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, 2009 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from _____ to ______

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

For the quarterly period ended March 31, 2009

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

For the transition period from _____ to ______

Commission file number: 000-51685

CNB Financial Corp.

(Exact name of registrant as specified in its charter)

Massachusetts	20-3801620
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

33 Waldo Street, P.O. Box 830, Worcester, MA 01613-0830
(Address of principal executive offices)

(508) 752-4800
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 [ ]

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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

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 [ ]
	Non-accelerated filer [ ]	Smaller Reporting Company [X]
	(Do not check if a 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 [ ] No [X]

At ~~May 11~~August 10, 2009, the registrant had 2,~~283~~285,~~208~~033 shares of common stock, $1.00 par value, issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION			PAGE

	Item 1-	Financial Statements

		Unaudited Consolidated Balance Sheets	1
		Unaudited Consolidated Statement of Income	2
		Unaudited Consolidated Statement of Changes in Stockholders’ Equity	3
		Unaudited Consolidated Statements of Cash Flows	4
		Notes to Unaudited Consolidated Financial Statements	5

	Item 2-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3-	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4T-	Controls and Procedures	24

Item 1-	Financial Statements	PAGE
	Unaudited Consolidated Balance Sheets	1
	Unaudited Consolidated Statements of Income	2
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity	3
	Unaudited Consolidated Statements of Cash Flows	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3-	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4T-	Controls and Procedures	17

PART II – OTHER INFORMATION

~~Item 1-~~	~~Legal~~Item ~~Proceedings~~1-	18Legal Proceedings	24
~~Item 1A-~~	~~Risk~~Item ~~Factors~~1A-	18Risk Factors	24
~~Item 2-~~	~~Unregistered~~Item ~~Sales of Equity Securities and Use of Proceeds~~2-	18Unregistered Sales of Equity Securities and Use of Proceeds	24
~~Item 3-~~	~~Defaults~~Item ~~Upon Senior Securities~~3-	18Defaults Upon Senior Securities	24
~~Item 4-~~	~~Submission~~Item ~~of Matters to a Vote of Security Holders~~4-	18Submission of Matters to a Vote of Security Holders	24
~~Item 5-~~	~~Other~~Item ~~Information~~5-	18Other Information	25
~~Item 6-~~	~~Exhibits~~Item 6-	18Exhibits	25
~~Signatures~~	Signatures	19
			26

CNB FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets

~~March 31~~June 30, 2009 and December 31, 2008

(Unaudited)

ASSETS	~~March~~June 3130,			December 31,
	2009			2008
Cash and Cash Equivalents	$	94,~~077~~854,000		$	4,508,000
Investment Securities Available-for-Sale		3026,~~230~~185,000			31,314,000
Investment Securities Held-to-Maturity, (fair value of $8,529,000 as of March 31, 2009 and $8,798,000 as of December 31, 2008)		8,627,000			8,950,000
Investment Securities Held-to-Maturity, (fair value of $8,200,000 as of June 30, 2009 and $8,798,000 as of December 31, 2008)		8,251,000			8,950,000
Federal Reserve Bank Stock		743,000			786,000
Federal Home Loan Bank Stock		3,143,000			3,143,000
Loans		241,~~836~~111,000			242,396,000
Less: Allowance for Loan Losses		(23,~~978~~132,000	)		(2,873,000	)
Loans, Net		~~238~~237,~~858~~979,000			239,523,000
Premises and Equipment, Net		21,~~036~~974,000			2,107,000
Accrued Interest Receivable		~~959~~881,000			977,000
Deferred Tax Asset		21,~~009~~939,000			2,132,000
Other Real Estate Owned		879,000			879,000
Prepaid Expenses and Other Assets		~~625~~612,000			840,000
Total Assets	$	297,186,000		$	295,159,000
	$	287,440,000		$	295,159,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non Interest-bearing Deposits	$	28,174,000		$	26,904,000
Non-Interest bearing deposits	$	26,064,000		$	26,904,000
Interest-bearing Deposits		173,888,000			169,661,000
Interest-bearing deposits		160,355,000			169,661,000
Deposits		202,062,000			196,565,000
Total Deposits		186,419,000			196,565,000
Federal Home Loan Bank Advances		5662,650,000			55,650,000
Federal Funds Purchased		-			3,000,000
Subordinated Debentures		7,732,000			7,732,000
Securities Under Agreement to Repurchase		98,~~197~~926,000			11,035,000
Accrued Expenses and Other Liabilities		1,684,000			1,638,000
Total Liabilities		277,325,000			275,620,000
Total Liabilities:		267,411,000			275,620,000
Commitments and Contingencies (Note 8)
Stockholders' Equity:
Preferred Stock Par Value $1.00 Shares Authorized: 1,000,000 as of March 31, 2009 and zero as of March 31, 2008; zero issued or outstanding as of March 31, 2009 and March 31, 2008		-			-
Preferred Stock Par Value: $1.00 Shares Authorized: 1,000,000 as of June 30, 2009 and zero as of December 31, 2008; zero issued or outstanding as of June 30, 2009 and December 31, 2008 Common Stock
Common Stock Par Value: $1.00
Par Value: $1.00
Shares Authorized: 10,000,000 as of March 31, 2009 and December 31, 2008
Shares Authorized: 10,000,000 as of June 30, 2009 and December 31, 2008
Issued and Outstanding: 2,283,000 as of March 31, 2009 and December 31, 2008		2,283,000			2,283,000
Issued and Outstanding: 2,283,000 as of June 30,2009 and December 31, 2008		2,283,000			2,283,000
Additional Paid-in Capital		20,~~487~~526,000			20,448,000
Accumulated Deficit		(3,~~231~~210,000	)		(3,321,000	)
Accumulated Other Comprehensive Income, net of taxes		322,000			129,000
Accumulated Other Comprehensive Income		430,000			129,000
Total Stockholders' Equity		1920,~~861~~029,000			19,539,000
Total Liabilities and Stockholders' Equity	$	297,186,000		$	295,159,000
	$	287,440,000		$	295,159,000
See Notes to Consolidated Financial Statements

See Notes to Unaudited Consolidated Financial Statements

CNB FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Income

For the Three and Six Months Ended ~~March~~June 3130, 2009 and 2008

(Unaudited)

	Three Months Ended				Six Months Ended
	March 31,
	June 30,				June 30,
	2009		2008		2009		2008
Interest and Dividend Income:
Interest and Fees on Loans	$	3,~~575~~646,000	$	3,~~754~~612,000	$	7,222,000	$	7,367,000
Interest and Dividends on Investments		~~521~~475,000		~~844~~784,000		996,000		1,627,000
Total Interest and Dividend Income		4,~~096~~121,000		4,~~598~~396,000		8,218,000		8,994,000
Interest Expense:
Interest Expense on Deposits		968,000		1,562,000
Deposits		843,000		1,255,000		1,810,000		2,816,000
Interest Expense on Borrowings		605,000		722,000
Borrowings		590,000		703,000		1,195,000		1,426,000
Total Interest Expense		1,~~573~~433,000		21,~~284~~958,000		3,005,000		4,242,000
Net Interest Income		2,~~523~~688,000		2,~~314~~438,000		5,213,000		4,752,000
Provision for Loan Losses		150,000		~~100~~184,000		300,000		284,000
Net Interest Income, After Provision for Loan Losses		2,~~373~~538,000		2,~~214~~254,000		4,913,000		4,468,000
Other Income:
Fees on Deposit Accounts		6061,000		5259,000		121,000		111,000
Loan Related Fees		2230,000		2926,000		52,000		55,000
Security Gains (net of losses)		-		184,000
Other		37,000		47,000		70,000		73,000
Other		33,000		26,000
Security Gains (net of losses)		108,000		-		108,000		184,000
Total Other Income		~~115~~236,000		~~291~~132,000		351,000		423,000
Operating Expense:
Operating Expense: Employee Compensation and Benefits
Employee Compensation and Benefits		1,228,000		1,215,000
		1,199,000		1,218,000		2,427,000		2,434,000
Occupancy and Equipment		~~362~~331,000		~~325~~320,000		693,000		646,000
Professional Fees		~~275~~240,000		~~178~~289,000		466,000		467,000
Marketing and Public Relations		62,000		78,000
Merger Related Professional Fees		305,000		-		355,000		-
Data Processing Expense		156,000		123,000
Marketing and Public Relations		13,000		4,000		75,000		81,000
Other General and Administrative Expenses		268,000		231,000
Data Processing Expense		156,000		132,000		312,000		254,000
Total Operating Expense		2,351,000		2,150,000
FDIC Insurance and Special Assessment		302,000		39,000		382,000		78,000
Income Before Taxes		137,000		355,000
Other General and Administrative Expenses		200,000		200,000		389,000		392,000
Provision for Income Taxes		47,000		85,000
Total Operating Expense		2,746,000		2,202,000		5,099,000		4,352,000
Net Income	$	90,000	$	270,000
Income Before Taxes		28,000		184,000		165,000		539,000
Net Income per Basic Share	$	0.04	$	0.12
Provision for Income Taxes		8,000		47,000		54,000		132,000
Net Income per Diluted Share	$	0.04	$	0.12
Net Income	$	20,000	$	137,000	$	111,000	$	407,000
Weighted Average Shares - Basic		2,283,000		2,283,000
Net Income per Basic Share	$	0.01	$	0.06	$	0.05	$	0.18
Weighted Average Shares - Diluted		2,283,000		2,283,000
Net Income per Diluted Share	$	0.01	$	0.06	$	0.05	$	0.18
Weighted Average Shares - Basic		2,283,000		2,283,000		2,283,000		2,283,000
Weighted Average Shares - Diluted		2,283,000		2,283,000		2,283,000		2,283,000

See Notes to Unaudited Consolidated Financial Statements

CNB FINANCIAL CORP.

Consolidated ~~Statements~~ Statement of Changes in Stockholders’ Equity

For the ~~Three~~Six Months Ended ~~March~~June 3130, 2009

(Unaudited)

	Common Stock									Accumulated Other
	Number of Shares		Par Value		Additional Paid-in Capital		Accumulated Deficit			~~Accumulated Other~~ Comprehensive Income (Loss) net of taxes		Total
Balance, December 31, 2008		2,283,000	$	2,283,000	$	20,448,000	$	(3,321,000	)	$	129,000	$	19,539,000
Net Income								90111,000					90111,000
Other Comprehensive Income Unrealized Gains on Securities Available-for-Sale
Other Comprehensive Income Unrealized Gains (Losses) on Securities Available-for-Sale, net of reclassification for $108,000 realized gain and deferred taxes
											193,000		193,000
											301,000		301,000
Total Comprehensive Income													283,000
Total Comprehensive income													412,000
Share-based Compensation						3978,000							3978,000
Balance, March 31, 2009		2,283,000	$	2,283,000	$	20,487,000	$	(3,231,000	)	$	322,000	$	19,861,000
Balance, June 30, 2009		2,283,000	$	2,283,000	$	20,526,000	$	(3,210,000	)	$	430,000	$	20,029,000

See Notes to Unaudited Consolidated Financial Statements

CNB FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the ~~Three~~Six Months Ended ~~March~~June 3130, 2009 and 2008

(Unaudited)

	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2009			2008
Cash Flows from Operating Activities:
Net Income	$	90111,000		$	~~270~~407,000
Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities:
Share-based Compensation		3978,000			4175,000
Provision for Loan Losses		~~150~~300,000			~~100~~284,000
Gains on sale of securities Available-for-Sale		-(108,000	)		(184,000	)
Decrease (Increase) in Net Deferred Loan Costs		24,000			(1,000	)
Increase in Net Deferred Loan Costs		29,000			(6,000	)
Depreciation, Amortization of Premiums and Accretion of Discounts on Securities		63130,000			58120,000
Increase (Decrease) in Accrued Interest Receivable		18,000			(32,000	)
Decrease in Accrued Interest Receivable		96,000			18,000
(Increase) Decrease in Other Assets		214,000			(44,000	)
Decrease in Other Assets		228,000			23,000
Increase in Accrued Expenses and Other Liabilities		46,000			7,000
Increase (Decrease) in Accrued Expenses and Other Liabilities		46,000			(527,000	)
Net Cash Provided by Operating Activities		~~644~~910,000			~~215~~210,000
Cash Flows from Investing Activities:
Purchase of Investment Securities Held-to-Maturity		-			(50,000	)
Purchase of Investment Securities Available-for-Sale		-			(7,001,000	)
Principal Payments on Mortgage Backed Securities (CMOs) Available-for-Sale		1,420,000			1,436,000
Principal Payments on Mortgage Backed Securities (CMOs)		4,463,000			2,895,000
Principal Payments on Mortgage Backed Securities (CMOs) Held-to-Maturity		322,000			-
Proceeds from Maturity of Investment Securities Held-to-Maturity		-			2,000,000
Proceeds from Maturity (Call) of Investment Securities Available-for-Sale		-			6,789,000
Proceeds from Maturity, Sale or Call of Investment Securities Available-for-Sale		2,000,000			8,789,000
(Purchase) Redemption of Federal Reserve Stock, FHLBB Stock and other bonds		43,000			(25,000	)
Repayment (Purchase) of Federal Reserve Stock, FHLBB Stock and other bonds		43,000			(116,000	)
Loan Originations, net of Principal Repayments		~~491~~1,215,000			(412,~~071~~165,000	)
Purchases of Premises and Equipment		(1030,000	)		(523,000	)
Net Cash Provided (Used) by Investing Activities		27,~~266~~691,000			(25,~~877~~671,000	)
Cash Flows from Financing Activities:
Cash Flows from Financing Activities: (Decrease) Increase in Deposits
Change in Deposits		5,497,000			(7,288,000	)
		(10,146,000	)		13,115,000
Advances from FHLBB		932,~~000~~500,000			1228,~~000~~900,000
Repayment of FHLBB Advances		(825,~~000~~500,000	)		(517,~~500~~000,000	)
Reduction of Federal Funds Purchased		(3,000,000	)		-
Decrease of Securities Under Agreement to Repurchase		(1,838,000	)		(15,000	)
(Decrease) Increase of Securities Under Agreement to Repurchase		(2,109,000	)		1,243,000
Net Cash Provided (Used) by Financing Activities		1,659,000			(803,000	)
Net Cash (Used) Provided by Financing Activities		(8,255,000	)		26,258,000
Net Change in Cash and Cash Equivalents		4346,~~569,~~000			(320,~~465~~797,000	)
Cash and Cash Equivalents, Beginning of the Period		4,508,000			8,825,000
Cash and Cash Equivalents, End of the Period	$	94,~~077~~854,000		$	529,~~360~~622,000

~~See~~Supplemental ~~Notes to~~Disclosure ~~Consolidated~~of ~~Financial~~Cash ~~Statements~~Flow Information

Interest Paid	$	3,248,000	$	4,866,000
Taxes Paid	$	62,000	$	27,000
Transfer of Loans to OREO	$	-	$	879,000

See Notes to Unaudited Consolidated Financial Statements

CNB FINANCIAL CORP. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION

CNB Financial Corp. (the “Company”) is a bank holding company. Its wholly-owned subsidiary Commonwealth National Bank, N.A. (the “Bank”) is a nationally chartered bank operating primarily in Worcester County, Massachusetts. The Bank operates out of its main office at 33 Waldo Street, Worcester, Massachusetts and has two branch offices in Worcester, Massachusetts and one each in Shrewsbury, Northbridge and West Boylston, Massachusetts. The Bank is subject to competition from other financial institutions, including commercial banks, savings banks, credit unions and mortgage banking companies. The Company is subject to the regulations of, and periodic examinations by, the Federal Reserve Board. The Bank is also subject to the regulations of, and periodic examinations by, the Office of the Comptroller of the Currency (the “OCC”) and ~~the~~ the Federal Deposit Insurance Corporation (the “FDIC”). Deposits with the Bank are insured up to the FDIC maximum amounts including unlimited deposit insurance coverage for non-interest bearing deposit transaction accounts. The Bank is also participating in the FDIC Temporary Liquidity Guaranty Program. The Company created Commonwealth National Bank Statutory Trust I, an unconsolidated special purpose subsidiary of the Company that was formed to facilitate the issuance of trust preferred securities to the public. The Bank has two subsidiaries, CNB Security Corporation (formed to buy, hold and or sell investment assets) and CNB Properties, LLC (formed to hold real estate assets acquired through foreclosure).

The Company created Commonwealth National Bank Statutory Trust I, an unconsolidated special purpose subsidiary of the Company that was formed to facilitate the issuance of trust preferred securities to the public. The Bank has two subsidiaries, CNB Security Corporation (formed to buy, hold and or sell investment assets) and CNB Properties, LLC (formed to hold real estate assets acquired through foreclosure).

Company Formation

The Company was formed on December 16, 2005 upon the reorganization of the Bank into a bank holding company structure. The Bank was organized as a national bank under the National Bank Act and received its charter to operate as a national bank from the OCC effective November 19, 2001.

In connection with the reorganization, the holders of common stock of the Bank received one share of common stock of the Company in exchange for each share of common stock of the Bank. Outstanding certificates representing shares of common stock of the Bank now represent shares of the common stock of the Company and such certificates may, but need not, be exchanged by the holders for new certificates for the appropriate number of shares of the Company. The par value of the Company’s common stock is $1 per share, and the par value of the Bank’s common stock is $5 per share. The holders of Bank options and warrants immediately prior to the reorganization received one option or warrant to acquire shares of the common stock of the Company for each Bank option or warrant then held by them on the same terms and conditions.

2. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of ~~March~~June 3130, 2009, ~~and~~ the results of operations for the three and six months ended June 30, 2009 and 2008 and cash flows for the ~~three~~six-month periods ended ~~March~~June 3130, 2009 and 2008. These statements should be read in conjunction with the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The consolidated financial statements include the accounts of the Company and the Bank. All material inter-company transactions have been eliminated in consolidation. The Company, as a separately incorporated bank holding company, has no significant operations other than serving as the sole stockholder of the Bank. Its commitments and debt service requirement, at ~~March~~June 3130, 2009, consist of subordinated debentures, including accrued interest, amounting to $7.7 million issued to the unconsolidated subsidiary, Commonwealth National Bank Statutory Trust I. ~~The~~Commonwealth National Bank Statutory Trust I is an unconsolidated special purpose subsidiary of the Company that was formed to facilitate the issuance of trust preferred securities to the public. The Company has one reportable operating segment. The results of operations for the ~~three~~six-month period ended ~~March~~June 3130, 2009 are not necessarily indicative of the results to be expected for the full year. In connection with the preparation of the accompanying financial statements, the Company has evaluated events and transactions through August 10, 2009, the date the consolidated financials were issued.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred, through a provision for loan losses charged to earnings. Losses are charged against the allowance when management believes the collectibility of principal is doubtful. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is based on management’s estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the final outcome of loans and nonperforming loans. Because of these inherent uncertainties, actual losses may differ from the amounts reflected in these consolidated financial statements. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and its effect on borrowers, the size and composition of the loan portfolio, the amount of non-performing loans and classified assets, the performance of individual loans in relation to contract term, industry peer standards and estimated fair values of underlying collateral.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

Key elements of the above estimates, including assumptions used in independent appraisals, are dependent upon the economic conditions prevailing at the time of the estimates. Accordingly, uncertainty exists as to the final outcome of certain of the valuation judgments as a result of economic conditions in the Company’s lending areas. The inherent uncertainties in the assumptions relative to projected sales prices or rental

~~rates~~value ~~may result~~or inobservable market price) of the ~~ultimate~~impaired ~~realization~~loan is lower than the carrying value of ~~amounts~~that onloan. The ~~certain~~general component covers non-classified loans ~~that~~and ~~are significantly~~is ~~different~~based ~~from~~on ~~the~~historical ~~amounts~~loss ~~reflected~~experience infor ~~these~~each ~~consolidated financial~~loan ~~statements~~type adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All loans are individually evaluated for impairment, except for smaller balance homogeneous residential and consumer loans. These loans are evaluated in the aggregate, according to the Company’s normal loan review process, which reviews overall credit evaluation, non-accrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral-dependent. For collateral-dependent loans, the extent of impairment is the shortfall, if any, between the collateral value, less costs to dispose of such collateral, and the carrying value of the loan. Loans on non-accrual status and restructured troubled debts are considered to be impaired.

Income Taxes

The Company records income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary difference between the accounting bases and the tax bases of the Company’s assets and liabilities. Deferred taxes are measured using enacted tax rates that are expected to be in effect when the amounts related to such temporary differences are realized or settled. A valuation allowance is established against deferred tax assets when, based upon the available evidence, management believes it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

The Company and its subsidiaries file a consolidated federal income tax return in the United States and separate income tax returns in Massachusetts. The Company’s federal and state income tax returns filed for 2003 and prior are no longer subject to examination by the federal or state jurisdictions.

Recent Accounting Pronouncements

FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on January 1, 2009 and did not impact the financial statements because no restricted shares have been issued under the Company’s Equity Incentive Plan.

In ~~April,~~ May 2009, the Financial Accounting Standards Board (FASB) issued ~~FASB~~Statement ~~Staff~~of ~~Position~~Financial Accounting Standards No. ~~FAS 157-4~~165, ~~Determining~~Subsequent ~~Fair Value~~Events ~~When~~(“SFAS ~~the~~No. ~~Volume~~165”). ~~and~~This ~~Level~~statement establishes general standards of ~~Activity~~accounting for ~~the~~and ~~Asset~~disclosure orof ~~Liability~~events ~~Have Significantly~~that ~~Decreased~~occur ~~and~~after ~~Identifying~~the ~~Transactions~~balance ~~That~~sheet ~~Are~~date ~~Not Orderly.”FSP 157-4~~but ~~affirms~~before ~~that~~financial ~~the~~statements ~~objective~~are ofissued or ~~fair~~are ~~value~~available ~~when~~to ~~the~~be ~~market for~~issued. anIn ~~asset~~particular, isthis ~~not~~Statement ~~active~~sets isforth 1) the ~~price~~period ~~that~~after ~~would~~the bebalance ~~received~~sheet todate ~~sell~~during ~~the~~which ~~asset in~~management anof ~~orderly~~a ~~transaction,~~reporting ~~and~~entity ~~clarifies~~should ~~and~~evaluate ~~includes~~events ~~additional~~or ~~factors~~transactions ~~for determining~~that ~~whether~~may ~~there~~occur ~~has~~for ~~been~~potential arecognition ~~significant~~or ~~decrease~~disclosure in ~~market~~the ~~activity~~financial ~~for an~~statements, ~~asset~~2) ~~when~~ the ~~market~~circumstances ~~for~~under ~~that~~which ~~asset~~an isentity ~~not~~should ~~active.~~recognize ~~FSP 157-4~~events ~~requires an~~or ~~entity~~transactions tooccurring ~~base~~after ~~its~~the ~~conclusion~~balance ~~about~~sheet ~~whether~~date ain ~~transaction~~its ~~was~~financial ~~not~~statements ~~orderly~~and on 3) the ~~weight~~disclosures ofthat ~~the~~an ~~evidence.~~entity ~~FSP 157-4~~should ~~also~~make ~~amended~~about ~~SFAS 157,~~events ~~“Fair Value~~or ~~Measurements,”~~transactions tothat occurred ~~expand~~after ~~certain~~the ~~disclosure~~balance ~~requirements~~sheet date. ~~FSP~~SFAS ~~157-4~~No. 165 is effective for interim or annual financial periods ~~beginning~~ending after ~~March~~June 15, 2009 and ishad ~~not~~no ~~expected to~~effect ~~significantly~~on ~~impact~~ the ~~Company’s~~ financial statements.

In ~~April,~~ June 2009, the FASB issued ~~FASB~~Statement ~~Staff~~of ~~Position~~Financial Accounting Standards No. ~~FAS 115-2 and FAS 124-2~~166, ~~Recognition~~ ~~and~~Accounting ~~Presentation~~for Transfers of ~~Other-Than-Temporary~~Financial ~~Impairments.~~Assets ~~FSP~~(“SFAS ~~115-2~~No ~~and 124-2 (i~~166”) ~~changes~~. ~~existing~~This ~~guidance~~Statement ~~for~~improves ~~determining~~the ~~whether~~relevance, anrepresentational ~~impairment is~~faithfulness, ~~other than temporary to debt securities~~ and ~~(ii) replaces~~comparability of the ~~existing requirement~~information that ~~the~~a reporting entity’s ~~management~~provides ~~assert~~in itits ~~has~~financial ~~both~~reports ~~the~~about ~~intent~~a ~~and~~transfer ~~ability~~of tofinancial ~~hold~~assets; anthe ~~impaired~~effects ~~security~~of ~~until recovery with~~ a ~~requirement~~transfer ~~that management~~on ~~assert:~~its ~~(a) it~~financial ~~does~~position, ~~not~~financial ~~have~~performance, ~~the~~and ~~intent~~cash toflows; ~~sell~~and ~~the~~a ~~security; and~~transferor’s ~~(b) it~~continuing isinvolvement ~~more~~in ~~likely~~transferred ~~than~~financial ~~not~~assets. itThis ~~will~~Statement ~~not~~is ~~have~~effective toas ~~sell~~of the ~~security before~~beginning ~~recovery~~ of ~~its~~each ~~cost~~reporting ~~basis.~~entity’s ~~Under~~first ~~FSP 115-2~~annual ~~and~~reporting ~~124-2,~~period ~~declines~~that ~~in the~~begins ~~fair~~after ~~value~~November of15, ~~held-to-maturity~~2009, ~~and available-~~for~~-sale~~ ~~securities~~interim ~~below~~periods ~~their cost~~within that ~~are~~first ~~deemed~~annual toreporting beperiod ~~other~~and ~~than~~for ~~temporary~~interim ~~are~~and ~~reflected~~annual inreporting ~~earnings~~periods ~~as realized~~thereafter. ~~losses~~Earlier toapplication ~~the extent the impairment~~ is ~~related to credit losses~~prohibited. The ~~amount~~ adoption of ~~the impairment related to other factors is recognized in other~~this ~~comprehensive~~pronouncement ~~income. FSP 115-2 and 124-2~~ is ~~effective for interim periods beginning after March 15, 2009 and is~~ not expected to ~~significantly~~have a material impact on the Company’s consolidated financial statements.

~~FSP SFAS 107-1~~In ~~and~~June ~~APB 28-1~~2009, ~~Interim Disclosures~~the ~~about~~FASB ~~Fair~~issued ~~Value~~Statement of Financial ~~Instruments.~~Accounting ~~FSP 107-1~~Standards ~~and APB~~No. ~~28-1 amends SFAS 107~~167, ~~Disclosures~~Amendments ~~about~~to ~~Fair~~FASB ~~Value~~Interpretation ~~of Financial~~No. ~~Instruments,~~46(R) to(“SFAS ~~require~~No. an167”). ~~entity~~This toStatement ~~provide~~amends ~~disclosures~~certain ~~about fair~~requirements ~~value~~ of ~~financial~~FASB ~~instruments~~Interpretation inNo. ~~interim~~46 ~~financial~~(revised ~~information~~December ~~and amends Accounting Principles Board (APB~~2003) ~~Opinion No. 28~~, ~~Interim~~Consolidation ~~Financial~~of ~~Reporting, to~~Variable ~~require~~Interest ~~those~~Entities, ~~disclosures~~to inimprove ~~summarized~~ financial ~~information~~reporting atby ~~interim~~enterprises ~~reporting~~involved ~~periods.~~with ~~Under~~variable ~~FSP 107-1~~interest entities and ~~APB 28-1,~~to aprovide ~~publicly~~more ~~traded company~~relevant ~~shall~~and ~~include~~reliable ~~disclosures~~information ~~about~~to ~~the~~users ~~fair value~~ of ~~its~~ financial ~~instruments~~ ~~whenever~~statements. itThis ~~issues~~Statement ~~summarized~~is ~~financial~~effective ~~information~~as ~~for~~of ~~interim reporting~~the ~~periods.~~beginning Inof ~~addition,~~each ~~entities~~reporting ~~must~~entity’s ~~disclose,~~first inannual ~~the~~reporting ~~body~~period orthat inbegins ~~the accompanying~~after ~~notes~~November of15, ~~its~~2009, ~~summarized financial information~~ for interim ~~reporting~~ periods ~~and~~within inthat ~~its~~first ~~financial statements for~~ annual reporting ~~periods~~period, ~~the~~and ~~fair value of all financial instruments~~ for ~~which~~interim itand isannual ~~practicable~~reporting toperiods ~~estimate~~thereafter. ~~that value,~~Earlier ~~whether~~application ~~recognized~~is ~~or not recognized in the statement of financial position, as required by SFAS 107~~prohibited. The ~~new~~adoption ~~interim~~of ~~disclosures~~this ~~required~~pronouncement ~~by FSP SFAS 107-1~~is ~~and~~not ~~APB~~expected ~~28-1~~to ~~will~~have bea ~~included~~material inimpact ~~the~~on the Company’s ~~interim~~ consolidated financial statements ~~beginning with the second quarter of 2009~~.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168"). SFAS 168 will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles ("GAAP"), superseding existing FASB, American Institute of Certified Public Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related accounting literature. SFAS 168 reorganizes the thousands of GAAP

pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. SFAS 168 will be effective for financial statements issued for reporting periods that end after September 15, 2009. This pronouncement will have no impact on the Company’s financial statements. However, all future references to authoritative accounting literature will be references in accordance with SFAS 168.

In April 2009, the FASB issued FASB Staff Position No. FAS 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. FSP 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. FSP 157-4 is effective for interim periods beginning after March 15, 2009. The Company adopted FAS 157-4 as of April 1, 2009 and the adoption did not significantly impact the Company’s financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP 115-2 and 124-2 (i) changes existing guidance for determining whether an impairment to debt securities is other than temporary and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP 115-2 and 124-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. FSP 115-2 and 124-2 is effective for interim periods beginning after March 15, 2009. The Company adopted FAS 115-2 and FAS124-2 as of April 1, 2009 and the adoption did not significantly impact the Company’s financial statements.

FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP 107-1 and APB 28-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Under FSP 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107. The Company adopted FSP 107-1 and APB 28-1 as of April 1, 2009 and the required disclosures are in Note 9.

4. INVESTMENT SECURITIES

The amortized cost and fair value of investment securities available-for-sale and held-to-maturity, with gross unrealized gains and losses, at ~~March~~June 3130, 2009 are as follows:

	Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale:			Gains		Losses
Securities Available-for-Sale:
Government Sponsored Enterprises Due after five years through ten years	$	1,891,000	$	110,000	$	-		$	2,001,000
Debt securities:
Mortgage-backed Securities (including CMOs)
GSE mortgage-backed	$	20,392,000	$	1,012,000	$	(2,000	)	$	21,402,000
Due after five years through ten years		4,865,000		228,000		-			5,093,000
Private Issue mortgage-backed securities		5,117,000		-		(334,000	)		4,783,000
Due after ten years		22,975,000		872,000		(711,000	)		23,136,000
	$	25,509,000	$	1,012,000	$	(336,000	)	$	26,185,000
	$	29,731,000	$	1,210,000	$	(711,000	)	$	30,230,000
Securities Held-to-Maturity:
Held-to-maturity:
Debt securities:
Mortgage-backed Securities(including CMOs)
Municipal	$	5,372,000	$	47,000	$	(111,000	)	$	5,308,000
Due after five years through ten years	$	3,105,000	$	55,000	$	(36,000	)	$	3,124,000
GSE mortgage-backed		1,775,000		62,000		-			1,837,000
Municipal Bonds
Private Issue mortgage-backed securities		954,000				(49,000	)		905,000
Due after five years through ten years		330,000		4,000		-			334,000
Other bonds and obligations		150,000		-					150,000
Due after ten years		5,042,000		27,000		(148,000	)		4,921,000
	$	8,251,000	$	109,000	$	(160,000	)	$	8,200,000
Other Bonds Due after one year through five years		150,000		-		-			150,000
Total Investment Securities	$	33,760,000	$	1,121,000	$	(496,000	)	$	34,385,000
	$	8,627,000	$	86,000	$	(184,000	)	$	8,529,000
Total Investment Securities	$	38,358,000	$	1,296,000	$	(895,000	)	$	38,759,000

The amortized cost and fair value of investment securities available-for-sale and held-to-maturity, with gross unrealized gains and losses, at December 31, 2008 are as follows:

	Amortized cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale:			Gains		Losses
Securities Available-for-Sale:
Government Sponsored Enterprises Due within one year	$	1,888,000	$	113,000	$	-		$	2,001,000
Debt securities:
Mortgage-backed Securities (including CMOs)
Government–sponsored enterprises (GSE)	$	1,888,000	$	113,000	$	-		$	2,001,000
Due after five years through ten years		5,119,000		100,000		-			5,219,000
GSE mortgage-backed		23,329,000		819,000		(48,000	)		24,100,000
Due after ten years		24,125,000		719,000		(750,000	)		24,094,000
Private Issue mortgage-backed securities		5,915,000		-		(702,000	)		5,213,000
	$	31,132,000	$	932,000	$	(750,000	)	$	31,314,000
Held-to-maturity:
Securities Held-to-Maturity:
Mortgage-backed Securities(including CMOs)
Debt securities:
Due after five years through ten years	$	3,428,000	$	36,000	$	(100,000	)	$	3,364,000
Municipal	$	5,372,000	$	30,000	$	(118,000	)	$	5,284,000
Municipal Bonds
GSE mortgage-backed		2,121,000		36,000		-			2,157,000
Due within one year		1,103,000		7,000		(1,000	)		1,109,000
Private Issue mortgage-backed securities		1,307,000				(100,000	)		1,207,000
Due after five years through ten years		4,269,000		23,000		(117,000	)		4,175,000
Other bonds and obligations		150,000		-					150,000
Other Bonds Due after one year through five years		150,000		-		-			150,000
	$	8,950,000	$	66,000	$	(218,000	)	$	8,798,000
Total Investment Securities	$	40,082,000	$	998,000	$	(968,000	)	$	40,112,000

LOANS

Major classifications of loans at March 31, 2009 and December 31, 2008 follow:

	March 31			December 31,
	2009			2008
Commercial and Industrial	$	49,278,000		$	53,389,000
Commercial Real Estate		156,026,000			152,080,000
Residential Real Estate		22,567,000			24,001,000
Consumer		13,965,000			12,926,000
Total loans		241,836,000			242,396,000
Less: Allowance for loan losses		(2,978,000	)		(2,873,000	)
Total loans, net	$	238,858,000		$	239,523,000

The Bank’s lending activities are conducted principally in Worcester County, Massachusetts. The Bank originates commercial real estate loans, commercial loans, commercial construction loans, commercial lines of credit, consumer loans and residential real estate loans. At March 31, 2009, no loans accruing interest were past due 90 days or more and $3.9 million of loans were on non-accrual status. Net deferred costs totaled $304,000 and $321,000 at March 31, 2009 and December 31, 2008, respectively.

A summary of changes in the allowance for loan losses for the three-month periods ended March 31, 2009 and 2008 follows:

	2009		2008
Beginning Balance	$	2,873,000	$	2,844,000
Provision for loan losses		150,000		100,000
Recoveries		23,000		1,000
Less: Loans charged-off		68,000		210,000
Balance as of March 31,	$	2,978,000	$	2,735,000

5. STOCK-OPTION PLAN

On November 6, 2001, the shareholders’ voted to approve the Bank’s 2001 Stock Option Plan (the “Plan”) for employees and directors of the Bank. The Compensation Committee of the Board of Directors administers the Plan (as amended on May 19, 2005 and March 22, 2007), which has authorized 400,000 shares for grant. Both incentive stock options and non-qualified stock options may be granted under the Plan. The authorization of grants, the determination of number of shares to be granted, the exercise date and the option price of each award will be determined by the Compensation Committee of the Board of Directors on the date of grant. The options vest annually at a rate of 25% over a four-year period and will expire on the tenth anniversary of the grant date.

Upon the reorganization of the Bank into a holding company structure, the Plan was assumed and restated by the Company on the same terms and conditions as the Bank’s Plan. All shares of common stock of the Bank under the Plan which remained available on the date of reorganization for issuance of options were converted into the same number of shares of common stock of the Company and are available for future option grants made by the Company. Any options thereafter granted pursuant to the Plan shall be options granted by the Company and shall relate to the common stock of the Company. The following table depicts the average of the assumptions that were used to estimate the fair value of options that remained outstanding at March 31, 2009. There were no stock options, or stock awards, granted during the quarter ended March 31, 2009.

Dividend yield	2.36%
Expected volatility	32.71%
Risk free interest rate	3.75%
Expected lives	6.0 years

The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2009 is as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage backed securities amortize monthly.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	cost		Value		cost		Value
Over 1 year to 5 years	$	-	$	-	$	150	$	150
Over 5 years to 10 years		-		-		330		333
Over 10 years		-		-		5,042		4,975
Total bonds and obligations		-		-		5,522		5,458

Mortgage-backed		25,509		26,185		2,729		2,742

Total debt securities	$	25,509	$	26,185	$	8,251	$	8,200

The following chart reflects the gross unrealized loss and fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired at June 30, 2009 and December 31, 2008.

June 30, 2009



	Less than 12 Months					12 Months or Longer					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
						(in thousands)

GSE mortgage-backed	$	367	$	(2	)	$	-	$	-		$	367	$	(2	)
Private issue mortgage- backed securities		2,221		(73	)		3,468		(310	)		5,689		(383	)
Municipals		1,778		(19	)		1,391		(92	)		3,169		(111	)

Total Temporarily Impaired Securities	$	4,366	$	(94	)	$	4,859	$	(402	)	$	9,225	$	(496	)

December 31, 2008


	Less than 12 Months					12 Months or Longer					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
						(in thousands)

GSE mortgage-backed	$	1,254	$	(48	)	$	-	$	-		$	1,254	$	(48	)
Private issue mortgage- backed securities		4,097		(478	)		2,323		(324	)		6,420		(802	)
Municipals		2,791		(117	)		298		(1	)		3,089		(118	)

Total Temporarily Impaired Securities	$	8,142	$	(643	)	$	2,621	$	(325	)	$	10,763	$	(968	)

The following table shows the number and percentage of depreciation of investment securities in a loss position as of June 30, 2009.

	Number of Securities		Amortized Cost		Gross Unrealized Losses			% of Depreciation
GSE mortgage-backed		1	$	369,000	$	(2,000	)		0.5	%
Private issue mortgage- backed securities		4		6,072,000		(383,000	)		6.3	%
Municipals		12		3,280,000		(111,000	)		3.4	%
		17	$	9,721,000	$	(496,000	)		5.1	%

The unrealized losses on the Company’s investment in municipal bonds and mortgage-backed securities issued by the U.S. government and government-sponsored enterprises were generally caused by interest rate changes. These investments are guaranteed by the U.S. Government or an agency thereof. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not have the intent to sell the securities, and it is more likely than not it will not have to sell the securities before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

The unrealized losses on the Company’s investment in mortgage-backed securities issued by certain private entities are primarily caused by (a) a general lack of liquidity in the market for these securities and (b) recent downgrades in certain levels of these securities by several industry analysts. The contractual terms of these investments do not permit the issuers to settle the security at a price less than the par value of the investment. At June 30, 2009, one of these securities with book value $1,524,000 and fair value $1,361,000 had a long-term credit rating of Ba1, which is one level below investment grade, and all other securities were investment grade. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments based on the current credit statistics of the underlying collateral and the level of credit support available to absorb losses. Management monitors these securities quarterly and performs individual impairment testing on securities with adverse agency ratings and significant unrealized losses. Therefore, it is expected that the bonds would not be ultimately settled at a price less than the par value of the investment. Because the Company does not have the intent to sell the securities, and it is more likely than not it will not have to sell the securities before recovery of its cost basis, it does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

During the first half of 2009, the Company had one available-for-sale investment security, which was originally purchased at a discount, called at par resulting in proceeds of $2.0 million and a gain of $108,000. During the six months ended June 30, 2008, the Company sold two available-for-sale investment securities resulting in proceeds of $3.8 million and gains of $184,000.

5. LOANS

Major classifications of loans at June 30, 2009 and December 31, 2008 follow:

	June 30,			December 31,
	2009			2008
Commercial and Industrial	$	50,122,000		$	53,389,000
Commercial Real Estate		151,555,000			152,080,000
Residential Real Estate		23,391,000			24,001,000
Consumer		16,043,000			12,926,000
Total loans		241,111,000			242,396,000
Less: Allowance for Loan Losses		(3,132,000	)		(2,873,000	)
Total loans, net	$	237,979,000		$	239,523,000

The Bank’s lending activities are conducted principally in Worcester County, Massachusetts. The Bank originates commercial real estate loans, commercial loans, commercial construction loans, commercial lines of credit, consumer loans and residential real estate loans. Net deferred costs totaled $299,000 and $321,000 at June 30, 2009 and December 31, 2008, respectively.

The Company grants commercial and residential mortgages, construction loans and commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans and commercial mortgages throughout Worcester County, Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate values and general

economic conditions in this area. Commercial real estate, including commercial construction loans, represents 64% of the total loan portfolio at June 30, 2009.

A summary of changes in the allowance for loan losses for the six-month periods ended June 30, 2009 and 2008 follows:

	2009			2008
Balance, Beginning of Year	$	2,873,000		$	2,844,000
Provision for loan losses		300,000			284,000
Recoveries		26,000			1,000
Less: Loans charged-off		(68,000	)		(212,000	)
Balance as of June 30,	$	3,132,000		$	2,917,000

As of June 30, 2009 and December 31, 2008, the Company’s recorded investment in impaired loans and the related valuation allowance was as follows:

	June 30, 2009				December 31, 2008
	Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance
Impaired Loans:
Valuation Allowance Required	$	1,817,000	$	120,000	$	166,000	$	18,000
No Valuation Allowance Required		1,334,000		-		3,312,000		-
	$	3,151,000	$	120,000	$	3,478,000	$	18,000

The valuation allowance on impaired loans is included in the allowance for loan losses on the consolidated balance sheets. At June 30, 2009 and December 31, 2008, no loans accruing interest were past due 90 days or more and $3.2 million and $3.5 million, respectively, of loans were on non-accrual status.

6. STOCK-BASED PLANS

Stock Option Plan

Upon the reorganization of the Bank into a holding company structure, the Plan was assumed and restated by the Company on the same terms and conditions as the Bank’s Plan. All shares of common stock of the Bank under the Plan which remained available on the date of reorganization for issuance of options were converted into the same number of shares of common stock of the Company and are available for future option grants made by the Company. Any options thereafter granted pursuant to the Plan shall be options granted by the Company and shall relate to the common stock of the Company. There were no stock options or stock awards granted during the six months ended June 30, 2009.

7. WEIGHTED AVERAGE SHARES – BASIC AND DILUTED

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations for the three and six month periods ended ~~March 31~~June 30, 2009 and 2008 is presented below:

	Three Months Ended
	Three Months Ended June 30,
	March 31,
	2009		2008
Weighted-average shares outstanding:
Weighted-average shares outstanding—Basic		2,283,000		2,283,000
Dilutive securities		-		-
Weighted-average shares outstanding—Diluted		2,283,000		2,283,000

Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be antidilutive. For the three months ended March 31, 2009 and 2008, options and warrants outstanding totaling 449,000 and 380,000 shares, respectively, were excluded from the calculations, as their effect would have been antidilutive.11

	Six Months Ended June 30,
	2009		2008
Weighted-average shares outstanding:
Weighted-average shares outstanding—Basic		2,283,000		2,283,000
Dilutive securities		-		-

Weighted-average shares outstanding—Diluted		2,283,000		2,283,000

Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be antidilutive. Stock options and warrants totaling 449,000 and 380,000 were excluded from the diluted earnings per share calculation at June 30, 2009 and 2008 respectively, as their effect would have been anitdilutive.

8. LOAN COMMITMENTS

Financial instruments with off-balance-sheet risk at ~~March~~June 3130, 2009 follow:

Commitments whose contract amounts represent credit risk–
	Commitments to originate loans	$ 1,975,000
	Unadvanced Loan Proceeds	9,919,000
	Unused lines of credit	17,699,000
	Secured commercial lines of credit	31,673,000
	Letters of Credit	2,425,000

Commitments whose contract amounts represent credit risk–

Commitments to originate loans	$	5,826,000
Unadvanced Loan Proceeds		10,038,000
Unused lines of credit		16,778,000
Secured commercial lines of credit		33,792,000
Letters of Credit		2,386,000

9. FAIR VALUES OF ASSETS AND LIABILITIES

~~Effective January~~The 1,Company ~~2008,~~groups ~~the~~its ~~Company~~financial ~~adopted~~assets ~~Statement~~and offinancial ~~Financial~~liabilities ~~Accounting~~measured ~~Standards No.~~at ~~157~~fair ~~(“SFAS~~value ~~157”),~~in ~~Fair Value~~three ~~Measurements~~levels, based on the markets in which ~~provides~~the aassets ~~framework~~and ~~for~~liabilities ~~measuring~~are ~~fair~~traded ~~value under~~and ~~generally~~the ~~accepted~~reliability ~~accounting~~of ~~principles~~the assumptions used to determine fair value.

The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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 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.

9The following methods and assumptions were used by the Company in estimating fair value disclosures:

~~Assets~~ Cash and ~~liabilities~~cash ~~measured~~equivalents at- ~~fair~~The ~~value~~carrying onamounts aof ~~recurring~~cash ~~basis~~and ~~are~~short-term ~~summarized~~instruments ~~below as~~approximate offair ~~March~~values ~~31,~~based ~~2009:~~on the short-term nature of the assets.

							Asset/Liabilities
	Level 1		Level 2		Level 3		at Fair Value
Assets
Securities available for sale	$	-	$	30,229,000	$	-	$	30,229,000
Total Assets	$	-	$	30,229,000	$	-	$	30,229,000

Interest-bearing deposits in banks - The carrying amounts of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

Investment Securities – The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities and U.S. Government and federal agency securities. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. These securities include government-sponsored enterprise obligations, FHLMC and FNMA bonds, corporate bonds and mortgage-backed securities. The fair value of Federal Home Loan Bank of Boston stock and the Federal Reserve Bank of Boston stock are equal to cost, since there is no market for these instruments and they are redeemable at par. There is currently a moratorium on the redemption of Federal Home Loan Bank of Boston stock.

Loans receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings – For short-term borrowings maturing within ninety days, carrying values approximate to fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Long-term borrowings - The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest - The carrying amounts of accrued interest approximate fair value.

Subordinated Debentures - The fair value of subordinated debentures approximates book value due to the three-month repricing nature of these instruments.

Commitments to Extend Credit and Commercial and Standby Letters of Credit- The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of financial commercial and standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties. The fair value of these fees at June 30, 2009 and December 31, 2008 was immaterial to the consolidated financial statements as a whole.

Off-balance sheet credit-related instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2009:

							Asset/Liabilities
	Level 1		Level 2		Level 3		at Fair Value
Assets
Securities available-for-sale	$	-	$	26,185,000	$	-	$	26,185,000
Total Assets	$	-	$	26,185,000	$	-	$	26,185,000

Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2008:

							Asset/Liabilities
	Level 1		Level 2		Level 3		at Fair Value
Assets
Securities available for sale	$	-	$	31,314,000	$	-	$	31,314,000
Total Assets	$	-	$	31,314,000	$	-	$	31,314,000

At ~~March 31~~June 30, 2009 and December 31, 2008, there were no liabilities valued at fair value.

The Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of March 31, 2009 and 2008.13

							Quarter ended March 31, 2009
	Level 1		Level 2		Level 3		Total Gains/(Losses)
Assets
Impaired Loans	$	-	$	-	$	2,248,000	$	-
Total Assets	$	-	$	-	$	2,248,000	$	-

Quarter ended March 31, 2008

Three months ended June 30, 2009

Six-months ended June 30, 2009

Level 1

Level 2

Level 3

Total Gains/(Losses)

Assets

Impaired Loans

~~271~~2,020,000

~~44,000~~-

Total Assets

~~271~~2,020,000

~~44,000~~-

The amount of loans represents the carrying value and related write-downs of impaired loans for which adjustments are based on the estimated value of the collateral. Determination of the fair value of level 3 items in the above table included management’s consideration of the value of loan collateral such as accounts receivable (discounted for the probability of collection), and equipment, (estimating the equipment value at the time of a potential sale) plus the value of underlying personal guarantees of principals of the borrowing entities. During the quarter ended March 31, 2009, no loans carried at fair value on a nonrecurring basis were written-down by a charge to the allowance for loan losses compared with $481,000 in loans carried at fair value on a nonrecurring basis written-down by a $210,000 charge to the allowance for loan losses to bring their fair value to $271,000 for the quarter ended March 31, 2008. During the quarter ended March 31, 2009, one loan, in the amount of $68,000 was charged-off against the allowance for loan losses.

							Three months ended June 30, 2008		Six-months ended June 30, 2008
	Level 1		Level 2		Level 3		Total Gains/(Losses)		Total Gains/(Losses)
Assets
Impaired Loans	$	-	$	-	$	271,000	$	-	$	( 44,000	)
Total Assets	$	-	$	-	$	271,000	$	-	$	( 44,000	)

Summary of Fair Values of Financial Instruments

The estimated fair values and related carrying or notional amounts of the Company’s financial instruments are as follows at June 30, 2009 and December 31, 2008. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	June 30, 2009				December 31, 2008
(Dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial Assets
Cash and Cash Equivalents	$	4,854	$	4,854	$	4,508	$	4,508
Securities Available-for-Sale		26,185		26,185		31,314		31,314
Securities Held-to-Maturity		8,251		8,200		8,950		8,798
Federal Reserve Bank Stock		743		743		786		786
Federal Home Loan Bank Stock		3,143		3,143		3,143		3,143
Loans, Net		237,979		239,556		239,523		240,642
Accrued Interest Receivable		881		881		977		977

Financial Liabilities
Deposits:
Demand Deposits		26,064		26,064		26,904		26,155
Savings and NOW Accounts		55,210		55,210		49,788		48,728
Certificates of Deposit		105,145		105,973		119,873		120,790
Federal Home Loan Bank of Boston Advances		62,650		64,912		55,650		56,788
Federal Funds Purchased		-		-		3,000		3,000
Securities Under Agreements to Repurchase		8,926		8,926		11,035		11,035
Subordinated Debentures		7,732		7,732		7,732		7,732
Accrued Interest Payable		544		544		795		795

10. MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank 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 Company’s consolidated financial statements and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for Prompt Corrective Action (“PCA”), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of ~~March~~ 31June 30, 2009, the Company and the Bank met all capital adequacy requirements to which they are subject.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). The minimum ratios necessary for the Bank to be categorized as “Well Capitalized” are also reflected in the table below. At June 30, 2009, the Bank was categorized as “Well Capitalized” as defined by federal regulations. There are no conditions or events since the last filing with the FDIC that management believes have changed the Bank’s category.

10June 30, 2009:

(as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The minimum ratios necessary for the Bank to be categorized as “Well Capitalized” are also reflected in the table below. At March 31, 2009, the Bank was categorized as “Well Capitalized” as defined by federal regulations. There are no conditions or events since the last filing with the FDIC that management believes have changed the Bank’s category.

(Dollars in Thousands)	Company					Bank					Minimum Capital			For Bank to be “Well Capitalized” under PCA
	Amount		Ratio			Amount		Ratio			Requirements			provisions
Leverage Ratio	$	24,891		8.55	%	$	23,994		8.25	%		4.00	%		5.00	%
Tier 1 risk-based ratio		24,891		10.59	%		23,994		10.22	%		4.00	%		6.00	%
Total risk-based ratio		29,097		12.38	%		26,931		11.47	%		8.00	%		10.00	%

A reconciliation of the Company’s year-end total stockholders’ equity to the Bank’s regulatory capital is as follows:

(Dollars in Thousands)
	June 30, 2009
	Company					Bank					Minimum			For Bank to be “Well Capitalized”
	Consolidated		Bank
	Amount		Ratio			Amount		Ratio			CapitalRequirements			under PCA provisions
Total Stockholders' Equity	$	20,029	$	20,029
Leverage Ratio	$	25,105		8.44	%	$	23,875		8.03	%		4.00	%		5.00	%
Adjustments for Tier 1 capital:
Tier 1 risk-based ratio		25,105		10.49	%		23,875		9.99	%		4.00	%		6.00	%
Holding company equity adjustment				5,334
Total risk-based ratio		29,083		12.16	%		26,863		11.24	%		8.00	%		10.00	%
Net unrealized (gains) on available-for-sale securities, net of tax		(430)		(430)
Allowable subordinated debt		6,231		-
Disallowed deferred tax asset		(939)		(939)
Total Tier 1		24,891		23,994
Adjustments for total capital:
Excess subordinated debt		1,269		-
Includable allowances for loan and commitment losses		2,937		2,937
Total Capital for Regulatory Reporting	$	29,097	$	26,931

11. AGREEMENT AND PLAN OF MERGER

On ~~April 29~~June 25, 2009, the Company and ~~Berkshire~~United ~~Hills~~Financial Bancorp, Inc. ~~(“Berkshire Hills Bancorp”)~~, the parent company of ~~Berkshire~~United Bank, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company will merge with and into ~~Berkshire~~United ~~Hills~~Financial Bancorp, Inc. Concurrent with the merger, it is expected that ~~the~~Commonwealth National Bank will merge with and into ~~Berkshire~~United Bank.

Under the terms of the Merger Agreement, ~~each~~the ~~outstanding share of~~ Company’s ~~common~~shareholders ~~stock~~ will behave ~~converted~~the ~~into~~opportunity ~~the~~to ~~right~~elect to receive 0either: (1) $10.~~3696~~75 ~~shares~~per ofshare ~~Berkshire~~in ~~Hills Bancorp~~cash ~~common~~for ~~stock. Berkshire~~each ~~Hills~~Company ~~Bancorp~~share; ~~expects~~(2) to0.8257 ~~issue approximately~~United ~~843,874~~Financial shares offor ~~Berkshire~~each ~~Hills~~Company ~~Bancorp~~share; or (3) a combination of United Financial common stock and cash, ~~not~~provided that the total cash consideration ~~including~~paid ~~any~~by ~~shares~~United ~~issued~~Financial asBancorp ato ~~result~~shareholders of the ~~exercise~~Company equals 50% of the total merger consideration. All Company ~~stock~~shareholder ~~options which~~elections will be ~~exchanged~~subject ~~for~~to ~~Berkshire~~the ~~Hills~~allocation ~~Bancorp~~and ~~stock~~proration ~~options~~procedures set forth in the Merger Agreement.

~~The senior~~In ~~management~~connection ofwith ~~Berkshire~~the ~~Hills~~Company’s ~~will~~determination ~~remain~~to ~~the~~enter ~~same~~into ~~following~~ the ~~merger. At~~ ~~the~~Merger ~~closing~~Agreement, ofon ~~the~~June ~~merger~~25, 2009, Berkshire Hills Bancorp, Inc. and ~~Berkshire~~ ~~Bank~~the ~~will~~Company ~~each~~mutually ~~expand~~agreed to terminate the ~~size~~Agreement and Plan of ~~its~~Merger between ~~board~~Berkshire byHills ~~one~~Bancorp, ~~member~~Inc. and ~~appoint~~the Company (the “Berkshire Merger Agreement”). In ~~one~~accordance ~~member~~with the terms of the ~~Company’s~~Berkshire ~~board~~Merger Agreement, Berkshire Hills Bancorp was paid a termination fee of ~~directors~~$970,000. Under tothe ~~its~~terms ~~board~~of the Merger Agreement, the termination fee was paid by United Financial Bancorp.

The ~~transaction~~ ismerger ~~subject~~agreement requires CNB Financial Corp. to ~~customary~~pay ~~closing~~United ~~conditions,~~Financial ~~including~~Bancorp ~~the~~a ~~receipt~~fee of ~~regulatory~~ ~~approvals~~$1,227,000 ~~and~~if ~~approval~~the bymerger ~~the~~agreement ~~shareholders~~is ofterminated ~~Berkshire~~in ~~Hills~~certain ~~Bancorp and~~circumstances ~~the~~that ~~Company~~involve a competing offer. ~~The~~If ~~merger~~circumstances isexist ~~currently~~requiring ~~expected~~a termination fee to be ~~completed~~paid to United Financial Bancorp or if United Financial Bancorp is unable ~~late~~to inobtain ~~the~~regulatory ~~third~~approval ~~quarter~~for reason primarily attributable to CNB Financial Corp., then CNB Financial Corp. will reimburse United Financial Bancorp for its payment to Berkshire Hills Bancorp of ~~2009~~a $970,000 termination fee.

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of the Company, and is intended to qualify as a tax free reorganization for federal income tax purposes, with shares of the Company exchanged for United Financial Bancorp, Inc. shares on a tax free basis. The merger is currently expected to be completed in the fourth quarter of 2009.

ITEM 2- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CNB Financial Corp. (the “Company”) is the parent of Commonwealth National Bank, N.A. (the “Bank”), a national bank with six full-service branches located in the greater Worcester, Massachusetts area. The Company reports its financial results on a consolidated basis with the Bank.

The following analysis of financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto appearing in Part I, Item 1 of this report and in the Annual Report on Form 10-K for the year ended December 31, 2008.

Forward-looking Statements Safe Harbor Statement

This report may contain forward-looking statements that are subject to numerous assumptions, risks and uncertainties. These forward-looking statements are generally identified by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Statements pertaining to future periods are subject to numerous uncertainties because of the possibility of changes in underlying factors and assumptions. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including: changes in interest rates; changes in the economic scenario from the current anticipated scenario which could materially change anticipated credit quality trends and the ability to generate loans; competition; and changes in accounting, tax or regulatory practices or requirements. The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this report, in its Form 10-K for the year ended December 31, 2008, ~~including~~included in the Risk Factors section of that report, or in its other filings with the SEC. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements.

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements.

Significant Accounting Policies

Disclosure of the Company's significant accounting policies is included in Note 23 to the consolidated financial statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and Note 3 to the consolidated financial statements of this Form 10-Q. ~~These~~Some of these policies ~~require~~are ~~significant~~particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses. Additional information is contained on pages 1421 and 1522 of this Form 10-Q regarding the provision and allowance for loan losses.

~~Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008~~16

Comparison of Operating Results for the Three and Six Months Ended June 30, 2009 and 2008

General

The operating results of the Company depend primarily upon net interest income, which is the difference between interest income on interest-earning assets, primarily loans and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net earnings are also affected by other income and operating expense, such as employee compensation and benefits, occupancy and equipment expense, and other operating expenses.

Overview

The Company recorded net income of $9020,000 for the three-month period ended ~~March 31~~June 30, 2009, an 85% decrease compared to $~~270~~137,000 for the same quarter of 2008. Diluted earnings per diluted share were $0.0401 and $0.1206 for the ~~first~~second quarters of 2009 and 2008, respectively. ~~Excluding~~Year-to-date ~~the~~net ~~gain~~income onequaled ~~available-~~$111,000 for~~-sale~~ ~~investments~~the in2009 ~~the~~period, ~~first~~a ~~quarter~~73% ofdecrease ~~2008~~compared ofto $~~119~~407,000 ~~after-tax,~~for ~~net~~the ~~income~~2008 period. Diluted earnings per diluted share were $0.05 and $0.18 for the ~~first~~six-month ~~quarter~~periods ~~ended~~ending June 30, 2009 ~~decreased~~and ~~$61~~2008,~~000~~ ~~over~~respectively. The ~~the~~decrease ~~prior~~in ~~year~~net ~~period.~~income ~~This~~ was ~~primarily~~predominantly due to increased professional fees relating to the pending merger as well as an increase ofin ~~operating~~the ~~expenses~~FDIC toinsurance ~~$201,000,~~premium orexpense 9%and the FDIC special assessment. The special assessment is due in September 2009, ~~and~~but was required to be fully anaccrued ~~increase~~by ofJune ~~$50~~30,~~000~~ 2009. Net interest income increased 10%, or ~~50%~~$250,000, incomparing the ~~provision~~second ~~for~~quarter ~~loan~~of ~~losses.~~2009 ~~Net~~to ~~interest income~~the second quarter of 2008 and increased 910%, or $~~209~~461,000, comparing the year-to-date periods. The Company recorded a gain on a call of available-for-sale investments during the second quarter of 2009 of $108,000, compared with a gain on sale of available-for-sale investments of $184,000 during the ~~same~~first ~~period~~six in months of 2008.

Analysis of Net Interest Income

Net interest income is the difference between the income the Company earns on interest-earning assets such as loans and investments and the interest the Company pays for its deposits and borrowed funds. As the Company’s primary source of earnings, net interest income will fluctuate with interest rate movements. To lessen the impact of changes in interest rates, the Company endeavors to structure the balance sheet so that there will be regular opportunities to change the interest rates on (or “reprice”) many of the interest-earning assets in order to match the variability of interest rates paid on the Company’s deposits and other interest-bearing liabilities. Imbalance among interest-earning assets and interest-bearing liabilities at any point in time constitutes interest rate risk.

Net interest income equaled $2.5,688,000 ~~million~~ for the three-month period ended ~~March~~June 3130, 2009 compared to $2.3,438,000 ~~million~~ for the three-month period ended ~~March~~June 3130, 2008, an increase of $~~209~~250,000, or 910%. The following table provides the average balances of the major balance sheet categories that generate interest income or interest expense and the resulting asset yields or rate paid for the three-month period ended ~~March~~June 3130, 2009 compared to the three months ended ~~March 31~~June 30, 2008. The difference between asset yields and the rate paid equals the net interest spread. The difference between interest income and interest expense equals net interest income, which is divided into the average balance of interest-earning assets to arrive at the net interest margin. The total dollar amount of interest income from assets and the subsequent yields are calculated on a taxable equivalent basis, using a federal tax rate of 34%.

1217

Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates

For the Three Months Ended ~~March~~June 3130, 2009 and 2008

	Three Months Ended									Three Months Ended
(Dollars in Thousands)	~~March~~June 3130, 2009									~~March~~June 3130, 2008
(Fully Taxable Equivalent)	Average Balance			Interest Income and Expense (Taxable Equivalent)			Average Yield/Rate			Average Balance			Interest Income and Expense (Taxable Equivalent)			Average Yield/Rate
INTEREST EARNING ASSETS
Total Loans	$	~~242~~241,~~448~~968		$	3,~~575~~646			56.9804	%	$	~~219~~222,~~749~~823		$	3,~~754~~612			6.8752	%
Investments, Fed Funds and Int. Bearing Balances		4842,~~273~~280			~~551~~505			4.6379	%		6265,~~143~~633			~~879~~821			5.6903	%
Total Interest Earning Assets		~~290~~284,~~721~~248			4,~~126~~151			5.7686	%		~~281~~288,~~892~~456			4,~~633~~433			6.6118	%
Allowance for Loan Losses		(2,~~848~~983	)								(2,~~836~~736	)
Cash and Due from Banks		4,~~189~~256									45,~~412~~280
Premises and Equipment		2,~~081~~018									2,~~350~~273
Other Assets		4,~~378~~374									23,~~643~~286
Total Assets	$	~~298~~291,~~521~~913								$	~~288~~296,~~461~~559
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits	$	5049,~~277~~390		$	5350			0.4341	%	$	5755,~~146~~400		$	~~278~~179			1.9630	%
Time Deposits		~~122~~118,~~989~~070			~~915~~793			32.0269	%		~~112~~114,~~771~~205			1,~~284~~076			43.5879	%
Borrowed Funds		6867,~~687~~425			~~535~~532			3.16	%		5968,~~762~~140			~~599~~615			43.0363	%
Subordinated Debentures		7,500			7058			3.7306	%		7,500			~~123~~88			64.4964	%
Total Interest Bearing Liabilities		~~249~~242,~~453~~385			1,~~573~~433			2.5637	%		~~237~~245,~~179~~245			21,~~284~~958			3.8721	%
Demand Deposits		2728,~~580~~062			-			-			27,~~748~~013			-			-
Total Deposits and Borrowed Funds		~~277~~270,~~033~~447			1,~~573~~433			2.3013	%		~~264~~272,~~927~~258			21,~~284~~958			32.4789	%
Other Liabilities		1,~~790~~488									2,~~233~~781
Stockholders' Equity		19,~~698~~978									21,~~301~~520
Total Liabilities and Stockholders' Equity	$	~~298~~291,~~521~~913								$	~~288~~296,~~461~~559
Interest Rate Spread								3.4573	%								3.1429	%
Net Interest Income (tax equivalent basis)				$	2,553								$	2,349
Net Interest Income (Tax Equivalent Basis)					2,718									2,475
Net Interest Margin								3.5684	%								3.3545	%
Less: adjustment of tax exempt income					(30	)								(35	)
Less: Adjustment of Tax Exempt Income					(30	)								(37	)
Net Interest Income				$	2,~~523~~688								$	2,~~314~~438

~~The average~~Earning ~~balance of interest earning~~ assets ~~was~~averaged $~~290~~284.72 million during the three-month period ~~March~~ended 31June 30, 2009, a 31% ~~increase~~decrease compared to the same period of 2008~~. The~~, ~~average~~primarily ~~balance~~due ofto decreases in the investment portfolio. Total deposits and borrowed funds ~~was~~averaged $~~277~~270.0 4 million during the three-month period ended ~~March~~June 3130, 2009, a 51% ~~increase~~decrease ~~since~~compared to the same period of 2008, primarily due to a reduction in savings accounts and borrowed funds, offset by an increase in the average balances of certificates of deposit, NOW and money market and demand deposits. Asset yields decreased by 8532 basis points and the cost of deposits and borrowed funds declined by ~~117~~76 basis points causing a 3144 basis point improvement in the net interest spread. The Company’s net interest margin ~~climbed to 3.56%~~ for the three months ended ~~March~~June 3130, 2009~~, from~~ ~~the~~is ~~year~~3.84% ~~earlier~~compared with same period’s in 2008 of 3.3545%, aan 21increase of 39 basis ~~point~~points. This increase, asin net interest margin is a result of a larger proportion of earning assets invested in loans, the continued lower and more normally sloped interest rate environment and the successful implementation of the Company’s interest rate risk strategies.

The average balance of loans grew by $2219.71 million, or 109%, compared to the ~~first~~ second quarter of 2008 primarily in commercial real estate loans, which increased by 18 15%, or $2419.57 million, over the same period in 2008. The average balance of residential real estate and consumer loans increased 87%, or $1.8 5 million, and 618%, or $12.0 3 million, respectively. The average balance of commercial loans declined $4.6.0 million, or 711%, period to period~~, averaging~~ .

1318

~~$51.5 million during the quarter.~~ A portion of the loan growth was funded by reducing the level of the lower-yielding investment securities portfolio. The yield on the loan portfolio declined by 8948 basis points from period to period due to the lower interest rate environment.

The total cost of deposits and borrowed funds declined by ~~117~~76 basis points comparing the three-month period ofended June 30, 2009 to the same period of 2008 as a result of lower market interest rates and a change in the composition of the Company’s deposit and borrowed funds portfolio. The average balance of time deposits increased to $118.1 million, or 3%, and the rate on time deposits decreased by ~~156~~ 110 basis points as maturing certificates of deposit, originally written at higher interest rates, were replaced at lower market rates. The average balance of ~~time~~NOW ~~deposits~~and money market accounts increased by $101.27 million, or 98%, ascompared to the ~~Company~~second ~~attracted~~quarter ~~new balances~~of at2008 ~~lower~~and ~~rates~~their average cost decreased by 42 basis points. The average ~~balances~~balance of savings, ~~NOW and money market~~ accounts ~~deceased~~declined $67.97 million, or 1222%, compared to the ~~first quarter~~second quarter of 2008 and ~~the~~their average cost ~~of these categories~~ decreased by ~~153~~113 basis points. ~~Most~~The ofborrowed ~~the~~funds ~~decrease~~average inbalance ~~balances~~decreased ~~occurred~~by in$715,000, ~~the~~or ~~higher~~1%, ~~cost tiered-rate~~and ~~savings~~their ~~account product. The~~ cost ~~of borrowed funds~~ declined by 8747 basis points ~~and the average balance increased by $8.9 million, or 15%,~~ from the ~~2009~~2008 period to the ~~2008~~2009 period ~~as the Company sourced funds at advantageous rates~~. The average balance of subordinated debentures remained unchanged at $7.5 million and carried an average rate of 3.7306% during the ~~first~~second quarter of 2009 compared to a rate of 64.4964% during the corresponding quarter of 2008, a ~~decrease~~decline of ~~276~~158 basis points. Compared to the same quarter of 2008, total deposits and borrowed funds decreased by $1.8 million, or 1%, and their total cost has declined by 76 basis points to an average rate of 2.13% for the second quarter of 2009. The resulting net interest margin has improved to 3.84% for the 2009 period compared to 3.45% for the same period of 2008, an increase of 39 basis points.

The following table provides the average balances of the major balance sheet categories that generate interest income or interest expense and the resulting asset yields or rate paid for the six-month period ended June 30, 2009 compared to the six months ended June 30, 2008.

Distribution of Assets, Liabilities and Stockholders’ Equity Yields and Rates

For the Six Months Ended June 30, 2009 and 2008


	Six Months Ended									Six Months Ended
(Dollars in Thousands)	June 30, 2009									June 30, 2008
(Fully Taxable Equivalent)	Average Balance			Interest Income and Expense (Taxable Equivalent)			Average Yield/Rate			Average Balance			Interest Income and Expense (Taxable Equivalent)			Average Yield/Rate
INTEREST EARNING ASSETS

Total Loans	$	242,206		$	7,222			6.01	%	$	221,286		$	7,367			6.69	%
Investments, Fed Funds and Int. Bearing Balances		45,260			1,055			4.70	%		63,888			1,696			5.34	%
Total Interest Earning Assets		287,466			8,277			5.81	%		285,174			9,063			6.39	%

Allowance for Loan Losses		(2,916	)								(2,786	)
Cash and Due from Banks		4,223									4,846
Premises and Equipment		2,049									2,312
Other Assets		4,376									2,964
Total Assets	$	295,198								$	292,510

INTEREST BEARING LIABILITIES

Savings, NOW and Money Market Deposits	$	49,831			102			0.41	%	$	56,273			457			1.63	%
Time Deposits		120,516			1,708			2.86	%		113,488			2,359			4.18	%
Borrowed Funds		68,052			1,067			3.16	%		63,951			1,215			3.82	%
Subordinated Debentures		7,500			128			3.39	%		7,500			211			5.66	%
Total Interest Bearing Liabilities		245,899			3,005			2.46	%		241,212			4,242			3.54	%
Demand Deposits		27,822									27,380
Total Deposits and Borrowed Funds		273,721			3,005			2.21	%		268,592			4,242			3.18	%

Other Liabilities		1,654									2,508
Stockholders' Equity		19,823									21,410
Total Liabilities and Stockholders' Equity	$	295,198								$	292,510
Interest Rate Spread								3.59	%								3.21	%
Net Interest Income (Tax Equivalent Basis)					5,272									4,821
Net Interest Margin								3.70	%								3.40	%
Less: Adjustment of Tax Exempt Income					(59	)								(69	)
Net Interest Income				$	5,213								$	4,752

Earning assets averaged $287.5 million during the six-month period ended June 30, 2009, a 1% increase compared to the same period of 2008, due to loan growth offset by a reduction of the investment portfolio. Total deposits and borrowed funds averaged $273.7 million during the six-month period ended June 30, 2009, a 2% increase since the same period of 2008, primarily due to growth in time deposits offset by decreases in savings. Asset yields decreased by 58 basis points and the cost of deposits and borrowed funds declined by 97 basis points causing a 38 basis point improvement in the net interest spread. The Company’s net interest margin climbed to 3.70% for the six months ended June 30, 2009, from the year earlier 3.40% as a result of a larger proportion of earning assets invested in loans, the continued lower and more normally sloped interest rate environment and the successful implementation of the Company’s interest rate risk strategies.

The average balance of loans grew by $20.9 million, or 10%, compared to the first half of 2008. The yield on the loan portfolio declined by 68 basis points from period to period as the portfolio reacted to the lower interest rate environment. The growth in loans was primarily in commercial real estate, which increased 16%, or $21.1 million, compared with the same quarter in 2008. The average balance of consumer and residential loans also increased by $1.4 million, or 12%, and $1.7million, or 8%, respectively, during the year-to-date period ended June 30, 2009 compared with the same period in 2008. The average balance of commercial loans declined $5.1 million, or 9%, period to period, to $50.9 million during the six-month period ended June, 30, 2009. An average $3.3 million of loans were in non-accrual status during the period compared to $1.5 million during the same period of 2008.

The total cost of deposits and borrowed funds declined by 97 basis points comparing the six-month period of 2009 to the same period of 2008 as a result of lower market interest rates and a change in the composition of the Company’s deposit and borrowed funds portfolio. The rate on time deposits decreased by 132 basis points as maturing certificates of deposit, originally written at higher interest rates, were replaced at lower market rates. The average balance of time deposits increased by $7.0 million, or 6%, in the six months ended June 30, 2009 compared to the first half of 2008. The average balance of NOW and money market accounts increased by $1.3 million, or 6%, compared to the first half of 2008. The savings account average balance decreased $7.8 million, or 22%, from the year earlier period. Most of the decrease in balances occurred in the higher cost tiered-rate savings account product. The cost of borrowed funds declined by 66 basis points and the average balance increased by $4.1 million, or 6%, from the 2008 period to the 2009 period. The average balance of subordinated debentures remained unchanged at $7.5 million and carried an average rate of 3.49% during the first half of 2009 compared to a rate of 5.66% during the corresponding period of 2008. Compared to the same period of 2008, total deposits and borrowed funds increased by $5.1 million, or 2%, and their total cost declined by 97 basis points to an average rate of 2.21% for the first half of 2009. The resulting net interest margin improved to 3.70% for the 2009 period compared to 3.40% for the same period of 2008, an increase of 30 basis points.

Provision for Loan Losses

The ~~Bank’s~~ provision for loan losses was $150,000 ~~for~~during the ~~first~~quarter ~~three~~ending ~~months~~June 30, 2009 compared to a provision of $184,000 for the second quarter 2008. The provision for loan losses was $300,000 for 2009 year-to-date compared to a $~~100~~284,000 provision for the ~~same~~first ~~period~~half of 2008. The ~~increase~~ ~~in the~~ provision ~~for~~increased ~~loan~~in ~~losses~~2009 ~~reflected~~primarily due to an increase in non-performing loans, net charge-offs of $42,000, continued loan growth, ~~particularly~~and inthe ~~commercial~~current ~~real~~economic ~~estate~~climate. During the same period of 2008 net charge-offs equaled $211,000. Management, based upon known circumstances and conditions on individual loans, industry trends, regional and national economic conditions and estimates of the ~~continued~~probable ~~difficult~~losses ~~economic~~in ~~environment~~the loan portfolio, ~~offset~~determines bythe ~~reduced charge-offs~~necessary level of the allowance for loan losses.

Other Income

Other income (non-interest income) consists of service charges on deposits and other fee based services, including loan document preparation fees and mortgage referral fees. For the ~~first~~second ~~three~~quarter ~~months~~ of 2009, other income ~~was~~ (excluding security gains) decreased by 3% to $~~115~~128,000, compared to $~~107~~132,000 ~~(excluding $184,000 in security gains)~~ for the same period of 2008. ~~Service~~For the ~~charges~~first onhalf ~~deposits~~of ~~for~~2009, ~~the~~other ~~three-month period~~income of(excluding ~~2009~~security gains) increased by 152%, orto $8243,000, compared to $239,000 for the same period of 2008 as. Increased aamounts ~~result~~of other income recorded during the second quarter and the first half of ~~growth~~2009 incompared ~~fee~~to ~~generating~~2008 were the result of increased fees on deposit accounts partially offset by a reduction in loan related and other fees. ~~Loan referral~~Additionally, ~~fees~~during ~~declined~~the byfirst half of 2009, the Company recorded a $7108,000 ~~for~~pre-tax gain on the ~~three~~call ~~months~~of ~~ended~~available-for-sale investments ~~March~~compared 31with a $184,000 gain on the sale of available-for-sale investments during the corresponding period of 2008. The asgain a recorded during the 2009 period was the result of ~~reduced~~the ~~activity~~call inat ~~mortgage~~par ~~lending~~on a U.S. Agency investment security purchased at a deep discount.

Operating Expense

Operating expense, alternatively known as non-interest expense, totaled $25.41 million for the first ~~three~~six months of 2009, an increase of 917%, or $~~201~~747,000, compared to the same period of 2008. ~~Employee compensation and benefits expense comprised 52% of non-interest expense.~~ This ~~category~~increase ~~increased~~is ~~by $13,000,~~mainly ~~or 1%, to $1.2 million~~ due to ~~merit~~ increases ~~and increases~~ in ~~the~~professional ~~cost~~fees ofand ~~employee~~FDIC ~~benefit~~insurance ~~programs~~premium costs. ~~Occupancy~~Professional ~~and~~fees ~~equipment expenses equaled $362,000~~ for the first ~~period,~~six anmonths ~~increase~~ of ~~11%~~2009 ~~compared to the 2008 period as the Company recorded significantly higher costs for weather-related expenses and various maintenance repairs. Professional fees~~ totaled $~~275~~466,000, acompared to $97467,000, orduring ~~55%, increase over~~ the same period inof 2008. ~~Included~~During inthe ~~professional~~quarter ~~fees were~~ended ~~increased appraisal~~ and ~~legal~~year-to-date ~~fees~~ended ~~associated~~June ~~with~~30, ~~loan~~2009, ~~workouts~~professional ~~and increases in shareholder relations and other associated legal~~ fees, ~~related~~relating to ~~the~~ ~~company’s~~merger ~~consideration~~analysis ofwas ~~participation~~$305,000 inand ~~the~~$355,000, ~~United~~respectively. There ~~States~~were ~~Department~~no ~~of the~~merger ~~Treasury~~related ~~Capital~~expenses ~~Purchase~~during ~~Program and holding~~ the ~~special~~same ~~meeting~~periods ~~of stockholders~~in 2008. ~~Marketing~~Other general and ~~public~~administrative ~~relations~~expenses ~~fees~~decreased ~~declined~~to by $16389,000, or 201%, ~~compared~~during to the ~~prior~~six ~~year~~months ~~period~~ended toJune ~~$62~~30,~~000~~ as2009 acompared ~~result~~to ~~of fewer~~$392,000 ~~advertising~~for ~~placements in~~ the ~~local~~same ~~print,~~period ~~radio~~in ~~and outdoor media and a~~2008. FDIC ~~greater~~expense ~~reliance~~for ~~upon~~the ~~more~~quarter ~~effective~~ended ~~direct~~June ~~marketing. Data processing expense equaled $156~~30,~~000,~~ an2009 ~~increase~~was of $33302,000, ~~or 27%,~~ compared with $~~123~~39,000 ~~for~~during the same period in 2008 ~~due to increased software maintenance and processing fees attributed to the increased number of deposit and loan accounts maintained on the data processing system~~. ~~Other~~FDIC ~~general~~insurance ~~and administrative~~ expenses ~~increased~~for ~~$37,000, or 16%, in~~ the ~~first~~six ~~three~~ months ~~of 2009~~ended ~~compared~~June to30, ~~the~~2009 ~~same~~and ~~period~~June of30, 2008~~. This~~ ~~increase~~were ~~is primarily attributable to a~~ $41382,000, orand ~~105%, increase in FDIC insurance expense (~~$8078,000 ~~during~~ ~~the~~respectively. These ~~2009~~increases ~~period~~are ~~compared~~due to ~~$39,000 for~~ the ~~same~~increase ~~period~~in ofthe ~~2008)~~quarterly asFDIC ~~a result~~insurance ofpremium ~~increased~~assessment ~~premiums~~rate ~~charged~~and tothe ~~all~~accrual ~~banks~~of by the FDIC~~. A~~ special ~~insurance premium~~ assessment ofdue 20in ~~basis~~September ~~points has been proposed by the FDIC~~2009, ~~which~~but ~~will~~required ~~further~~to ~~increase~~be ~~FDIC~~accrued ~~premiums~~by inJune 30, 2009.

Employee compensation and benefits expense for the six months ended June 30, 2009 comprised 48% of non-interest expense. This category decreased by $7,000, or 0.3%, to $2.4 million due to a reduction in staffing levels. Occupancy and equipment expenses equaled $693,000 for the six month period ended June 30, 2009, an increase of 7%, or $47,000, compared to the 2008 period as the Company recorded higher costs for weather related expenses and maintenance services. Marketing and public relations fees declined by $6,000, or 7%, to $75,000 during the six months ended June 30, 2009 compared to the prior year period as a result of fewer advertising placements in the local print, radio and outdoor media and a greater reliance upon more effective direct marketing. Data processing expense increased by $58,000, or 23%, during the first six months of 2009 as a result of increases in the numbers of loan and deposit accounts maintained on the data processing systems.

Income Taxes

During the second quarter of 2009, the Company recorded income tax expense of $8,000 (an effective tax rate of 29%) compared to $47,000 (an effective tax rate of 26%) recorded during the same period of 2008. For the ~~three~~ six month period ended ~~March~~June 3130, 2009, the Company recorded income tax expense of $4754,000, equivalent to an effective rate of 3433%. During the same period of 2008, the Company recorded income tax expense of $85132,000, equivalent to an effective rate of 2425%. The change in the effective tax rate was attributable to a decrease in the relative level of tax advantaged income (primarily generated by municipal securities) as a percentage of taxable income.

1421

~~relative level~~Comparison of ~~tax~~Financial ~~advantaged~~Condition ~~income~~at ~~(primarily~~June ~~generated~~30, by2009 ~~municipal~~and ~~securities)~~December ~~as a~~31, ~~percentage of taxable income.~~2008

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Overview

Total assets were $~~297~~287.24 million at ~~March~~June 3130, 2009, compared to $295.21 million at December 31, 2008, ana ~~increase~~decrease of $27.07 million, or ~~0.7~~approximately 3%. The decrease in total assets was primarily caused by a $5.8 million decrease in the investment portfolio and a $1.5 million decrease in net loans.

Loans

The loan portfolio’s decrease of $~~560~~1.5 million,~~000~~ (or 0.26%), since December 31, 2008 was primarily due to a 76.75%, or $43.13 million decrease in commercial and industrial (C+I) loans ~~and~~, a $1610,000, or 2.45% ~~million~~decrease in residential real estate loans and a $525,000, or 60.3%, decrease in ~~residential~~commercial real estate loans. Offsetting these decreases ~~were~~was growth of $3.91 million, or 2 24.61%, in ~~commercial~~consumer ~~real~~loans, ~~estate~~primarily ~~and~~home ~~$1.0~~equity ~~million,~~lines orof ~~8% in consumer loans~~credit.

The allowance for loan losses increased by $~~105~~259,000 ~~during~~since ~~the~~December ~~quarter~~31, 2008 and equaled $3.01 million at ~~March~~June 3130, 2009, due to a $~~150~~300,000 provision for loan losses, ~~offset~~ ~~by $45,000 in net~~ charge-offs. of $68,000 ~~of loans was charged-off~~ and ~~recoveries totaled~~ $2326,000 ~~for~~in ~~the quarter~~recoveries. During the same period of 2008, one loan was charged-off for $~~210~~212,000, no recoveries of $1,000 were recorded and $~~100~~284,000 was provided to the reserve. At ~~March~~June 3130, 2009, the allowance for loan losses equaled 1.2330% of total loans versus 1.19% at December 31, 2008. Non-performing loans at ~~March~~June 3130, 2009 were $3.9 2 million (1.63% of loans) compared to $3.4 million (1.4% of loans) at December 31, 2008. The ~~increase~~modest decrease in non-performing loans was primarily a result of the ~~continued~~ payoff in full of an $844,000 commercial real estate loan offset by the addition of five loans to non-accrual status as a result of the continued difficult economic climate. The ratio of the allowance for loan losses to non-performing loans at June 30, 2009 was 99%, compared with 84% at December 31, 2008. Management, based upon known circumstances and conditions, determines the level of the allowance for loan losses. In addition to assessing risk on individual loans, the Company considers industry trends and regional and national economic conditions. In addition to the allowance for loan losses, the Company maintains a separate liability account as a reserve for probable losses on currently unfunded loan commitments. At ~~March~~June 3130, 2009, this reserve equaled $61,000.

Other real estate owned (OREO) was $879,000 at June 30, 2009, unchanged from December 31, 2008. This comprised of one property acquired through foreclosure.

Investment Securities

Investment securities available-for-sale are carried at ~~estimated~~ fair value and totaled $3026.2 million at ~~March~~June 3130, 2009, a decrease of $15.1 million, or 316%, from December 31, 2008 due to ~~normal~~the ~~amortization~~maturity of ~~principal~~an investment, normal amortization and ~~significant prepayments~~the call of ~~principal~~an oninvestment ~~various~~prior ~~mortgage-backed securities~~to its scheduled maturity. Investment securities classified as held-to-maturity were $8.63 million at ~~March~~June 3130, 2009, a decrease of $~~323~~699,000, or 48%, from December 31, 2008, ~~also~~ as a result of normal amortization.

Short-term Investments

Cash and cash equivalents increased by $~~4.5~~346,000 ~~million~~ since December 31, 2008 and equaled $94.19 million at ~~March~~June 3130, 2009. ~~The~~Excess ~~increase~~liquidity was ~~caused~~held byat the Federal Reserve Bank in an ~~increase~~ interest bearing account versus being invested in overnight federal funds sold~~, which equaled $4~~.8 Federal ~~million~~funds sold at ~~March 31~~June 30, 2009 were zero, compared to $215,000 at December 31, 2008 ~~with the proceeds from deposit growth and the maturation of securities~~.

Deposits

Deposits, in conjunction with borrowed funds, are the Bank’s primary source of funds. Total deposits ~~increased~~were to $~~202~~186.4 million at ~~March~~June 3130, 2009, a $510.51 million (or 35%) ~~increase~~decrease since December 31, 2008. A ~~The~~significant ~~growth~~portion of the decline in deposits during the first ~~three~~six months of 2009 was ~~used~~the todecrease ~~support~~of ~~asset~~higher ~~growth~~cost ~~and~~time ~~to offset~~deposits, ~~declines~~($14.7 inmillion ~~borrowed~~decrease), ~~funds~~ since December 31, 2008. ~~The deposit~~There ~~increases~~was ~~occurred~~also inan ~~demand deposits (~~$~~1.3 million increase)~~840, ~~savings ($953,~~000 ~~increase)~~decrease ~~and~~in ~~certificates~~demand ofdeposits ~~deposit~~since ~~($3.8~~December ~~million increase)~~2008. Personal and commercial money markets and NOW accounts ~~decreased~~ increased $~~486,000~~1.2 million and savings accounts increased $4.2 million.

To attract new core depositors, the Bank periodically conducts deposit promotion campaigns that are comprised of newspaper, radio and outdoor advertisements, competitive pricing and in-branch promotions. These programs continue to generate increases in customer relationships. Management believes that the new relationships that result from these marketing efforts provide valuable opportunities to cross sell other deposit and loan products and services, as well as build a solid base of core deposits.

Borrowed Funds

Borrowed funds include Federal Home Loan Bank advances, federal funds purchased, subordinated debentures and securities under agreement to repurchase. During the first ~~three~~six months of 2009, ~~the aggregate of~~ these items ~~decreased~~increased by $31.89 million, or 52.54%. Advances from the Federal Home Loan Bank of Boston ~~increased~~comprise the increase by growing $17.0 million since the end of 2008, ~~yet~~offset ~~overnight federal~~by ~~funds~~a ~~purchased~~reduction in the balance of securities under agreement to repurchase, which declined by $32.01 million, ~~and~~or ~~overnight~~19%, ~~repurchase agreements~~from ~~issued~~December 31, 2008. As is the case in ~~conjunction~~the ~~with~~deposit portfolio, the ~~customer~~Federal ~~cash~~Home ~~management~~Loan ~~sweep~~Bank ~~product declined~~of byBoston ~~$1.9~~advance ~~million~~growth occurred during a significantly lower interest rate environment allowing for a reduction in the average cost of borrowed funds, thereby procuring funding at relatively low and advantageous interest rates leading to a higher net interest margin.

Stockholders’ Equity

Stockholders’ equity at ~~March~~June 3130, 2009 was $1920.90 million, an increase of $~~323~~490,000 from December 31, 2008. The increase was due to year-to-date earnings of $90111,000, the $3978,000 impact of the accounting treatment for share-based compensation and the $~~193~~301,000 (net of taxes) increase in the market value of available-for sale investment securities that resulted from movements in market interest rates. The current level of net unrealized gains on available-for-sale investment securities is $~~322~~430,000, net of taxes. Book value per basic and diluted share at ~~March~~June 3130, 2009 was $8.7077, compared to the $8.56 at December 31, 2008.

Liquidity and Capital Resources

Liquidity represents the Bank’s ability to generate adequate amounts of funds to meet its needs for cash. Specifically, liquidity ensures that adequate funds are available to fund loan demand, meet deposit withdrawals, maintain reserve requirements, pay operating expenses and satisfy other commitments. The Bank’s ability to maintain and increase deposits will serve as its primary source of liquidity. Secondary sources of liquidity are principal and interest payments on loans and scheduled maturities of the investment portfolio. In addition, the liquidity is supplemented through the use of borrowings. The Company maintains cash balances that are available to pay the interest expense associated with the subordinated debentures and to pay normal operating expenses. These cash balances are considered sufficient to provide adequate liquidity for the payment of these expenses until such time that the Bank is permitted to pay dividends to the Company.

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At ~~March~~June 3130, 2009, cash and cash equivalents totaled $94.19 million, ~~including~~with no funds invested in overnight federal funds sold ~~of $4~~.~~8 million.~~ Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $3026.2 million at ~~March~~June 3130, 2009. In addition, at ~~March~~June 3130, 2009, the Company had the ability to borrow an additional $2314.25 million from a combination of Federal Home Loan Bank of Boston advances and federal funds purchased lines of credit.

At ~~March 31~~June 30, 2009, the Company had $1115.9 million in loan commitments and unadvanced loan proceeds outstanding. In addition to commitments to originate loans, the Company had $4950.46 million in unused and secured lines of credit. Certificates of deposit due within one year of ~~March~~June 3130, 2009 totaled $~~108~~93.53 million, or 5450% of total deposits. If these deposits do not remain with the Company, the Company will be required to seek other sources of funds, including other certificates of deposit or other borrowed funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than the Company currently pays on its certificates of deposit. The Company believes, however, based on past experience that a significant portion of our certificates of deposit will remain with the Company. The Company has the ability to attract and retain deposits by adjusting the offered interest rates.

The primary investing activity of the Bank is the origination of loans to businesses and individuals. The primary financing activity of the Bank is accepting demand, savings and time deposits from businesses and individuals. Other sources of funds for the Bank are overnight borrowings from customers in the form of repurchase agreements, federal funds purchases and advances (borrowings) from the Federal Home Loan Bank of Boston.

The Bank anticipates that it will have sufficient funds available to meet commitments outstanding and to meet loan demand. In estimating uses of funds, cash requirements for expected loan originations and initial funding amounts of those loans for the forward looking 90-day period are constantly developed, reviewed and evaluated. Estimating the expected deposit trends for the ensuing 90-day period projects the primary source of funds. Expected changes in the interest rate environment are considered when estimating loan originations and pay-downs, as well as deposit flows. Mismatches between expected uses and sources of funds identify the need to adjust the level of the Bank’s investment portfolio or the level of borrowed funds.

Under applicable provisions of federal law, the Company and the Bank must meet specific quantitative capital requirements. As of ~~March~~June 3130, 2009, the Company’s and the Bank’s Tier 1 Leverage Capital ratios were 8.4455% and 8.0325%, respectively. The Company’s Tier 1 and Total Risk -Based Capital ratios were 10.59% and 12.38%, respectively. The Bank’s Tier 1 and Total Risk-Based Capital ratios were 10.4922% and 1211.1647%, respectively. These levels of capital place the Company and the Bank above the regulatory guidelines and requirements, which provides the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business. At June 30, 2009, the Company and the Bank were “well capitalized” as defined by federal regulations.

respectively. The Bank’s Tier 1 and Total Risk Based Capital ratios were 9.99% and 11.24%, respectively. These levels of capital place the Company and the Bank above the regulatory guidelines and requirements, which provides the opportunity to take advantage of business opportunities while ensuring that it has the resources to protect against risk inherent in its business. At March 31, 2009, the Company and the Bank were “well capitalized” as defined by federal regulations.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the ~~three~~six months ended ~~March~~June 3130, 2009, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

ITEM 4T - Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and ~~Chief~~Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as such term is defined in Rule 13a-15(c) promulgated under the Security Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, the Company’s Chief Executive Officer and ~~Chief~~Principal Financial Officer have concluded that as of the end of the fiscal quarter covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There have not been any changes in the Company’s internal control over financial reporting during ~~the~~ the Company’s last fiscal quarter that have materially affected, or which are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1 – Legal Proceedings

The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.

Item1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. As of ~~March~~ 31June 30, 2009, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

~~None~~The Company did not repurchase any shares of common stock during the quarter ended June 30, 2009.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Submission of Matters to Vote of Security Holders

On ~~February~~ 5May 21, 2009, the Company held aits ~~special~~annual meeting of ~~stockholders~~shareholders. Shareholders approved the election of five directors to ~~consider~~ serve for terms of three years and ~~act~~ratified ~~upon~~the selection of Wolf & Company, P.C. as the ~~following:~~Company’s independent registered public accounting firm for 2009.

~~1. Amending the~~The ~~Company’s~~voting ~~articles~~results offor ~~organization to authorize~~ the ~~issuance~~election of updirectors towere ~~one million~~as ~~(1,000,000) shares of preferred stock; and~~follows:

2. Granting to the Company’s management the authority to adjourn, postpone or continue the special meeting of stockholders.

Name	For	Withheld
Paula A. Aiello	1,533,596	17,372
Gerald D. Cohen	1,538,610	12,358
Lawrence J. Glick	1,526,338	24,630
Ralph D. Marois	1,538,009	12,959
Charles R. Valade	1,538,223	12,745

~~Question #1~~The ~~was~~voting ~~approved~~results byfor ~~votes~~the ratification of ~~1,624,772~~the inselection ~~favor, 30,925 against and 15,256 abstentions. Question #2 was approved by votes~~ of ~~1,605,892~~Wolf in& ~~favor~~Company, ~~49,811~~ ~~against and 15,250 abstentions~~P. ~~There~~C. were noas ~~broker non-votes.~~follows:

	For	Against
	1,529,946	7,468

There were 13,553 abstentions and zero broker non-votes.

Item 5 – Other Information

None.

Item 6 – Exhibits

Exhibit No.	~~Description~~	Description
3.1	~~Articles of Organization(1)~~	Articles of Organization (1)
3.2	~~Amendment to Articles of Organization(2)~~	Amendment to Articles of Organization(2)
3.3	~~Bylaws(1)~~	Bylaws (1)
4.1	~~Common Stock Certificate(3)~~	Common Stock Certificate (3)
31.1	~~Sarbanes-Oxley Section 302 Certification of Charles R. Valade~~	Sarbanes-Oxley Section 302 Certification of Charles R. Valade
31.2	~~Sarbanes-Oxley Section 302 Certification of William M. Mahoney~~	Sarbanes-Oxley Section 302 Certification of Kimberly M. Anderson
32.1	~~Sarbanes-Oxley Section 906 Certification of Charles R. Valade~~	Sarbanes-Oxley Section 906 Certification of Charles R. Valade
32.2	~~Sarbanes-Oxley Section 906 Certification of William M. Mahoney~~	Sarbanes-Oxley Section 906 Certification of Kimberly M. Anderson

(1) Incorporated by reference in this document to the Form 8-K12G3 filed with the Securities and Exchange Commission on December 19, 2005.

(2)	Incorporated by reference in this document to the Form 10-K for the year ended December 31, 2008.
(3)	Incorporated by reference in this document to the Annual Report on Form 10-KSB for the year ended December 31, 2005.

(2) Incorporated by reference in this document to the Form 10-K for the year ended December 31, 2008.

18(3) Incorporated by reference in this document to the Annual Report on Form 10-KSB for the year ended December 31, 2005.

SIGNATURES

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

	CNB FINANCIAL CORP.
Date: May 13, 2009	By: /s/ Charles R. Valade
Date: August 10, 2009	By: /s/ Charles R. Valade
	Charles R. Valade	~~Charles R. Valade~~
	President and Chief Executive Officer	~~President and Chief Executive Officer~~
Date: May 13, 2009	By: /s/ William M. Mahoney
Date: August 10, 2009	By: /s/ Kimberly M. Anderson
		William M. Mahoney
	Kimberly M. Anderson
		Treasurer & Chief Financial Officer
	Treasurer and Principal Financial Officer

19 26

Filing Compare · CNB Financial Corp.