CNBW CNB Corporation (CE)

CAUTIONARY NOTICE WITH RESPECT TO
FORWARD LOOKING STATEMENTS

             This report contains "forward-looking statements" within the meaning of the securities laws.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.

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

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

All forward-looking statements are expressly qualified in their entirety by this cautionary notice.  The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report.  The Company has expressed its expectations, beliefs and projections in good faith and believes they have a reasonable basis.  However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

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See Notes to Consolidated Financial Statements

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See Notes to Consolidated Financial Statements

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See Notes to Consolidated Financial Statements

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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 the weighted average number of common shares outstanding resulting in 829,187 shares for the three-month period ended March 31, 2009 and 847,936 shares for the three-month period ended March 31, 2008.

Recently Issued Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

FSP EITF 99-20-1, "Amendments to the Impairment Guidance of EITF Issue No. 99-20," ("FSP EITF 99-20-1") was issued in January 2009.  Prior to the FSP, other-than-temporary impairment was determined by using either Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets," ("EITF 99-20") or SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," ("SFAS 115") depending on the type of security.  EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the FSP amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment.  The FSP was effective for reporting periods ending after December 15, 2008.  Management has reviewed the Company's security portfolio and evaluated the portfolio for any other-than-temporary impairments.

On April 9, 2009, the FASB issued three staff positions related to fair value which are discussed below. 

FSP SFAS 115-2 and SFAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP SFAS 115-2 and SFAS 124-2") categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors.  Other-than-temporary impairment (OTTI) exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered.  An OTTI related to credit losses should be recognized through earnings.  An OTTI related to other factors should be recognized in other comprehensive income.  The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the aging of securities with unrealized losses).

FSP SFAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly" recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased.  The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique.  Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale.  If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value.  An entity's intention to hold an asset or liability is not relevant in determining fair value.  Quoted prices provided by pricing services may still be used when estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions.  Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.

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Recently Issued Accounting Pronouncements - Continued

FSP SFAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods  A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor.  Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.

The three staff positions are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, in which case all three must be adopted.  The Company will adopt the staff positions for its second quarter 10-Q but does not expect the staff positions to have a material impact on the consolidated financial statements.

The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 111 on April 9, 2009 to amend Topic 5.M., "Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities" and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains the staff's previous views related to equity securities; however debt securities are excluded from its scope.  The SAB provides that "other-than-temporary" impairment is not necessarily the same as "permanent" impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss.  The SAB was effective upon issuance and had no impact on the Company's financial position.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the 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 or on deposit with the Federal Reserve Bank.  The average amounts of these reserve balances for the three-month period ended March 31, 2009 and for the year ended December 31, 2008 were approximately $1,406 and $2,638, respectively.

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NOTE 3 - INVESTMENT SECURITIES

Investment securities with a par value of approximately $198,003 at March 31, 2009 and $174,673 at December 31, 2008 were pledged to secure public deposits and for other purposes required by law.

The following summaries reflect the book value, unrealized gains and losses, approximate market value, and tax-equivalent yields of investment securities listed by type of issuer and maturity at March 31, 2009 and at December 31, 2008.

As of March 31, 2009, the Bank did not hold any securities of an issuer that exceeded 10% of stockholders' equity. The net unrealized holding gains on available-for-sale securities component of capital was $991 as of March 31, 2009.

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NOTE 3 - INVESTMENT SECURITIES (Continued)

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

As of December 31, 2008, the Bank did not hold any securities of an issuer that exceeded 10% of stockholders' equity. The net unrealized holding gains on available-for-sale securities component of capital was $1,498 as of December 31, 2008.

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NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

     The following is a summary of loans at March 31, 2009 and December 31, 2008 by major classification:

       Changes in the allowance for loan losses for the quarters ended March 31, 2009 and 2008, and the year ended December 31, 2008 are summarized as follows:

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

At March 31, 2009, March 31, 2008, and December 31, 2008 loans on which no interest was being accrued totaled $4,915, $885, and $2,990, respectively.  A portion of the loans on which no interest was being accrued as well as other loans identified by management are classified as impaired.  Impaired loans at March 31, 2009, March 31, 2008, and December 31, 2008, were $4,974, $385, and $4,158, respectively.  The Company had $1,670 of foreclosed real estate at March 31, 2009, $64 of foreclosed real estate at March 31, 2008, and $639 of foreclosed real estate at December 31, 2008.  Loans 90 days past due and still accruing interest totaled $275, $323, and $608 at March 31, 2009, March 31, 2008, and December 31, 2008, respectively.

At March 31, 2009, March 31, 2008, and December 31, 2008 classified assets, the majority consisting of classified loans, were $24,740, $16,678, and $18,170, respectively.  At March 31, 2009,  March 31, 2008, and December 31, 2008 classified assets represented 26.80%, 18.55%, and 19.99% of total capital (the sum of Tier 1 Capital and the Allowance for Loan Losses), respectively.

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NOTE 5 - PREMISES AND EQUIPMENT

     Property at March 31, 2009 and December 31, 2008 is summarized as follows:

     Depreciation and amortization of bank premises and equipment charged to operating expense was $330 for the three-month period ended March 31, 2009, and $1,330 for the year ended December 31, 2008.  The construction in progress is primarily related to the renovation of the Company's Surfside branch office located in Conway, South Carolina and land improvements and installation of an automated teller machine (ATM) at the Company's Carolina Forest site located in Myrtle Beach, South Carolina.  Remaining construction and equipment costs associated with the Surfside branch office and the Carolina Forest ATM are estimated at approximately $61 and $82, respectively.

NOTE 6 - CERTIFICATES OF DEPOSIT IN EXCESS OF $100,000

     At March 31, 2009 and December 31, 2008, certificates of deposit of $100 or more included in time deposits totaled approximately $194,918 and $210,669, respectively.  Interest expense on these deposits was approximately $1,440 for the three-month period ended March 31, 2009 and $8,110 for the year ended December 31, 2008.

NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

     At March 31, 2009 and December 31, 2008, securities sold under repurchase agreements totaled $96,688 and $67,415, respectively.  Securities with a book value of $103,414 ($104,119 fair value) and $71,752 ($72,845 fair value), respectively, were used as collateral for the agreements.  The weighted-average interest rate of these agreements was 1.32 percent and 2.41 percent at March 31, 2009 and December 31, 2008, respectively.

NOTE 8 - LINES OF CREDIT

     At March 31, 2009, the Bank had unused short-term lines of credit to purchase Federal Funds from unrelated banks totaling $33,500.  These lines of credit are available on a one to seven day basis for general corporate purposes of the Bank.  All of the lenders have reserved the right to withdraw these lines at their option.

     The Bank has a demand note through the U.S. Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond.  The Bank may borrow up to $7,000 under the arrangement at a variable interest rate.  The note is secured by bonds with a market value of $1,995 at March 31, 2009.  The amount outstanding under the note totaled $1,497 and $2,672 at March 31, 2009 and December 31, 2008, respectively.

     The Bank also has a line of credit from the Federal Home Loan Bank of Atlanta for $88,034 secured by a lien on the Bank's 1-4 family mortgages. Allowable terms range from overnight to twenty years at varying rates set daily by the FHLB.  There were $30,000 in borrowings under the agreement at March 31, 2009 and $30,000 at December 31, 2008.

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NOTE 9 - INCOME TAXES

     Income tax expense for the quarters ended March 31, 2009 and March 31, 2008 on pretax income of $2,858 and $3,835 totaled $920 and $1,295, respectively.   The provision for federal income taxes is calculated by applying the 34% statutory federal income tax rate and increasing or reducing this amount due to any tax-exempt interest, state bank tax (net of federal benefit), business credits, surtax exemption, tax preferences, alternative minimum tax calculations, or other factors.  A summary of income tax components and a reconciliation of income taxes to the federal statutory rate are included in fiscal year-end reports.

     The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109."

NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES

     From time to time the Bank is a party to various litigation matters, both as plaintiff and as defendant, arising from its normal operations.  No material losses are anticipated in connection with any of these matters at March 31, 2009.

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

     Following are the off-balance-sheet financial instruments whose contract amounts represent credit risk:

     Loan commitments involve agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and some involve payment of a fee.  Many of the commitments are expected to expire without being fully drawn.  Therefore, the total amount of loan commitments does not necessarily represent future cash requirements.  Each customer's creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if any, upon extension of credit is based on management's credit evaluation of the borrower.  Collateral held varies but may include certificates of deposit or other negotiable collateral, commercial and residential real properties, accounts receivable, inventory and equipment.

     Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party.  The credit risk involved in issuing standby letters of credit is the same as that involved in making loan commitments to customers. Many letters of credit will expire without being drawn upon and do not necessarily represent future cash requirements.

     Management believes that its various sources of liquidity provide the resources necessary for the bank subsidiary to fund the loan commitments and to perform under standby letters of credit, if the need arises.  Neither the Company nor the Bank are involved in other off-balance sheet contractual relationships or transactions that could result in liquidity needs or other commitments or significantly impact earnings.

NOTE 11 - EMPLOYEE BENEFIT PLAN

     The Bank has a defined contribution pension plan covering all employees who have attained age twenty-one and have a minimum of one year of service.  Upon ongoing approval of the Board of Directors, the Bank matches one-hundred percent of employee contributions up to three percent of employee salary deferred and fifty percent of employee contributions in excess of three percent and up to five percent of salary deferred.  The Board of Directors may also make discretionary contributions to the Plan.  For the three-month period ended March 31, 2009 and the year ended December 31, 2008, $100 and $579, respectively, was charged to operations under the plan.

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NOTE 12 - REGULATORY MATTERS

     The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements.  The regulations require the Bank and the Company to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the tables below) of Tier 1 capital to adjusted total assets (Leverage Capital ratio) and minimum ratios of Tier 1 and total capital to risk-weighted assets.  To be considered adequately capitalized under the regulatory framework for prompt corrective action, the Company and the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risked-based ratios as set forth in the tables below.  The Company's and the Bank's actual capital ratios are presented in the tables below as of March 31, 2009:

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NOTE 13 - FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized 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 (for example, impaired loans).

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

The Company has no assets or liabilities whose fair values are measured using Level 1 inputs.

The Company's available-for-sale investment securities ($199,884 at March 31, 2009) include debt securities of U.S. government sponsored enterprises, municipal bonds, and mortgage backed securities.  The Company considers the market quoted prices of these instruments to be equivalent to debt securities that are traded less frequently than exchange-traded instruments and therefore classifies them as Level 2 inputs.  The Company predominantly makes loans for the purposes of real estate acquisition, construction, agriculture, commercial and industrial needs, and consumer expenditures.  The majority of the Company's loans are real estate secured.  Loans which are deemed to be impaired are primarily valued at the fair values of the underlying real estate collateral.  Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs. The aggregate carrying amount of impaired loans at March 31, 2009 was $4,974.  The Company also generally acquires other real estate owned through foreclosure of debts previously contracted.  Other real estate owned is valued at fair value.  Fair values for other real estate owned are obtained using independent appraisals, which the Company considers to be Level 2 inputs.  The aggregate carrying amount of other real estate owned at March 31, 2009 was $1,670.

The Company's available-for-sale investment securities, impaired loans, and other real estate owned are the only assets whose fair values the Company measures using level 2 inputs.  The Company has no liabilities whose fair values are measured using Level 2 inputs.

The Company has no assets or liabilities whose fair values are measured using Level 3 inputs.

The Company does not have goodwill, other intangible assets, other assets acquired through foreclosure, or other non-financial assets.

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NOTE 14 - CONDENSED FINANCIAL INFORMATION

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

Item 2.

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

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

Management's Discussion and Analysis is provided to afford a clearer understanding of the major elements of the Company's results of operations, financial condition, liquidity, and capital resources. The following discussion should be read in conjunction with the Company's financial statements and notes thereto and other detailed information appearing elsewhere in this report.  In addition, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year.  The accompanying consolidated financial statements include all accounts of the Company and the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accompanying unaudited consolidated financial statements at March 31, 2009 and for the three-month periods ending March 31, 2009 and 2008  have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q of the Securities and Exchange Commission.  Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements.  However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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DISTRIBUTION OF ASSETS AND LIABILITIES

The Company has historically maintained a conservative approach in determining the distribution of assets and liabilities.  Loans increased 2.4% from $583,759 at March 31, 2008 to $597,763 at March 31, 2009, and decreased .1%, from $598,281 at December 31, 2008 to $597,763 at March 31, 2009.  Loans decreased as a percentage of total assets from 68.3% to 66.8% from March 31, 2008 to March 31, 2009 and decreased from 68.4% to 66.8% from December 31, 2008 to March 31, 2009.  Loan demand in our market area slowed to a moderate pace during 2007.  This trend has continued throughout 2008, into 2009, and is expected to continue through the remainder of 2009.  Securities and federal funds sold decreased as a percentage of total assets from 26.2% at March 31, 2008 to 25.7% at March 31, 2009, and decreased from 26.1% of total assets at December 31, 2008 to 25.7% at March 31, 2009, a reflection of continued moderate loan demand coupled with lower levels of deposits.  The level of investments and federal funds sold provides for a more than adequate supply of liquidity.

Management has sought to build the deposit base with stable, relatively non-interest-sensitive deposits by offering the small to medium deposit account holders a wide array of deposit instruments at competitive rates. Non-interest-bearing demand deposits decreased as a percentage of total assets from 13.3% at March 31, 2008 to 12.0% at March 31, 2009, and increased from 11.5% at December 31, 2008 to 12.0% at March 31, 2009.  As more customers, both business and personal, are attracted to interest-bearing deposit accounts, we expect the percentage of non-interest bearing demand deposits to decline over the long-term.  Interest-bearing deposits decreased from 69.8% of total assets at March 31, 2008 to 63.3% at March 31, 2009, and decreased from 66.2% at December 31, 2008 to 63.3% at March 31, 2009.  Securities sold under agreement to repurchase increased from 5.8% at March 31, 2008 to 10.8% at March 31, 2009, and increased from 7.7% of total assets at December 31, 2008 to 10.8% at March 31, 2009.  Other short-term borrowings decreased from 3.9% of total assets at December 31, 2008 to 3.7% at March 31, 2009.  Other short-term borrowings increased from .2% at March 31, 2008 to 3.7% at March 31, 2009.

The following table sets forth the percentage relationship to total assets of significant components of the Company's balance sheets as of March 31, 2009 and March 31, 2008 and December 31, 2008:

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RESULTS OF OPERATIONS

Earnings for the three-month periods ended March 31, 2009 and 2008 were $1,938 and $2,540, respectively, resulting in a return on average assets of .87% and 1.16% and a return on average stockholders' equity of 9.05% and 12.24%, respectively.

The earnings were primarily attributable to net interest income in each period (see Net Income-Net Interest Income). Other factors include management's ongoing effort to maintain noninterest income at adequate levels (see Net Income - Noninterest Income) and to control noninterest expenses (see Net Income - Noninterest Expenses). This level of earnings, coupled with a moderate dividend policy, has supplied the necessary capital funds to support growth in total assets. Total assets increased $40,311 or 4.7% to $894,545 at March 31, 2009 from $854,234 at March 31, 2008. The following table sets forth the financial highlights for the three-month periods ending at March 31, 2009 and March 31, 2008:

(1)       For the three-month period ended March 31, 2009, average total assets amounted to $890,887 with average stockholders equity
            totaling $85,704 for the same period.
 

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NET INCOME

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

Interest rates paid on deposits and borrowed funds and earned on loans and investments have generally followed the fluctuations in market interest rates in 2009 and 2008.  However, fluctuations in market interest rates do not necessarily have a significant impact on net interest income, depending on the bank's rate sensitivity position.  A rate sensitive asset (RSA) is any loan or investment on which the interest rate can be re-priced either up or down within a certain time interval. A rate sensitive liability (RSL) is an interest paying deposit or other liability on which the interest rate can be re-priced either up or down within a certain time interval.  When a proper balance between RSA and RSL exists, market interest rate fluctuations should not have a significant impact on earnings. The larger the imbalance, the greater the interest rate risk assumed by the Bank and the greater the positive or negative impact of interest rate fluctuations on earnings.  The Bank seeks to manage its assets and liabilities in a manner that will limit interest rate risk and thus stabilize long-term earning power. Management believes that a 200 basis point rise or fall in interest rates will have less than a 10 percent effect on before-tax net interest income over a one-year period, which is within Bank guidelines.

The Bank maintained net interest margins for the three-month periods ended March 31, 2009 and March 31, 2008, of 3.79% and 3.93%, respectively, as compared to management's long-term target of 4.20%.  Net interest margins have been compressed for the Bank and industry-wide for several years for a variety of reasons.  Dramatic decreases in market interest rates by the Federal Reserve during the first quarter of 2008 and additional decreases in market rates during 2008 placed further significant pressure on net interest margins for the industry as a whole.  The resulting more historically typical upward-sloping yield curve would generally enhance the Bank's net interest margin.  However, interest rates have been reduced to historically low levels.  An extremely low interest rate environment is not one which enhances net interest margin.  As well, competition in the Bank's specific market remains significant, as new competitors seek market share and other competitors attempt to reduce their dependence on brokered deposits.  These factors tend to compress margins by driving the cost of deposits upward while driving the yields on loans downward. 

Fully-tax-equivalent net interest income for the three-month period ended March 31, 2009 was $8,015, a decrease of 1.4% from the $8,127 attained for the three-month period ended March 31, 2008.  During the same period, total fully-tax-equivalent interest income decreased by 17.5% to $11,401 from $13,821 and total interest expense decreased by 40.5% to $3,386 from $5,694.  Fully-tax-equivalent net interest income as a percentage of average total earning assets decreased .14% to 3.79% for the three-month period ended March 31, 2009 from 3.93% for the three-month period ended March 31, 2008.

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 sheets for the three-month periods ended March 31, 2009 and 2008, and a summary of changes in net interest income resulting from changes in volume and changes in rate between the three-month periods ended March 31, 2009 and 2008.

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