

                   

                   

                  

                   

**$         321**

**$            21**

**$         846**

**$           30**

**$     1,167**

**$           51**

 

 

 

 

 

 

                

                  

                  

                 

                

                 

**$        738**

**$              2**

**$          509**

**$             7**

**$     1,247**

**$             9**

** **

** **

** **

** **

** **

** **

** **

** **

**December 31, 2009**

** **

**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    **

$     24,224  1,405              88

$           155     68                 1

$             -  -               -

$               -  -                 -

$    24,224  1,405             88

$         155  68               1

**$     25,717**

**$           224**

**$             -**

**$               -**

**$    25,717**

**$         224**

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

  $       1,985            726

  $             17               15

  $             -          503

  $               -              13

  $      1,985        1,229

  $           17             28

          Total

**$       2,711**

**$             32**

**$        503**

**$            13**

**$      3,214**

**$           45**

     Securitiesclassified as available-for-sale are recorded at fair market value.  AtJune 30, 2010, the Company owned $846 of available-for-sale securities in acontinuous loss position for twelve months or more with $30 of unrealizedlosses consisting of three municipal securities.  The Company does not intendto sell these securities and it is more likely than not that the Company willnot be required to sell these securities before recovery of its amortizedcosts.  At December 31, 2009, there were no available-for-sale securities in acontinuous loss position for twelve months or more.

     Securities classified as held-to-maturity are recordedat cost.  At June 30, 2010 the Company owned $509, fair value, of held-to-maturitysecurities in a continuous loss position for twelve months or more with $7 ofunrealized losses consisting of one municipal security.  The Company does notintend to sell this security and it is more likely than not that the Companywill not be required to sell this security before recovery of its amortizedcosts.  At December 31, 2009, the Company owned $503, fair value, ofheld-to-maturity securities in a continuous loss position for twelve months ormore with $13 of unrealized losses consisting of one municipal security.

     For the six-month period ended June 30, 2010,there were no sales of available-for-sale securities.  For the six-month periodended June 30, 2009, the Company sold $45,605(book value) of available-for-salesecurities for a gain of $1,352.

     Managementreviews securities for other-than-temporary impairment on at least a quarterlybasis, and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) the length of time and theextent to which the fair value has been less than cost, (2) the financialcondition and near-term prospects of the issuer, and (3) the 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 ANDALLOWANCE FOR LOAN LOSSES********    ** The following is a summary of loans at June 30, 2010 and December31, 2009 by major classification:

 

**  June 30, **

**December 31,**

 

** 2010**

**2009**

 

 

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

$ 371,556    

$ 375,741    

                              **- construction**

75,047    

81,311    

**Agricultural  loans**

4,714    

2,930    

**Commercial  and industrial loans**

69,761    

74,565    

**Loans  to individuals for household,**

 

 

**  family  and other consumer expenditures**

42,530    

44,865    

**All  other loans, including overdrafts and**

 

 

**  deferred  loan costs**

          396    

           384    

**     Gross  loans**

$ 564,004    

$  579,796    

**       Less  allowance for loan losses**

   (11,506)   

      (9,142)   

**         Net  loans**

$ 552,498    

$  570,654    

     Changes in the allowance for loan losses for the quartersand six-months ended June 30, 2010 and 2009, and the year ended December 31,2009 are summarized as follows:

** **

**    Quarter  Ended**

**Year  Ended**

**     Six-Months  Ended**

 
**   June 30,**

**December 31,**

**June 30,**

 

**    2010   **

**   2009  **

**    2009        **

**    2010  **

**   2009  **

 
**Balance,  beginning of period**

$ 10,310 

$ 6,965 

$  7,091       

$  9,142 

$ 7,091 

 
**Charge-offs:**

** **

** **

** **

** **

** **

 
   Commercial,  financial, and agricultural

1,298 

770 

2,251       

1,995 

1,129 

 
   Real  Estate - construction and mortgage

1,289 

729 

4,383       

3,151 

1,650 

 
   Loans  to individuals

       178 

      257 

    1,141       

       509 

      506 

 
**       Total  charge-offs**

$  2,765 

$ 1,756 

$  7,775       

$  5,655 

$ 3,285 

 
**Recoveries:**

** **

** **

** **

** **

** **

 
   Commercial,  financial, and agricultural

$       84 

$      45 

$     593       

$     184 

$    141 

 
   Real  Estate - construction and mortgage

4 

6 

16       

15 

6 

 
   Loans  to individuals

         67 

        45 

       469       

       251 

      121 

 
       Total  recoveries

$     155 

$      96 

$  1,078       

$     450 

$    268 

 
**Net  charge-offs**

$  2,610 

$ 1,660 

$  6,697       

$  5,205 

$ 3,017 

 
**Additions  charged to operations**

$  3,806 

$ 3,095 

$  8,748       

$  7,569 

$ 4,326 

 
**Balance,  end of period**

$11,506 

$ 8,400 

$  9,142       

$11,506 

$ 8,400 

 
 

** **

** **

** **

** **

** **

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

    .46%

    .28%

  1.15%       

    .91%

    .50%

 
**   to  average loans outstanding during the     period**

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
Theentire balance of the allowance for loan losses is available to absorb futureloan losses.

At June 30, 2010, December 31, 2009, and June 30, 2009 loans on which no interestwas being accrued totaled $20,874, $12,678, and 6,097, respectively.  All loanson which no interest was being accrued as well as other loans identified bymanagement as having weaknesses which result in a determinationof an inability on the part of the borrower to make full and timely payment ofprincipal and interest areclassified as impaired.  Impaired loans at June 30, 2010, December 31, 2009, andJune 30, 2009 were $24,815, $13,578, and $7,792, respectively.  The portionof the allowance for loan losses specifically allocated to impaired loans atJune 30, 2010, December 31, 2009, and June 30, 2009 was $2,000, $176, and $139,respectively.  The Company had$3,226 of foreclosed real estate at June 30, 2010, $1,622 of foreclosed realestate at December 31, 2009, and $1,410 of foreclosed real estate at June 30,2009.  Loans 90 days past due and still accruing interest totaled $913, $961,and $590 at June 30, 2010, December 31, 2009, and June 30, 2009, respectively.

At June 30, 2010,December 31, 2009, and June 30, 2009 classified assets, the majority consistingof classified loans, were $78,956, $52,614, and $28,324, respectively.  At June30, 2010,  December 30, 2009, and June 30, 2009 classified assets represented 81.80%,56.79%, and 30.25% of total capital (the sum of Tier 1 Capital and theAllowance for Loan Losses), respectively.

****-12-

**NOTE5 - PREMISES AND EQUIPMENT******     Property at June 30, 2010 and December 31, 2009is summarized as follows:

**June 30,**

**December 31,**

**2010**

**2009**

**Land  and buildings**

$ 26,315        

$ 26,315            

**Furniture,  fixtures and equipment**

9,821        

9,642            

**Construction  in progress**

          90        

            -            

** **

$ 36,226        

$ 35,957            

**Less  accumulated depreciation and amortization**

   13,451        

   12,706            

$ 22,775        

$ 23,251            

     Depreciation and amortization of bank premisesand equipment charged to operating expense was $746 and $750 for the six-monthperiods ended June 30, 2010 and 2009, respectively, and $1,538 for the yearended December 31, 2009.  The construction in progress is primarily related to therenovation of the Company's Myrtle Beach branch office located in Myrtle Beach,South Carolina, renovation of the Company's Main Street branch office locatedin Conway, South Carolina, and the renovation of the Company's Northside branchoffice located in Myrtle Beach, South Carolina.  There are no remaining costsassociated with renovation of the Main Street branch office.  Remainingconstruction, equipment, and furniture and fixtures costs associated with the MyrtleBeach branch office and the Northside branch office are $5 and $9, respectively.

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

     At June 30, 2010 and December 31, 2009, certificatesof deposit of $100 or more included in time deposits totaled approximately $227,871and $230,004, respectively.  Interest expense on these deposits wasapproximately $2,335 and $2,839 for the six-month periods ended June 30, 2010and 2009, respectively, and $5,359 for the year ended December 31, 2009. 

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

     At June 30, 2010 and December 31, 2009,securities sold under repurchase agreements totaled $100,112 and $104,654,respectively.  Securities with a book value of $113,342 ($114,544 fair value)and $110,865 ($111,556 fair value), respectively, were used as collateral forthe agreements.  The weighted-average interest rate of these agreements was .78percent and 1.11 percent at June 30, 2010 and December 31, 2009, respectively.

**NOTE 8 - LINES OF CREDIT**

     At June 30, 2010, 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 $3,084 at June 30, 2010. The amount outstanding under the note totaled $498 and $650 at June 30,2010 and December 31, 2009, respectively.

     The Bank also has a line of credit from theFederal Home Loan Bank of Atlanta for $52,174 secured by a lien on the Bank's1-4 family mortgages. Allowable terms range from overnight to twenty years atvarying rates set daily by the FHLB.  There were $10,000 in borrowings underthe agreement at June 30, 2010 and $15,000 at December 31, 2009.

-13-

**NOTE 9 - INCOME TAXES**

     Income tax expense/(benefit) for the six monthsended June 30, 2010 and June 30, 2009 on pretax income/(loss) of $(660) and $4,024totaled $(397) and $1,245, respectively.   The provision for federal incometaxes is 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 June 30, 2010.

     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:** **

** **

**June  30, 2010**

**           Loan  Commitments                   **

    $ 46,472

**           Standby  letters of credit         **

         1,820

     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 othertermination clauses and some involve payment of a fee.  Many of the commitmentsare expected to expire without being fully drawn.  Therefore, the total amountof loan commitments does not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis.  Theamount of 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-month and six-month periods ended June 30, 2010 and the year ended December 31, 2009,$98, $193, and $380, respectively, was charged to operations under the plan.

-14-

**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 June 30, 2010:

**Company**

 

 

 

 

 

**For**

 

**Capital adequacy**

**                                   **

**         Purposes          **

**            Actual            **

**         Minimum         **

**Amount**

**Ratio**

**Amount**

** Ratio **

 

 

 

 

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

$93,290

16.05%

$46,503

8.0%

** **

 

 

 

 

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

85,972

14.79   

23,252

4.0   

** **

 

 

 

 

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

85,972

9.16   

37,563

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)**

$92,339

15.89%

$46,500

8.0%

$58,126

10.0%

** **

 

 

 

 

 

 

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

85,021

14.63   

23,250

4.0   

34,875

6.0   

** **

 

 

 

 

 

 

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

85,021

9.05   

37,561

4.0   

46,952

5.0   

****-15-

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

     Theestimated fair values of the Company's financial instruments were as follows atJune 30, 2010 and December 31, 2009 (amounts in thousands):

** **

**       June  30, 2010         Carrying       **    **Fair      **

**    December  31, 2009     Carrying       **  **Fair     **

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

**  Amount   **  $  62,619    14,000    226,046    33,831    3,041    552,498    730,819    100,112    10,000    498  

**   Value   **$  62,619   14,000   226,046   34,227   3,041   557,248   729,881   100,112   9,925   498 

**  Amount   **  $  62,644    14,000    214,615    14,949    3,041    570,654    705,270    104,654    15,000    650     

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

** **

**Notional  **

** **

**Notional  **

** **

** **

**Amount   **

** **

**Amount  **

** **

**OFF BALANCE SHEET INSTRUMENTS**

** **

** **

** **

** **

Commitments to extend credit

$  46,472  

 

$  44,732  

 

Standby letters of credit

1,820  

 

2,369  

 

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

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

****Level 1

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

****Level 2

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

-16-

**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 for assets and liabilitiesrecorded at fair value on a recurring or non-recurring basis:

**Investment SecuritiesAvailable for Sale**

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

**Loans**

Loans that areconsidered impaired are recorded at fair value on a non-recurring basis.  Oncea loan is considered impaired, the fair value is measured using one of severalmethods, including collateral liquidation value, market value of similar debtand discounted cash flows. Those impaired loans not requiring a specificcharge against the allowance represent loans for which the fair value of theexpected repayments or collateral meet or exceed the recorded investment in theloan.  At June 30, 2010, substantially all of the total impaired loans wereevaluated 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 value upon transfer of the loans toforeclosed assets.  Subsequently, other real estate owned is carried at thelower of carrying value or fair value. Fair value is based upon independentmarket prices, appraised values of the collateral or management's estimation ofthe value of the collateral.  When the fair value of the collateral is based onan observable market price or a current appraised value, the Bank records theother real estate owned as nonrecurring Level 2.  When an appraised value isnot available or management determines the fair value of the collateral isfurther impaired below the appraised value and there is no observable marketprice, the Company records the other real estate owned as non-recurring Level3.

-17-

***NOTE 13 - ESTIMATED FAIR VALUE OFFINANCIAL INSTRUMENTS, Continued***

     Assets and liabilities measured at fair value ona recurring basis for June 30, 2010 and December 31, 2009 are presented in thefollowing table (dollars in thousands):

**June 30, 2010**

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

$                    -

$         192,219

$                   -

     State,  County, and Municipal

-

24,390

-

     Mortgage  backed securities

-

8,356

-

     Other

                      -

               1,081

                     -

          Total

$                    -

$         226,046

$                   -

 

 

 

**December 31, 2009**

 

 

 

 

 

 

Available-for-sale  securities

 

 

 

     Government  Sponsored Enterprises

$                     -

$179,307

$                  -

     State,  County, and Municipal

-

25,039

-

     Mortgage  backed securities

-

9,442

-

     Other

                      -

                 827

                    -

          Total

$                    -

$        214,615

$                  -

     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 June 30, 2010 and December 31,2009 for which a nonrecurring change in fair value was recorded during the sixmonths and year ended June 30, 2010 and December 31, 2009.

**June 30, 2010**

Quoted       market price    in active markets   (Level 1)     

  Significant other  observable inputs   (Level 2)     

Significant     unobservable  inputs         (Level 3)    

Other  real estate owned

$                    -

$             3,226

$                   -

Impaired  loans

$                    -

$           22,815

$                   -

** **

$                    -

$           26,041

$                   -

** **

 

 

 

**December 31, 2009**

 

 

 

 

 

 

Other  real estate owned

$                    -

$             1,622

$                   -

Impaired  loans

$                    -

$           13,065

$                   -

$                    -

$           14,687

$                   -

****-18-

**NOTE 14 - CONDENSED FINANCIAL INFORMATION**

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

**CONDENSED  BALANCE SHEET  (Unaudited)**

** **

**   June  30,**

**ASSETS**

**    2010  **

**    2009      **

   Cash

$       914

$    1,457  

   Investment in subsidiary

86,496

85,418  

   Other assets

          37

           36  

$  87,447

$  86,911  

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

   Stockholders' equity

$ 87,447

$  86,911  

$ 87,447

$  86,911  

 

 

 

 

**CONDENSED  STATEMENT OF INCOME  (Unaudited)**

**For the  six-month  period ended June 30,**

**    2010     **

**    2009  **

   Equity in net income/(loss) of  subsidiary

$   (158)

$  2,896 

   Other expenses

     (105)

     (117)

**      NET INCOME/(LOSS)**

$   (263)

$ 2,779 

** **

**NOTE 15 - SUBSEQUENT EVENTS**

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

-19-

**Item2.**

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

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

Management'sDiscussion and Analysis is provided to afford a clearer understanding of themajor elements 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 and six-month periods ending June 30,2010 and 2009 and the year ended December 31, 2009 have been prepared inaccordance with generally accepted accounting principles ("GAAP") forinterim financial information and with the instructions to Form 10-Q of theSecurities and Exchange Commission.  Accordingly, they do not include allinformation and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.

**DISTRIBUTION OF ASSETS AND LIABILITIES**

The Company has historically maintained a conservative approach in determiningthe distribution of assets and liabilities.  Loans decreased 5.4% from $596,426at June 30, 2009 to $564,004 at June 30, 2010, and decreased 2.7%, from$579,796 at December 31, 2009 to $564,004 at June 30, 2010.  Loans decreased asa percentage of total assets from 66.6% to 60.4% from June 30, 2009 to June 30,2010 and decreased from 63.0% to 60.4% from December 31, 2009 to June 30,2010.  Loan demand in our market area has softened during the last twelve monthsdue to the continuing subdued local real estate market.  Securities and federalfunds sold increased as a percentage of total assets from 23.8% at June 30,2009 to 29.3% at June 30, 2010, and increased from 26.4% of total assets atDecember 31, 2009 to 29.3% at June 30, 2010, a reflection of continued softloan demand coupled with higher levels of deposits.  The level of investmentsand excess Federal Reserve deposits provide for a more than adequate supply ofliquidity.

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 11.9% at June 30, 2009 to 12.0% at June 30, 2010, and increased from 10.5%at December 31, 2009 to 12.0% at June 30, 2010.  As more customers, bothbusiness and personal, are attracted to interest-bearing deposit accounts, weexpect the percentage of non-interest bearing demand deposits to decline overthe long-term.  Interest-bearing deposits increased from 64.0% of total assetsat June 30, 2009 to 66.3% at June 30, 2010, and increased from 66.1% atDecember 31, 2009 to 66.3% at June 30, 2010.  Securities sold under agreementto repurchase decreased from 11.3% of total assets at June 30, 2009 to 10.7% atJune 30, 2010, and decreased from 11.4% of total assets at December 31, 2009 to10.7% at June 30, 2010.  Other short-term borrowings decreased from 1.7% oftotal assets at December 31, 2009 to 1.07% at June 30, 2010.  Other short-termborrowings decreased from 2.4% at June 30, 2009 to 1.1% at June 30, 2010.

The following table sets forth the percentage relationship to total assets ofsignificant components of the Company's balance sheets as of June 30, 2010 andJune 30, 2009 and December 31, 2009:

 

**       June  30,     **

**December 31,**

**Assets:**

**   2010 **

**  2009  **

**2009**

   Earning  assets:

** **

** **

** **

   Loans

60.4%

66.6%

63.0%       

   Securities  held to maturity

3.6   

1.0   

1.6          

   Securities  available for sale

24.2   

22.8   

23.3          

   Federal  funds sold and securities purchased under agreement to resell

    1.5   

    0.0   

    1.5          

   Other  earning assets

    4.4   

    4.6   

    4.3          

      Total  earning assets

  94.1   

  95.0   

  93.7          

   Other  assets

    5.9   

    5.0   

    6.3          

      Total  assets

100.0%

100.0%

100.0%       

** **

** **

 

**Liabilities  and stockholder's equity:**

** **

** **

 

  Interest-bearing  liabilities:

** **

** **

 

    Interest-bearing  deposits

66.3%

64.0%

66.1%       

    Federal  funds purchased and securities sold under agreement to repurchase

10.7   

11.3   

11.4          

    Other  short-term borrowings

    1.1   

   2.4   

    1.7          

        Total  interest-bearing liabilities

  78.1   

 77.7   

  79.2          

    Noninterest-bearing  deposits

12.0   

11.9   

 10.5          

    Other  liabilities

.5   

.7   

.8          

    Stockholders'  equity

    9.4   

    9.7   

    9.5          

        Total  liabilities and stockholders' equity

100.0%

100.0%

100.0%       

-20-

**RESULTSOF OPERATIONS**

Earnings/(losses) for the three-month periods ended June 30, 2010 and 2009 were$(220) and $841 respectively, resulting in a return on average assets of (.09)%and .37% and a return on average stockholders' equity of (1.01)% and 3.84%,respectively. 

Earnings/(losses) for the six-month periods ended June 30, 2010 and 2009 were$(263) and $2,779 respectively, resulting in a return on average assets of(.06)% and .62% and a return on average stockholders' equity of (.60)% and6.41%, respectively.

The losses for the three and six-month periods ended June 30, 2010 wereprimarily attributable to an increased provision for loan losses coupled withdecreased noninterest income (see Net Income - Provision for Loan Losses andNet Income - Noninterest Income).  The earnings/(losses) for the three andsix-month periods ended June 30, 2009 were primarily attributable to netinterest income (see Net Income-Net Interest Income).  Management anticipates,but cannot assure, that earnings will remain well below historical levelsthrough 2010, but may improve during the first half of 2011.  Total assetsincreased $38,571 or 4.3% to $934,118 at June 30, 2010 from $895,547 at June30, 2009. The following table sets forth the financial highlights for the threeand six-month periods ended at June 30, 2010 and June 30, 2009:

**CNB Corporation and Subsidiary                                                                            FINANCIAL HIGHLIGHTS                                                                             **

** **

 
**Three-Month  Period                 Six-Month  Period                 Ended June 30,                          Ended June 30,              **

** **

** **

 
** **

**2010****  **

**2009 **

**Percent     Increase  (Decrease)**

**2010  **

**2009  **

**Percent     Increase  (Decrease)**

 
**Net  Interest Income**

$   7,583  

$   8,110

(6.5)%

$   15,250 

$ 15,978

(4.6)%

 
**Provision  for loan losses**

3,806  

3,095

23.0 %

7,569 

4,326

75.0 %

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

3,777  

5,015

(24.7)%

7,681 

11,652

(34.1)   

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

(390) 

1,166

(133.4)   

(660)

4,024

(116.4)   

 
**Net  Income/(Loss)**

(220) 

841

(126.2)   

(263)

2,779

(109.5)   

 
**     Per  Share**

(.13) 

.50

(126.0)   

(.16)

1.67

(109.6)   

 
**Cash  dividends declared**

-  

-
   -    

-
-

   -      

 
**     Per  Share**

-  

-

   -    

- 

-

   -      

 
**Total  assets**

934,118 

895,547

4.3 %

934,118

895,547

4.3     

 
**Total  deposits**

730,819 

679,618

7.5    

730,819

679,618

7.5     

 
**Loans**

564,004 

596,426

 (5.4)   

564,004

596,426

 (5.4)    

 
**Investment securities and  securities available  for sale**

259,877 

210,048

23.7    

259,877

210,048

23.7     

 
**Stockholders' equity**

87,447 

86,911

.6    

87,447

86,911

.6     

 
**    Book value per share**

52.21 

51.63

1.1    

52.21

51.63

1.1     

 
**Ratios:**

 

 

 

 

 

 

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

(.09)% 

.37%

(124.3)%

(.06)%

.62%

(109.7)%

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

(1.01)% 

3.84%

(126.3)%

(.60)%

6.41%

(109.4)%

 
 
 

 

 

 

 

 

  
(1)       For the three-month period endedJune 30, 2010, average total assets amounted to $939,072 with average stockholders'equity           totaling $87,541for the same period.

           For thesix-month period ended June 30, 2010, average total assets amounted to $935,913with average stockholders equity           totaling $87,824for the same period.

-21-

**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 loans, securities, deposits, andborrowed 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 and six-month periods endedJune 30, 2010, of 3.52% and 3.54%, respectively, and 3.87% and 3.83%,respectively, for the same periods in 2009, 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 2008 placedfurther significant pressure on net interest margins for the industry as awhole.  The resulting more historically typical upward-sloping yield curvewould generally enhance the Bank's net interest margin.  However, marketinterest rates have been reduced to historically low levels.  An extremely lowinterest rate environment is not one that enhances net interest margin. Further, the persistence of an extremely low interest rate environment placesincreasing pressure on net interest margin as more and more earning assetsre-price into this market.  As well, competition in the Bank's specific marketremains significant, as new competitors seek market share and other competitorsattempt to reduce their dependence on brokered deposits.  These factors tend tocompress margins by keeping the cost of deposits high in relation toestablished national benchmark rates while driving the yields on loansdownward.  This is less evident in the current economic environment due tosoftened loan demand.

Fully-tax-equivalent net interest income for the three-month period ended June30, 2010 was $7,738, a decrease of 6.3% from the $8,262 attained for thethree-month period ended June 30, 2009.  For the same periods, totalfully-tax-equivalent interest income decreased by 9.2% to $10,270 from $11,315and total interest expense decreased by 23.0% to $2,352 from $3,053. Fully-tax-equivalent net interest income as a percentage of average totalearning assets decreased 9.0% to 3.52% for the three-month period ended June30, 2010 from 3.87% for the three-month period ended June 30, 2009.

Fully-tax-equivalent net interest income for the six-month period ended June30, 2010 was $15,556, a decrease of 4.4% from the $16,277 attained for thesix-month period ended June 30, 2009.  For the same periods, totalfully-tax-equivalent interest income decreased by 8.3% to $20,821 from $22,716and total interest expense decreased by 18.4% to $5,255 from $6,439. Fully-tax-equivalent net interest income as a percentage of average totalearning assets decreased 7.6% to 3.54% for the six-month period ended June 30,2010 from 3.83% for the three-month period ended June 30, 2009.

The tables on the following four pages present an analysis of average balances,yields and rates for the interest sensitive segments of the Company's balance sheetsfor the three-month and six-month periods ended June 30, 2010 and 2009, and asummary of changes in net interest income resulting from changes in volume andchanges in rate between the three-month and six-month periods ended June 30,2010 and 2009.

-22-

 

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

 

 

**Three Months Ended 6/30/10**

**Three Months Ended 6/30/09**

** **

**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)

$565,903

$ 8,621

6.09%

$600,557

$  9,411

6.27%

      Securities:

** **

** **

** **

** **

** **

** **

        Taxable

217,312

1,144

2.11   

188,296

1,441

3.06   

        Tax-exempt

32,911

456

(2)     5.54   

30,928

448

(2)      5.79   

      Federal    funds sold

13,879

9

.26   

    4,440

       4

.36   

      Other    earning assets

    49,871

         40

.32   

    29,902

         11

.15   

          Total    earning assets

  879,876

  10,270

4.67   

  854,123

  11,315

5.30   

    Other    assets

    59,196

** **

** **

    43,650

** **

** **

          Total    assets

$939,072

** **

** **

$897,773

** **

** **

** **

** **

** **

** **

** **

** **

**Liabilities    and stockholders' equity**

** **

** **

** **

** **

** **

** **

    Interest-bearing    liabilities:

** **

** **

** **

** **

** **

** **

      Interest-bearing    deposits

$619,077

2,264

1.46   

$567,970

2,673

1.88   

      Fed    funds purchased and securities sold             under agreement to    repurchase

****109,049

    221

****.81   

****108,386

    302

    1.11   

      Other    short-term borrowings

    11,014

          47

1.71   

     21,660

          78

1.44   

          Total    interest-bearing liabilities

$739,140

$   2,532

1.37   

$698,016

$   3,053

1.75   

    Noninterest-bearing    deposits

106,374

** **

** **

104,871

** **

** **

    Other    liabilities

6,017

** **

** **

7,305

** **

** **

    Stockholders'    equity

    87,541

** **

** **

    87,581

** **

** **

          Total    liabilities and stockholders' equity

$939,072

** **

** **

$897,773

** **

** **

    Net    interest income as a percent of total

** **

** **

** **

** **

** **

** **

       earning    assets

$879,876

$   7,738

3.52   

$854,123

$   8,262

3.87   

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Ratios:**

** **

** **

** **

** **

** **

** **

Annualized    return on average total assets

** **

** **

(.09)  

** **

** **

.37   

Annualized    return on average stockholders' equity

** **

** **

(1.01)  

** **

** **

3.84   

Cash    dividends declared as a percent of net income

** **

** **

-   

** **

** **

-   

Average    stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

  Average    total assets

** **

** **

9.32   

** **

** **

9.76   

  Average    total deposits

** **

** **

12.07   

** **

** **

13.02   

  Average    loans

** **

** **

15.47   

** **

** **

14.58   

Average    earning assets as a percent of

** **

** **

** **

** **

** **

** **

   average    total assets

** **

** **

93.70  

** **

** **

95.14   

** **

** **

 

** **

** **

 

(1)  The Company had no out-of-period    adjustments or foreign activities.  Loan fees of $122 and $132 are included    in the above interest income for June 30, 2010 and 2009, respectively.     Loans on a non-accrual basis for the recognition of interest income    totaling $20,874 and $6,097 for June 30, 2010 and 2009, 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 $155 and $152 for June 30, 2010 and 2009,    respectively.

** **

** **

 

** **

** **

 

  -23-

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

 

 

**Six Months Ended 6/30/10**

**Six Months Ended 6/30/09**

** **

**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)

$570,465

$ 17,556

6.15%

$599,378

$  18,789

6.27%

      Securities:

** **

** **

** **

** **

** **

** **

        Taxable

  208,900

2,251

2.16   

183,122

3,010

3.29   

        Tax-exempt

    33,235

929

(2)  5.59   

30,387

880

(2)      5.79   

      Federal  funds sold

    13,940

17

.24   

    15,552

       20

.26   

      Other  earning assets

    51,690

         68

.26   

    21,343

         17

.16   

          Total  earning assets

  878,230

  20,821

4.74   

  849,782

  22,716

5.35   

    Other  assets

    57,683

** **

** **

    44,548

** **

** **

          Total  assets

$935,913

** **

** **

$894,330

** **

** **

** **

** **

** **

** **

** **

** **

**Liabilities  and stockholders' equity**

** **

** **

** **

** **

** **

** **

    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

      Interest-bearing  deposits

$615,989

4,681

1.52   

$571,760

5,663

1.98   

      Fed  funds purchased and securities sold           under agreement to repurchase

**  **109,632

  470

****.86   

****96,078

  590

  1.23   

      Other  short-term borrowings

    12,701

        104

1.64   

     26,848

        186

1.39   

          Total  interest-bearing liabilities

$738,322

$   5,255

1.42   

$694,686

$   6,439

1.85   

    Noninterest-bearing  deposits

  103,796

** **

** **

106,248

** **

** **

    Other  liabilities

      5,971

** **

** **

6,753

** **

** **

    Stockholders'  equity

    87,824

** **

** **

    86,643

** **

** **

          Total  liabilities and stockholders' equity

$935,913

** **

** **

$894,330

** **

** **

    Net  interest income as a percent of total

** **

** **

** **

** **

** **

** **

       earning  assets

$878,230

$ 15,566

3.54   

$849,782

$ 16,277

3.83   

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Ratios:**

** **

** **

** **

** **

** **

** **

Annualized  return on average total assets

** **

** **

(.06)  

** **

** **

.62   

Annualized  return on average stockholders' equity

** **

** **

(.60)  

** **

** **

6.41   

Cash  dividends declared as a percent of net income

** **

** **

-   

** **

** **

-   

Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

  Average  total assets

** **

** **

9.38   

** **

** **

9.69   

  Average  total deposits

** **

** **

12.20   

** **

** **

12.78   

  Average  loans

** **

** **

15.40   

** **

** **

14.46   

Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

   average  total assets

** **

** **

93.85   

** **

** **

95.02   

** **

** **

 

** **

** **

 

(1)  The  Company had no out-of-period adjustments or foreign activities.  Loan fees of  $278 and $270 are included in the above interest income for June 30, 2010 and  2009, respectively.  Loans on a non-accrual basis for the recognition of  interest income totaling $20,874 and $6,097 for June 30, 2010 and 2009,  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 $316 and $299 for June 30, 2010  and 2009, respectively.

** **

** **

 

** **

** **

 

-24-

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 June 30, 2010 and 2009**

 

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

** **

 

**2010**

**2009**

**2010(3)**

**2009(3)**

**2010**

**2009**

**Variance**

**Rate**

**Volume**

** **

**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

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

$565,903

$600,557

6.09%

6.27%

$8,621

$9,411

$    (790)

$   (262)

$   (528)

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

217,312

188,296

2.11%

3.06%

1,144

1,441

(297)

(450)

153 

 

**    Tax-exempt   (2)**

32,911

30,928

5.54%

5.79%

456

448

  8 

(19)

27 

 

**  Federal   funds sold**

13,879

4,440

.26%

.36%

9

4

5 

(1)

6 

 

** Other   Earning Assets**

    49,871

    29,902

.32%

.15%

          40

         11

          29 

         13 

        16 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$879,876

$854,123

4.67%

5.30%

$10,270

$11,315

$ (1,045)

$   (719)

$   (326)

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$619,077

$567,970

1.46%

1.88%

$  2,264

$  2,673

$    (409)

$   (596)

$    187 

 

**  Fed   funds purchased and securities**

 

 

 

 

 

 

 

 

 

 

**    sold   under agreement to repurchase**

109,049

108,386

.81%

1.11%

221

302

 (81)

(82)

1 

 

**  Other   short-term borrowings**

    11,014

    21,660

1.71%

1.44%

         47

         78

        (31)

        14 

       (45)

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  739,140

  698,016

1.37%

1.75%

    2,532

    3,053

      (521)

     (664)

       143 

 

**Interest-free    Funds Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

  140,736

  156,107

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Funds Supporting Earning Assets**

$879,876

$854,123

1.15%

1.43%

$  2,532

$  3,053

$    (521)

$   (664)

$     143 

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest   Rate Spread**

 

 

3.30%

3.55%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

  .22%

  .32%

             

             

 

 

 

 

**Net   Yield on Earning Assets**

 

 

3.52%

3.87%

$  7,738

$  8,262

 

 

 

 

(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

 

-25**-**

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Six Months Ended June 30, 2010 and 2009**

 

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

** **

 

**2010**

**2009**

**2010(3)**

**2009(3)**

**2010**

**2009**

**Variance**

**Rate**

**Volume**

** **

**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

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

$570,465

$599,378

6.15%

6.27%

$17,556

$18,789

$    (1,233)

$   (343)

$   (890)

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

208,900

183,122

2.16%

3.29%

2,251

3,010

(759)

(1,037)

278 

 

**    Tax-exempt   (2)**

33,235

30,387

5.59%

5.79%

929

880

49  

(31)

80 

 

**  Federal   funds sold**

13,940

15,552

.24%

.26%

17

20

(3)

(1)

(2)

 

** Other   Earning Assets**

    51,690

    21,343

.26%

.16%

          68

         17

          51 

         11 

        40 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$878,230

$849,782

4.74%

5.35%

$20,821

$22,716

$  (1,895)

$(1,401)

$   (494)

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$615,989

$571,760

1.52%

1.98%

$  4,681

$  5,663

$    (982)

$(1,318)

$     336 

 

**  Fed   funds purchased and securities**

 

 

 

 

 

 

 

 

 

 

**    sold   under agreement to repurchase**

109,632

96,078

.86%

1.23%

470

590

 (120)

(178)

58 

 

**  Other   short-term borrowings**

    12,701

    26,848

1.64%

1.39%

       104

       186

        (82)

         34 

     (116)

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  738,322

  694,686

1.42%

1.85%

    5,255

    6,439

   (1,184)

  (1,462)

       278 

 

**Interest-free    Funds Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

  139,908

  155,096

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total   Funds Supporting Earning Assets**

$878,230

$849,782

1.20%

1.52%

$  5,255

$  6,439

$ (1,184)

$(1,462)

$     278 

 

** **

 

 

 

 

 

 

 

 

 

 

**Interest   Rate Spread**

 

 

3.32%

3.50%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

  .22%

  .33%

             

             

 

 

 

 

**Net   Yield on Earning Assets**

 

 

3.54%

3.83%

$15,566

$16,277

 

 

 

 

(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

-26**-**

**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-dueloans, 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 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. The provision for loan losses was $3,806 for the three-month period ended June30, 2010 and $3,095 for the three-month period ended June 30, 2009.  Net loancharge-offs totaled $2,610 for the three-month period ended June 30, 2010 and$1,660 for the same period in 2009.  The increased provisions and higher levelof net charge-offs during the three-month period ended June 30, 2010 reflectsthe national economic recession and its impact on the local economy in whichthe Company operates.  The Myrtle Beach-Conway-North Myrtle Beach SouthCarolina Metropolitan Statistical Area, wherein the majority of the Company'soperations are situated, has recently experienced significant declines invarious sectors of its economy, primarily in the real estate sectors.  Theallowance for loan losses as a percentage of net loans was 2.08% at June 30,2010 and was 1.43% at June 30, 2009.

The provision for loan losses was $7,569 for the six-month period ended June30, 2010 and $4,326 for the six-month period ended June 30, 2009.  Net loancharge-offs/(recoveries) totaled $5,205 for the six-month period ended June 30,2010 and $3,017 for the same period in 2009.  The increased provision andhigher level of net charge-offs during the six-month period ended June 30, 2010again reflects the national economic recession as noted in the precedingparagraph.

The levels of loans on which no interest was being accrued, impaired loans,foreclosed real estate, and classified assets at March 31, 2010 and 2009 areoutlined in the notes to the consolidated unaudited financial statements (SeeNOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES).  All of these measurementsincreased during 2009, some markedly, and this trend continued through thefirst half of 2010.  Although increased, management considers all such levelsmanageable.  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.  Management recognizes the potential for further deteriorationof economic conditions in the Company's market areas in the short-term,especially with respect to real estate related activities and real propertyvalues.  However, management believes, but cannot assure, that substantiallyall of the Company's credit risks associated with the current real estatemarket decline have been identified.  Nonetheless, management anticipates theCompany will continue to incur above average provisions through 2010.

 

-27-

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

Securities Transactions - At June 30, 2010, December 31, 2009, and June 30,2009 total market value appreciation in the investment portfolio totaled$2,854, $1,891, and $255, respectively.  As indicated, the market values of theCompany's investment portfolio increased from June 30, 2009 to December 31,2009, and increased from December 31, 2009 to June 30, 2010.  During 2008 bondvalues fluctuated due to variances in the slope of the yield curve because ofinstability in new issue coupon rates and intermittent movement of fundsbetween the bond market and the stock market.  However, the yield curvegenerally normalized over the period.  The yield curve grew unusually steepduring 2009 as short term rates continued to decline to historical lows.  Thistrend continued into 2010.  However, the yield curve flattened slightly in thelate second quarter of 2010 due to declining long-term rates.

During 2009 management sold a portion of its investment portfolio, in part, totake advantage of existing gains in a historically low interest rateenvironment, and, in part, to facilitate the re-establishment of its investmentportfolio maturity strategy previously impacted by numerous investment calls. All investments sold were callable in the near term.  The increase in the totalmarket value of the investment portfolio during the periods is attributable tothe continued decline in investment rates.  The changes in market valueappreciation/(depreciation) in the investment portfolio do not generallydirectly affect operating results since the Company does not acquire investmentsecurities for trading.  However, the changes in the market valueappreciation/(depreciation) in the investment portfolio for the three andsix-month periods ended June 30, 2010 and June 30, 2009 are a component ofComprehensive Income and are set forth in the Condensed Consolidated Statementsof Comprehensive Income contained herein.

Noninterest Income - Noninterest income decreased by 26.7% to $1,822 for thethree-month period ended June 30, 2010 from $2,484 for the three-month periodended June 30, 2009.  Noninterest income decreased by 26.2% to $3,234 for thesix-month period ended June 30, 2010 from $4,376 for the six-month period endedJune 30, 2009.  The decreases in non-interest income for the three and six-monthperiods ended June 30, 2010 were primarily attributable to the decline in gainson sales of investment securities, which are generally nonrecurring. 

Noninterest Expenses - Noninterest expenses decreased by 5.5% to $5,989 for thethree-month period ended June 30, 2010 from $6,333 for the three-month periodended June 30, 2009.  The major components of noninterest expenses are salariesand employee benefits, which decreased 5.0% to $3,347 from $3,525; occupancyexpense which increased .2% to $814 from $812; and other operating expenseswhich decreased by 8.4% to $1,828 from $1,996.  Salaries and benefits decreaseddue to reduced staffing and decreased benefits expenses.  Occupancy expensegenerally continues to grow due to the addition of new banking facilities. Other operating expenses decreased 8.4% to $1,828 from $1,996.

Noninterest expenses decreased by 3.6% to $11,575 for the six-month periodended June 30, 2010 from $12,004 for the six-month period ended June 30, 2009. The major components of noninterest expenses are salaries and employee benefitswhich decreased 4.7% to $6,758 from $7,093.  Occupancy expense increased .9% to$1,616 for the six-month period ended June 30, 2010 from $1,602 for the sameperiod in 2009.  Other operating expenses decreased 3.3% to $3,201 from $3,309for the same periods, respectively.

Income Taxes -Provisions for income taxes decreased 152.3% to a benefit of $(170) for thethree-month period ended June 30, 2010 from a provision of $325 for thethree-month period ended June 30, 2009.  Income before income taxes lessinterest on tax-exempt investment securities decreased 179.4% to $(691) for thethree-month period ended June 30, 2010 from $870 for the same period in 2009. 

Provisions for income taxes decreased 131.9% to a benefit of $(397) forthe six-month period ended June 30, 2010 from a provision of $1,245 for thesix-month period ended June 30, 2009.  Income before income taxes less intereston tax-exempt investment securities decreased by 137.0% to $(1,273) for thesix-month period ended June 30, 2010 from $3,443 for the same period in 2009.

**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 Reserve System and the Federal Home Loan Bank of Atlanta. Managementbelieves that short-term and long-term liquidity sources are adequate to meetfunding needs, including the funding of off-balance sheet loan commitments andstandby letters of credit, if the need arises.  Although the Bank has notexperienced liquidity pressures, there can be no assurance that such pressureswill not be felt in the future.  Neither the Company nor the Bank is involvedin other off-balance sheet contractual relationships or other commitments thatcould result in liquidity needs or significantly impact earnings.

 

-28-

Thetable below summarizes future contractual obligations as of June 30, 2010 (inthousands).

**At June 30, 2010**

**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**

$326,083     

$44,658      

$9,018      

$8,225      

$     -        

$ 387,984     

**Borrowings**

  110,610     

            -      

         -      

         -      

       -        

  110,610     

 

 

 

 

 

 

**     Total**

$436,693     

$44,658      

$9,018      

$8,225      

$     -        

$498,594     

** **

**CAPITAL RESOURCES**

Total stockholders' equity was $87,447 and $87,429 at June 30, 2010 andDecember 31, 2009, representing 9.36% and 9.50% of total assets, respectively. At June 30, 2010, 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 and to support anticipated growth in Bank operations.

**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, 2009 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.  Thejudgments and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because ofthe nature of the judgments and assumptions we make, actual results coulddiffer from 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 2009Annual 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 different basis, thanits 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 operating restrictions from the regulators'judgments based on information available to them at the time of theirexamination.

-29-

**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.

****-30-

**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**

April 1 - April 30, 2010

720           

$80.50 

-

-

May 1 - May 31, 2010

842           

 79.50

-

-

June 1 - June 30, 2010

     83           

 79.50

-

-

Total

1,645           

$79.94

-

-

(1) During the period covered by this report, the Company purchased 1,645shares of stock from shareholders, at the request of the shareholders, whichare held by the Company as authorized and unissued shares.  These shares werepurchased on a 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:  August9, 2010

-31-

**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.

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