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| **SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| **Washington****, D.C.****  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the fiscal year ended**                                    December  31, 2005                                          **                                                                                                                                            |
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| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the transition period from                                                    to                                                        |
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| Commission file number:  **000-24523**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| **                              CNB  Corporation                              **                                                                                                                                                                                                                                                                                                                                                                                                      |
| (Exact name of registrant as specified  in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| **                        South Carolina                                    **                                                                                                                                                                                                                                                                                                                                                                                                        |                    **                       57-0792402                **                              |
| (State or other jurisdiction of  incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                               (I.R.S.  Employer Identification No. )                             |
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| **1400 Third Avenue, P.O. Box 320****, Conway, South Carolina****                **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |     **                            29528                                                   ** |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                          (Zip  Code)                    |
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| (Registrant's telephone number,  including area code):  **(843) 248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
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| Securities registered pursuant to  section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| **None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| Securities registered pursuant to  Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| **Common Stock, $10.00 par value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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|      Indicate  by check mark if the registrant is a well-known seasoned issuer, as defined  in Rule 405 of the Securities Act. [ ] Yes [X]No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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|      Indicate  by check mark if the registrant is not required to file reports pursuant to  Section 13 or Section 15(d) of the Act. [ ] Yes [X] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
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|      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 and (2) has been subject to such filing requirements  for the past 90 days. Yes    X     No      .                                                                                                                                                                                                                                                                                                                                                                                         |
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|      Indicate  by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation  S-K is not contained herein, and will not be contained, to the best of  registrant's knowledge, in definitive proxy or information statements  incorporated by reference in Part III  of this  Form 10-K or any  amendment to this Form 10-K. [  ]                                                                                                                                                                                                                                                                                                                                                                                               |
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|      Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, or a non-accelerated filer.  See definition of  "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange  Act. (Check one):  Large accelerated filer [ ]  Accelerated filer [X]   Non-accelerated filer [ ]                                                                                                                                                                                                                                                                                                                                                                                                  |
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|      Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  [ ] Yes [X ]  No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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|     As  of February 28, 2006, 788,531 shares of Common Stock of CNB Corporation were  outstanding.  As of June 30, 2005, the last business day of the registrant's  most recently completed second fiscal quarter, the aggregate market value of  such Common Stock held by nonaffiliates (based upon the price at which stock  was sold prior to such date) was approximately $92,688,680.                                                                                                                                                                                                                                                                                                                                                                              |
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| Documents  incorporated by reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Portions of the Company's Proxy Statement to be used in connection with the  Annual Meeting of Stockholders to be held May 9, 2006 are incorporated by  reference in Part III of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| **CNB CORPORATION AND  SUBSIDIARY  2005 ANNUAL REPORT ON FORM 10-K** |
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| **TABLE OF CONTENTS**                                                |
|                                                                 |  | ** ** |
|                                                                      | **PART I** | ** ** |
|                                                                 |  | **Page** |
| **ITEM 1   **                                                   | **Description of Business** | 1-20 |
| **ITEM 1A   **                                                  | **Risk Factors** | 21-23 |
| **ITEM 1B   **                                                  | **Unresolved Staff Comments** | 23 |
| **ITEM 2   **                                                   | **Properties** | 24 |
| **ITEM 3   **                                                   | **Legal Proceedings** | 24-25 |
| **ITEM 4   **                                                   | **Submission of Matters to a Vote of Security Holders** | 25 |
| **  **                                                     | ** ** |   |
| **  **                                                     | **PART II** |   |
| ** **                                                           | ** ** |   |
| **ITEM 5      **                                           | **Market for the Registrant's Common Equity, Related Stock Holder Matters  and Issuer Purchases of Securities** | 26 |
| **ITEM 6**                                                           | **Selected Financial Data** | 27 |
| **   ITEM 7      **                                   | **Management's Discussion and Analysis of Financial Condition and  Results of Operations** | 27-32 |
| **ITEM 7A**                                                          | **Quantitative and Qualitative Disclosures About Market Risk** | 32 |
| **   ITEM 8**                                                   | **Financial Statements and Supplementary Data** | 33-59 |
| **   ITEM 9**                                                   | **Changes In and Disagreements with Accountants on Accounting and Financial  Disclosure** | 60 |
| **ITEM 9A**                                                          | **Controls and Procedures** | 60-62 |
| **   ITEM 9B**                                                  | **Other Information** | 62 |

**PART III**
| **ITEM 10   **   | **Directors and Executive Officers of the Registrant**                                              | 63 |
|-----------------------|-----------------------------------------------------------------------------------------------------|----|
| **ITEM 11   **   | **Executive Compensation**                                                                          | 63 |
| **ITEM 12   **   | **Security Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters** | 63 |
| **ITEM 13   **   | **Certain Relationships and Related Transactions**                                                  | 63 |
| **ITEM 14   **   | **Principal Accounting Fees and Services**                                                          | 63 |
| **ITEM 15**           | **Exhibits and Financial Statement Schedules**                                                      | 64 |
| **   Signature** | 65                                                                                                  |

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**FORWARD-LOOKING STATEMENTS**

Statementsincluded in this report which are not historical in nature are intended to be,and are hereby identified as "forward-looking statements" for purposes of thesafe harbor provided by Section 21E of the Securities Exchange Act of 1934, asamended. Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events or performance and underlyingassumptions and other statements which are other than statements of historicalfacts.  Such forward-looking statements may be identified, withoutlimitation, by the use of the words "anticipates," "believes," "estimates,""expects," "intends," "plans," "predicts," "projects," and similar expressions.The Company's expectations, beliefs, estimates and projections are expressed ingood faith and are believed by the Company to have a reasonable basis,including without limitation, management's examination of historical operatingtrends, data contained in the Company's records and other data available fromthird parties, but there can be no assurance that management's expectations,beliefs, estimates or projections will result or be achieved or accomplished.

The Company cautions readers that forward-looking statements, including withoutlimitation, those relating to the Company's recent and continuing expansion,its future business prospects, revenues, working capital, liquidity, capitalneeds, interest costs, income, and adequacy of the allowance for loan losses,are subject to risks and uncertainties that could cause actual results todiffer materially from those indicated in the forward-looking statements, dueto several important factors herein identified, among others, and other risksand factors identified from time to time in the Company's reports filed withthe Securities and Exchange Commission.

The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

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

CNB Corporation (the "Company") is a SouthCarolina business corporation organized in 1985 for the purpose of becoming abank holding company for The Conway National Bank (the "Bank") underthe Bank Holding Company Act.  The Company's only business is ownership ofthe Bank.  The activities of the Company are subject to the supervision ofthe Federal Reserve, and the Company may engage directly or through subsidiarycorporations in those activities closely related to banking which arespecifically permitted under the Bank Holding Company Act.  See"Supervision and Regulation."  Although the Company, afterobtaining the requisite approval of the Federal Reserve and any otherappropriate regulatory agency, may seek to enter businesses closely related tobanking or to acquire existing businesses already engaged in such activities,the Company has not engaged in, and has no present intent to engage in, such otherpermissible activities.

**DESCRIPTION OF THE SUBSIDIARY**

The Bank is an independent community bank engaged in the general commercialbanking business in Horry County and the "Waccamaw Neck" portion of GeorgetownCounty, South Carolina. The Bank was organized in1903.  The Bank's MainOffice consists of an Operations and Administration Center along with anadjacent branch office known as the Conway Banking Office.  The Bank alsooperates twelve other branch offices throughout Horry County and the"Waccamaw Neck" area of Georgetown County.  The Bank has a fourteenthbranch office under construction located just north of Conway on Highway 701.  TheBank employs approximately 249 full-time-equivalent employees at its Operationsand Administration Building and thirteen branch offices.

The Bank performs the full range of normal commercial banking functions. Someof the major services provided include checking accounts, NOW accounts, moneymarket deposit accounts, IRA accounts, Health Savings Accounts, savings andtime deposits of various types and loans to individuals for personal use, homemortgages, home improvement, automobiles, real estate, agricultural purposesand business needs.   Commercial lending operations include varioustypes of credit for business, industry, and agriculture.   Inaddition, the Bank offers safe deposit boxes, wire transfer services, bankmoney orders, 24-hour teller machines on the STAR Network, internet banking,direct deposits and a MasterCard/Visa program. Through a correspondentrelationship the Bank offers discount brokerage services.  Additionally,the Bank provides long-term mortgage loans through its secondary mortgagedepartment which acts on an agency only basis for various investors.  The Bankdoes not provide trust services; does not sell annuities; and does not sellmutual funds.

The majority of the Bank's customers are individuals and small to medium-sizedbusinesses headquartered within the Bank's service area.  The Bank has nomaterial concentration of deposits from any single customer or group ofcustomers. At December 31, 2005 the Bank had three concentrations of creditto single industries (See Note 1 to the consolidated financial statements,contained elsewhere in this report).  There are no material seasonalfactors that would have any adverse effect on the Bank nor does the Bank relyon foreign sources of funds or income.

Further information about the Bank's business is set forth below under"Supplementary Financial Data, Guide 3 Statistical Disclosure by BankHolding Companies" and in Item 7, "Management's Discussion andAnalysis of Financial Condition and Results of Operations."

1

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**COMPETITION**

The Bank actively competes with other institutions in Horry County and the Waccamaw Neck region of Georgetown County in providing customers with deposit,credit and other financial services.  The principal competitors of theBank include local offices of five regional banks, five state-wide banks, elevenlocally owned banks in Horry and Georgetown Counties and various otherfinancial and thrift institutions.  At June 30, 2005, the Bank ranked third inHorry County and tenth in Georgetown County in deposits among its competitors. TheBank also competes with credit unions, money market funds, brokerage houses,insurance companies, mortgage companies, leasing companies, consumer financecompanies and other financial institutions. Significant competitive factorsinclude interest rates on loans and deposits, prices and fees for services,office location, customer service, community reputation, and continuity ofpersonnel.

 

**SUPERVISION ANDREGULATION**

**General**

The Company and the Bank are subject to an extensive collection of state andfederal banking laws and regulations which impose specific requirements andrestrictions on, and provide for general regulatory oversight with respect to,virtually all aspects of the Company's and the Bank's operations.  TheCompany and the Bank are also affected by government monetary policy and byregulatory measures affecting the banking industry in general.  Theactions of the Federal Reserve System affect the money supply and, in general,the Bank's lending abilities in increasing or decreasing the cost andavailability of funds to the Bank.  Additionally, the Federal ReserveSystem regulates the availability of bank credit in order to combat recessionand curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings,and changes in the reserve requirements against bank deposits.

The Company is also subject to limited regulation and supervision by the SouthCarolina State Board of Financial Institutions (the "State Board").  ASouth Carolina bank holding company may be required to provide the State Boardwith information with respect to the financial condition, operations,management and inter-company relationships of the holding company and itssubsidiaries.  The State Board also may require such other information asis necessary to keep itself informed about whether the provisions of South Carolina law and the regulations and orders issued thereunder by the State Board havebeen complied with, and the State Board may examine any bank holding companyand its subsidiaries. Furthermore, pursuant to applicable law and regulations,the Company must receive approval of, or give notice to (as applicable) theState Board prior to engaging in the acquisition of banking or non-bankinginstitutions or assets.

**Obligations of Holding Company to its Subsidiary Banks**

A number of obligations and restrictions are imposed on bank holding companiesand their depository institution subsidiaries by Federal law and regulatorypolicies that are designed to reduce potential loss exposure to the depositorsof such depository institutions and to the FDIC insurance funds in the eventthe depository institution is in danger of becoming insolvent or isinsolvent.  For example, under the policy of the Federal Reserve, a bankholding company is required to serve as a source of financial strength to itssubsidiary depository institutions and to commit resources to support suchinstitutions in circumstances where it might not do so absent suchpolicy.  In addition, the "cross-guarantee" provisions of the FederalDeposit Insurance Act, as amended ("FDIA"), require insured depositoryinstitutions under common control to reimburse the FDIC for any loss sufferedor reasonably anticipated by either the Savings Association Insurance Fund("SAIF") or the Bank Insurance Fund ("BIF") of the FDIC as a result of thedefault of a commonly controlled insured depository institution or for anyassistance provided by the FDIC to a commonly controlled insured depositoryinstitution in danger of default.  The FDIC may decline to enforce thecross-guarantee provisions if it determines that a waiver is in the bestinterest of the SAIF or the BIF or both.  The FDIC's claim for damages issuperior to claims of stockholders of the insured depository institution or itsholding company but is subordinate to claims of depositors, secured creditorsand holders of subordinated debt (other than affiliates) of the commonlycontrolled insured depository institutions.  On February 8, 2006 the FederalDeposit Insurance Reform Act of 2005 ("FDIRA") was signed into law as part ofthe Deficit Reduction Act of 2005.  The FDIRA provides for among other matters,the merging of the SAIF and the BIF into one Deposit Insurance Fund.  Thespecific date for this merger has yet to be determined.

The FDIA also provides that amounts received from the liquidation or otherresolution of any insured depository institution by any receiver must bedistributed (after payment of secured claims) to pay the deposit liabilities ofthe institution prior to payment of any other general or unsecured seniorliability, subordinated liability, general creditor or stockholder.  Thisprovision gives depositors a preference over general and subordinated creditorsand stockholders in the event a receiver is appointed to distribute the assetsof the bank.

Any capital loans by a bank holding company to any of its subsidiary banks aresubordinate in right of payment to deposits and to certain other indebtednessof such subsidiary bank. In the event of a bank holding company's bankruptcy,any commitment by the bank holding company to a federal bank regulatory agencyto maintain the capital of a subsidiary bank will be assumed by the bankruptcytrustee and entitled to a priority of payment.

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**Obligations of Holding Company to its Subsidiary Banks -Continued**

Under the National Bank Act, if the capital stock of a national bank isimpaired by losses or otherwise, the OCC is authorized to require payment ofthe deficiency by assessment upon the bank's shareholders, pro rata, and to theextent necessary, if any such assessment is not paid by any shareholder afterthree months notice, to sell the stock of such shareholder to make good thedeficiency.

**Capital Adequacy Guidelines for Bank Holding Companies and Banks**

The various federal bank regulators, including the Federal Reserve and theFDIC, have adopted risk-based and leverage capital adequacy guidelinesassessing bank holding company and bank capital adequacy.  These standardsdefine what qualifies as capital and establish minimum capital standards inrelation to assets and off-balance-sheet exposures, as adjusted for creditrisks. The capital guidelines and the Company's capital position are summarizedin Note 15 to the Financial Statements, contained elsewhere in this report. The Bank is considered well capitalized.

Failure to meet capital guidelines could subject the Bank to a variety ofenforcement remedies, including the termination of deposit insurance by theFDIC and a prohibition on the taking of brokered deposits.

The risk-based capital standards of both the Federal Reserve Board and the FDICexplicitly identify concentrations of credit risk and the risk arising fromnon-traditional activities, as well as an institution's ability to manage theserisks, as important factors to be taken into account by the agencies inassessing an institution's overall capital adequacy.  The capitalguidelines also provide that an institution's exposure to a decline in theeconomic value of its capital due to changes in interest rates be considered bythe agencies as a factor in evaluating a bank's capital adequacy.  TheFederal Reserve Board also has  issued additional capital guidelines for bankholding companies that engage in certain trading activities.

**Payment of Dividends**

The Company is a legal entity separate and distinct from the Bank.  Mostof the revenues of the Company result from dividends paid to the Company by theBank.  There are statutory and regulatory requirements applicable to thepayment of dividends by subsidiary banks as well as by the Company to itsshareholders.

Each national banking association is required by federal law to obtain theprior approval of the OCC for the payment of dividends if the total of alldividends declared by the board of directors of such bank in any year willexceed the total of (i) such bank's net profits (as defined and interpreted byregulation) for that year plus (ii) the retained net profits (as defined andinterpreted by regulation) for the preceding two years, less any required transfersto surplus.  In addition, national banks can only pay dividends to theextent that retained net profits (including the portion transferred to capitalin excess of par value of stock) exceed bad debts (as defined by regulation).

The payment of dividendsby the Company and the Bank may also be affected or limited by other factors,such as the requirements to maintain adequate capital above regulatoryguidelines.  In addition, if, in the opinion of the applicable regulatoryauthority, a bank under its jurisdiction is engaged in or is about to engage inan unsafe or unsound practice (which, depending on the financial condition ofthe Bank, could include the payment of dividends), such authority may require,after notice and hearing, that such bank cease and desist from suchpractice.  The OCC has indicated that paying dividends that deplete anational bank's capital base to an inadequate level would be an unsafe andunsound banking practice.  The Federal Reserve, the OCC and the FDIC have issuedpolicy statements, which provide that bank holding companies and insured banksshould generally only pay dividends out of current operating earnings.

**Certain Transactions by the Company with its Affiliates**

Federal law regulates transactions among the Company and its affiliates,including the amount of the Bank's loans to or investments in nonbankaffiliates and the amount of advances to third parties collateralized bysecurities of an affiliate.  Further, a bank holding company and itsaffiliates are prohibited from engaging in certain tie-in arrangements inconnection with any extension of credit, lease or sale of property orfurnishing of services.

3

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**FDIC Insurance Assessments**

Because the Bank's deposits are insured by the Bank Insurance Fund of the FDIC("BIF"), the Bank is subject to semiannual insurance assessments imposed by theFDIC. Since January 1, 1997, the assessments imposed on all FDIC deposits fordeposit insurance have an effective rate ranging from 0 to 27 basis points per$100 of insured deposits, depending on the institution's capital position andother supervisory factors.  However, legislation enacted in 1996 requiresthat both Savings Association Insurance Fund ("SAIF") insured and BIF insureddeposits pay a pro rata portion of the interest due on the obligations issuedby the Financing Corporation ("FICO").  The FICO assessment is adjustedquarterly to reflect changes in the assessment bases of the respective fundsbased on quarterly Call Report and Thrift Financial Report submissions.  OnFebruary 8, 2006 the Federal Deposit Insurance Reform Act of 2005 ("FDIRA") wassigned into law as part of the Deficit Reduction Act of 2005.  The FDIRAprovides for, among other matters, the revision of insurance limits, fund capand dividends, and premium assessments.

**Regulation of the Bank**

The Bank is also subject to regulation and examination by the OCC.  Inaddition, the Bank is subject to various other state and federal laws andregulations, including state usury laws, laws relating to fiduciaries, consumercredit laws and laws relating to branch banking.  The Bank's loanoperations are subject to certain federal consumer credit laws and regulationspromulgated thereunder, including, but not limited to:  the federalTruth-In-Lending Act, governing disclosures of credit terms to consumerborrowers; the Home Mortgage Disclosure Act, requiring financial institutionsto provide certain information concerning their mortgage lending; the EqualCredit Opportunity Act and the Fair Housing Act, prohibiting discrimination onthe basis of certain prohibited factors in extending credit; and the Fair DebtCollection Act, governing the manner in which consumer debts may be collectedby collection agencies.  The deposit operations of the Bank are subject tothe Truth in Savings Act, requiring certain disclosures about rates paid onsavings accounts; the Expedited Funds Availability Act, which deals withdisclosure of the availability of funds deposited in accounts and thecollection and return of checks by banks; the Right to Financial Privacy Act,which imposes a duty to maintain certain confidentiality of consumer financialrecords and the Electronic Funds Transfer Act and regulations promulgatedthereunder, which govern automatic deposits to and withdrawals from depositaccounts and customers' rights and liabilities arising from the use ofautomated teller machines and other electronic banking services.  The Bankis also subject to the requirements of the Community Reinvestment Act (the"CRA") which imposes on financial institutions an affirmative and ongoingobligation to meet the credit needs of their local communities, including lowand moderate-income neighborhoods, consistent with the safe and sound operationof those institutions. Each financial institution's actual performance inmeeting community credit needs is evaluated as part of the examination process,and also is considered in evaluating mergers, acquisitions and applications toopen a branch or facility.  As well, the Bank is subject to provisions of theGramm-Leach-Bliley Act of 1999 (See the section below of the same title).  TheBank is also subject to the Fair Credit Reporting Act, governing the use andprovision of information to credit reporting agencies; the Bank Secrecy Act,dealing with among other things, the reporting of certain currency transactions,and the USA Patriot Act, dealing with , among other things, requiring theestablishment of anti-money laundering programs, including standards forverifying customer information at account opening.

**Other Safety and Soundness Regulations**

Prompt Corrective Action.  The federal bankingagencies have broad powers under current federal law to take prompt correctiveaction to resolve problems of insured depository institutions.  The extentof these powers depends upon whether the institutions in question are "wellcapitalized," "adequately capitalized," "undercapitalized," "significantlyundercapitalized" or "critically undercapitalized."

A bank that is "undercapitalized" becomes subject to provisions of the FederalDeposit Insurance Act restricting payment of capital distributions andmanagement fees; requiring the OCC to monitor the condition of the bank;requiring submission by the bank of a capital restoration plan; restricting thegrowth of the bank's assets and requiring prior approval of certain expansionproposals.  A bank that is "significantly undercapitalized" is alsosubject to restrictions on compensation paid to senior management of the bank,and a bank that is "critically undercapitalized" is further subject torestrictions on the activities of the bank and restrictions on payments ofsubordinated debt of the bank and will ordinarily be placed in receivership. The purpose of these provisions is to require banks with less than adequatecapital to act quickly to restore their capital and to have the OCC movepromptly to take over banks that are unwilling or unable to take such steps.

Brokered Deposits.  Under current FDIC regulations, "well-capitalized"banks may accept brokered deposits without restriction, "adequatelycapitalized" banks may accept brokered deposits with a waiver from the FDIC(subject to certain restrictions on payments of rates), while"undercapitalized" banks may not accept brokered deposits.  Theregulations provide that the definitions of "well capitalized", "adequatelycapitalized" and "undercapitalized" are the same as the definitions adopted bythe agencies to implement the prompt corrective action provisions described inthe previous paragraph.

4

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**Interstate Banking**

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994("Riegle-Neal"), the Company and any other adequately capitalized bank holdingcompany located in South Carolina can acquire a bank located in any otherstate, and a bank holding company located outside South Carolina can acquireany South Carolina-based bank, in either case subject to certain depositpercentage and other restrictions.  Riegle-Neal also provides that, in anystate that has not previously elected to prohibit out-of-state banks fromoperating interstate branches within its territory, adequately capitalized andmanaged bank holding companies can consolidate their multi-state bankoperations into a single bank subsidiary and branch interstate through acquisitions. De novo branching by an out-of-state bank is permitted only if it is expresslypermitted by the laws of the host state.  The authority of a bank toestablish and operate branches within a state will continue to be subject toapplicable state branching laws.  South Carolina law was amended,effective July 1, 1996, to permit such interstate branching but not de novobranching by an out-of-state bank. 

The Riegle-Neal Act, together with legislation adopted in South Carolina,resulted in a number of South Carolina banks being acquired by largeout-of-state bank holding companies.  Size gives the larger banks certainadvantages in competing for business from larger customers.  Theseadvantages include higher lending limits and the ability to offer services inother areas of South Carolina and the region.  As a result, the Bank doesnot generally attempt to compete for the banking relationships of largecorporations, but concentrates its efforts on small to medium-sized businessesand on individuals.  The Company believes the Bank has competedeffectively in this market segment by offering quality, personal service.

**Gramm-Leach-Bliley Act of 1999**

The Gramm-Leach-Bliley Act of 1999, which makes it easier for affiliationsbetween banks, securities firms and insurance companies to take place, becameeffective in March 2000.  The Act removes Depression-era barriers that hadseparated banks and securities firms, and seeks to protect the privacy ofconsumers' financial information through the provisions of  Title V, commonlyknown as "The Privacy Act" as promulgated under the Federal Reserve RegulationP and the OCC's Regulation 12 CFR Part 40, and Section 501, commonly referredto as "Information Security" as promulgated under the OCC's Regulation 12 CFRPart 30.  The Privacy Act sets forth a consumer's entitlement to disclosure ofthe Bank's use and further disclosure of nonpublic personal financialinformation obtained by the Bank from the consumer.  The Regulation alsogoverns the consumer's right to opt-out of further disclosure of nonpublicpersonal financial information and requires the Bank to provide initial andannual privacy notices.  Information Security sets forth the requirement forthe Bank to develop a comprehensive plan for the safeguarding of customerinformation which encompasses all aspects of the Bank's technologicalenvironment, business practices, and Bank facilities.

Under provisions of the legislation and regulations adopted by the appropriateregulators, banks, securities firms and insurance companies are able tostructure new affiliations through a holding company structure or through afinancial subsidiary. The legislation creates a new type of bank holdingcompany called a "financial holding company" which has powers much more extensivethan those of standard holding companies.  These expanded powers includeauthority to engage in "financial activities," which are activities that are(1) financial in nature; (2) incidental to activities that are financial innature; or (3) complementary to a financial activity and that do not impose asafety and soundness risk.  Significantly, the permitted financialactivities for financial holding companies include authority to engage inmerchant banking and insurance activities, including insurance portfolioinvesting.  A bank holding company can qualify as a financial holdingcompany and expand the services it offers only if all of its subsidiarydepository institutions are well-managed, well-capitalized and have received arating of "satisfactory" on their last Community Reinvestment Act examination.

The legislation also creates another new type of entity called a "financialsubsidiary."  A financial subsidiary may be used by a national bank or agroup of national banks to engage in many of the same activities permitted fora financial holding company, though several of these activities, including realestate development or investment, insurance or annuity underwriting, insuranceportfolio investing and merchant banking, are reserved for financial holdingcompanies.  A bank's investment in a financial subsidiary affects the wayin which the bank calculates its regulatory capital, and the assets andliabilities of financial subsidiaries may not be consolidated with those of thebank.  The bank must also be certain that its risk management proceduresare adequate to protect it from financial and operational risks created both byitself and by any financial subsidiary.  Further, the bank must establishpolicies to maintain the separate corporate identities of the bank and itsfinancial subsidiary and to prevent each from becoming liable for theobligations of the other.

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

5

----

**Gramm-Leach-Bliley Act - Continued**

Although the Act reaffirms that states are the regulators for insuranceactivities of all persons, including federally-chartered banks, the Actprohibits states from preventing depository institutions and their affiliatesfrom conducting insurance activities.

The Act and the regulations adopted pursuant to the Act create new opportunitiesfor the Company to offer expanded services to customers in the future, thoughthe Company has not yet determined what the nature of the expanded servicesmight be or when the Company might find it feasible to offer them.  TheAct has increased competition from larger financial institutions that arecurrently more capable than the Company of taking advantage of the opportunityto provide a broader range of services. However, the Company continues tobelieve that its commitment to providing high quality, personalized service tocustomers will permit it to remain competitive in its market area.

**Sarbanes-Oxley Act of 2002**

The Sarbanes-Oxley Act was signed into law on July 30, 2002, and mandatedextensive reforms and requirements for public companies.  The SEC hasadopted extensive new regulations pursuant to the requirements of theSarbanes-Oxley Act.  The Sarbanes-Oxley Act and the SEC's implementingregulations have increased the Company's cost of doing business, particularlyits fees for internal and external audit services and legal services, and thelaw and regulations are expected to continue to do so.  However, theCompany has not been affected by Sarbanes-Oxley and the SEC regulations in waysthat are materially different or more onerous than those of other publiccompanies of similar size and in similar business.

**Legislative Proposals**

Legislation which could significantly affect the business of banking isintroduced in Congress from time to time.  The Company cannot predict thefuture course of such legislative proposals or their impact on the Companyshould they be adopted.
| **Available  information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The Company electronically  files with the Securities and Exchange Commission ("SEC") its annual reports  on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on  Form 8-K, amendments to those reports filed or furnished pursuant to Section  13(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and proxy  materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on  the Internet, www.sec.gov, that contains reports, proxy and  information statements, and other information regarding issuers that file  electronically with the SEC. The Company also makes its filings available,  free of charge, through its Web site, www.conwaynationalbank.com, as  soon as reasonably practical after the electronic filing of such material  with the SEC. |

** **

**SUPPLEMENTARY FINANCIAL DATAGUIDE 3.   STATISTICAL DISCLOSURE BY BANKHOLDING COMPANIES**

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

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

The tables on the following 3 pages present selectedfinancial data and an analysis of average balance sheets, average yield and theinterest earned on earning assets, and the average rate paid and the interestexpense on interest-bearing liabilities for the years ended December 31, 2005,2004, 2003.

6

----

|                                                                                            |
|-------------------------------------------------------------------------------------------------|
| **CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)** |
|                                                                                            |
|                                                                                            |
|                                                                                                 | **Twelve Months Ended 12/31/05** | ** ** |
|                                                                                                 | ** ** | **Interest** | **Avg. Ann.** | ** ** | ** ** | ** ** |
|                                                                                                 | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                 | **Balance** | **Expense** | **Rate** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income (1)

$453,610

$  30,953     

6.82%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

174,922

6,463     

3.70   

** **

** **

** **

 
        Tax-exempt

21,464

1,335 (2)

6.22   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    23,953

         782     

3.27   

** **

** **

** **

 
          Total  earning assets

$673,949

$  39,533     

5.87   

** **

** **

** **

 
    Other  assets

    55,214

** **

** **

** **

** **

** **

 
          Total  assets

$729,163

** **

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$483,451

$    9,779     

2.02   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

33,699

649     

1.93   

** **

** **

** **

 
      Other  short-term borrowings

      1,037

           31     

2.99   

** **

** **

** **

 
          Total  interest-bearing liabilities

$518,187

$  10,459     

2.02   

** **

** **

** **

 
    Noninterest-bearing  deposits

129,833

** **

** **

** **

** **

** **

 
    Other  liabilities

10,444

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    70,699

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$729,163

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$673,949

$  29,074     

4.31%

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.30%

** **

** **

** **

 
Annualized  return on average stockholders' equity

** **

** **

13.41   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

41.60   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

9.70   

** **

** **

** **

 
  Average  total deposits

** **

** **

11.53   

** **

** **

** **

 
  Average  loans

** **

** **

15.59   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

92.43%

** **

** **

** **

  
** **

** **

 

** **

** **

** **

  
** **

** **

 

** **

** **

** **

 
(1)

The  Company had no out-of-period adjustments or foreign activities.  Loan fees of  $566 are included in the above interest income.  Loans on a non-accrual  basis for the recognition of interest income totalling $405 as of December  31, 2005 are included in loans for purpose of this analysis.

 
 

 
(2)

Tax-exempt  income is presented on a tax-equivalent basis using a 34% tax rate.  The  amount shown includes a tax-equivalent adjustment of $454.

 
7

 

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

 

 

**Twelve Months Ended 12/31/04**

** **

** **

**Interest**

**Avg. Ann.**

** **

** **

** **

**Avg.**

**Income/**

**Yield or**

** **

** **

** **

**Balance**

**Expense**

**Rate**

** **

** **

** **

**Assets:**

** **

** **

** **

** **

** **

** **

 
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income(1)

$386,899

$  24,351     

6.29%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

174,016

6,656     

3.83   

** **

** **

** **

 
        Tax-exempt

23,832

1,450 (2)

6.08   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

   25,732

         327     

1.27   

** **

** **

** **

 
          Total  earning assets

$610,479

$  32,784     

5.37   

** **

** **

** **

 
    Other  assets

    47,166

** **

** **

** **

** **

** **

 
          Total  assets

$657,645

** **

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$437,390

$    6,578     

1.50   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

29,251

348     

1.19   

** **

** **

** **

 
      Other  short-term borrowings

      1,097

           12     

1.09   

** **

** **

** **

 
          Total  interest-bearing liabilities

$467,738

$    6,938     

1.48   

** **

** **

** **

 
    Noninterest-bearing  deposits

 118,149

** **

** **

** **

** **

** **

 
    Other  liabilities

4,058

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    67,700

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$657,645

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$610,479

$  25,846     

4.23%

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.26%

** **

** **

** **

 
Annualized  return on average stockholders' equity

** **

** **

12.23   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

40.47   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

10.29   

** **

** **

** **

 
  Average  total deposits

** **

** **

12.19   

** **

** **

** **

 
  Average  loans

** **

** **

17.50   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

92.83%

** **

** **

** **

  
** **

** **

 

** **

** **

** **

  
** **

** **

 

** **

** **

** **

 
(1)

The Company had no  out-of-period adjustments or foreign activities.  Loan fees of $426 are  included in the above interest income.  Loans on a non-accrual basis for  the recognition of interest income totalling $880 as of December 31, 2004 are  included in loans for purpose of this analysis

 
 

 
(2)

Tax-exempt income  is presented on a tax-equivalent basis using a 34% tax rate.  The amount shown  includes a tax-equivalent adjustment of $493.

 
8

 

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

 

 

**Twelve Months Ended 12/31/03**

** **

** **

**Interest**

**Avg. Ann.**

** **

** **

** **

**Avg.**

**Income/**

**Yield or**

** **

** **

** **

**Balance**

**Expense(1)**

**Rate**

** **

** **

** **

**Assets:**

** **

** **

** **

** **

** **

** **

 
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income(2)

$346,110

$  22,565

6.52%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

156,783

6,623

4.22   

** **

** **

** **

 
        Tax-exempt

25,375

1,564

6.16   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    24,111

         246

1.02   

** **

** **

** **

 
          Total  earning assets

$552,379

$  30,998

5.61   

** **

** **

** **

 
    Other  assets

    40,292

** **

** **

** **

** **

** **

 
          Total  assets

$592,671

** **

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$391,856

$    6,877

1.75   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

28,752

334

1.16   

** **

** **

** **

 
      Other  short-term borrowings

      1,389

           13

.94   

** **

** **

** **

 
          Total  interest-bearing liabilities

$421,997

$    7,224

1.71   

** **

** **

** **

 
    Noninterest-bearing  deposits

101,310

** **

** **

** **

** **

** **

 
    Other  liabilities

4,714

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    64,650

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$592,671

** **

** **

** **

** **

** **

 
    Net  interest income as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$552,379

$  23,774

4.30%

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
(1)  Tax-equivalent  adjustment based on a 34%

** **

** **

** **

** **

** **

** **

 
       tax  rate

** **

$       532

** **

** **

** **

** **

  
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.29%

** **

** **

** **

 
Annualized  return on average stockholders' equity

** **

** **

11.86   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

37.44   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

10.91   

** **

** **

** **

 
  Average  total deposits

** **

** **

13.11   

** **

** **

** **

 
  Average  loans

** **

** **

18.68   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

93.20%

** **

** **

** **

  
** **

** **

 

** **

** **

** **

  
** **

** **

 

** **

** **

** **

 
(2)

The Company  had no out-of-period adjustments or foreign activities.   Loan  fees of $282 are included in the above interest income.  Loans on a  non-accrual basis for the recognition of interest income totalling $351 as of  December 31, 2003 are included in loans for purpose of this analysis.

** **

 
9

The table "Rate/VolumeVariance Analysis" provides a summary of changes in net interest incomeresulting from changes in rate and changes in volume.  The changes due torate are the difference between the current and prior year's rates multipliedby the current year's volume.  The changes due to volume are thedifference between the current and prior year's volume multiplied by ratesearned or paid.

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2005 and 2004   (Dollars in Thousands)**

 
 

 
 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

** **

 

**2005**

**2004**

**2005**

**2004**

**2005**

**2004**

**Variance**

**Rate**

**Volume**

** **

**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

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

 $453,610

  $386,899

6.82%

6.29%

$30,953

$ 24,351

$ 6,602 

$ 2,404 

$4,198 

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

174,922

174,016

3.70%

3.83%

6,463

6,656

 (193)

(227)

34 

 

**    Tax-exempt   (2)**

21,464

23,832

6.22%

6.08%

1,335

1,450

(115)

30 

(145)

 

**  Federal   funds sold and Securities**

 

 

 

 

 

 

 

 

 

 

**    purchased   under agreement to resell**

    23,953

   25,732

 3.27%

1.27%

      782

        327

      455 

       479 

     (24)

 

**  **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$673,949

$610,479

5.86%

5.37%

$39,533

$ 32,784

$ 6,749 

$  2,686 

$ 4,063 

 

**  **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

**  **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$483,451

$437,390

2.02%

1.50%

$  9,779

$   6,578

$ 3,201

$  2,514

687 

 

**  Federal   funds purchased and securities**

 

 

 

 

 

 

 

 

 

 

**    sold   under agreement to repurchase**

33,699

29,251

1.93%

1.19%

649

348

301

249 

52 

 

**  Other   short-term borrowings**

      1,037

      1,097

2.99%

1.09%

         31

          12

         19

        20 

      (1)

 

**  **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  518,187

  467,738

2.02%

1.48%

  10,459

     6,938

    3,521

    2,783 

   738 

 

**Interest-free    Funds Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

155,762

142,741

 

 

 

 

 

 

 

 

**  **

              

              

          

          

             

              

            

              

          

 

**Total   Funds Supporting Earning Assets**

$673,949

$610,479

1.55%

1.14%

$10,459

$   6,938

 $ 3,521

$  2,783 

$ 738 

 

**  **

 

 

 

 

 

 

 

 

 

 

**Interest Rate   Spread**

 

 

3.84%

3.89%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

  .47%

  .34%

             

              

 

 

 

 

**Net Yield   on Earning Assets**

 

 

4.31%

4.23%

$29,074

$ 25,846

 

 

 

 
 
(1)  Includes non-accruing loans which does nothave a material effect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate.

10

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2004 and 2003   (Dollars in Thousands)**

 

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 
 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

** **

 
 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

** **

 
 

**2004**

**2003**

**2004**

**2003**

**2004**

**2003**

**Variance**

**Rate**

**Volume**

** **

 
**Earning   Assets:**

 

 

 

 

 

 

 

 

 

 

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

 $386,899

  $346,110

6.29%

6.52%

$ 24,351

$ 22,565

$ 1,786 

$   (890) 

$2,676

 

**  Investment   securities:**

 

 

 

 

 

 

 

 

 

 

**    Taxable**

174,016

156,783

3.83%

4.22%

6,656

6,623

 33 

(679)

712

 

**    Tax-exempt   (2)**

23,832

25,375

6.08%

6.16%

1,450

1,564

(114)

 (19)

(95)

 

**  Federal   funds sold and Securities**

 

 

 

 

 

 

 

 

 

 

**    purchased   under agreement to resell**

    25,732

   24,111

 1.27%

1.02%

    327 

        246

       81 

          64 

       17  

 

**  **

 

 

 

 

 

 

 

 

 

 

**Total   Earning Assets**

$610,479

$552,379

5.37%

5.61%

$32,784

$ 30,998

$ 1,786 

$  (1.524)

$  3,310

 

**  **

 

 

 

 

 

 

 

 

 

 

**Interest-bearing   Liabilities:**

 

 

 

 

 

 

 

 

 

 

**  **

 

 

 

 

 

 

 

 

 

 

**  Interest-bearing   deposits**

$437,390

$391,856

1.50%

1.75%

$  6,578

$   6,877

$ (299)

$  (1.093)

794 

 

**  Federal   funds purchased and securities**

 

 

 

 

 

 

 

 

 

 

**    sold   under agreement to repurchase**

29,251

28,752

1.19%

1.16%

348

334

14 

9 

5 

 

**  Other   short-term borrowings**

      1,097

      1,389

1.09%

  .94%

        12

          13

        (1)

             2 

        (3)

 

**  **

 

 

 

 

 

 

 

 

 

 

**Total   Interest-bearing Liabilities**

  467,738

  421,997

1.48%

1.71%

   6,938

     7,224

    (286)

    (1,082)

     796 

 

**Interest-free    Funds Supporting**

 

 

 

 

 

 

 

 

 

 

**  Earning   Assets**

142,741

130,382

 

 

 

 

 

 

 

 

**  **

              

              

          

          

            

             

            

               

            

 

**Total   Funds Supporting Earning Assets**

$610,479

$552,379

1.14%

1.31%

$  6,938

$   7,224

 $ (286)

$  (1,082)

$   796 

 

**  **

 

 

 

 

 

 

 

 

 

 

**Interest   Rate Spread**

 

 

3.89%

3.90%

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

**  on   Net Yield on Earning Assets**

 

 

 .34%

 .40%

            

             

 

 

 

 

**Net Yield   on Earning Assets**

 

 

4.23%

4.30%

$25,846

$ 23,774

 

 

 

 

(1)  Includes non-accruing loans which does nothave a material effect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate.

11

**INVESTMENTSECURITIES**

The goal of the investment policy of the Bank is to provide for management ofthe investment securities portfolio in a manner designed to maximize portfolioyield over the long term consistent with liquidity needs, pledgingrequirements, asset/liability strategies, and safety/soundness concerns. Specific investment objectives include the desire to: provide adequate liquidityfor loan demand, deposit fluctuations, and other changes in balance sheet mix;manage interest rate risk; maximize the institution's overall return; provideavailability of collateral for pledging; and manage asset-qualitydiversification of the bank's assets. During 2004 and 2005, investmentsecurities represented 32% and 23% of total assets, respectively.  Loan demandremained solid throughout 2004 and 2005 due to strong real estate activitydespite rising interest rates, although interest rates remained relatively low. At December 31, 2005 and 2004, the Loans/Total Assets ratios were 63.5% and 60.6%,respectively, as compared to 60.3% at December 31, 2003. Investment securitiesand federal funds sold have correspondingly fallen as a percentage of total assets.

Investment securities with a par value of $122,980,000, $99,580,000 and $85,195,000at December 31, 2005, 2004, 2003, respectively, were pledged to secure publicdeposits and for other purposes required by law.

The following summaries reflect the book value, unrealized gains and losses,approximate market value, and tax-equivalent yields on investment securities atDecember 31, 2005, 2004, 2003.
 
**                               December  31, 2005                               **
 
**(Dollars in Thousands)**

** **

**Book**

**Unrealized Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

 

 

 

 

 

 

**AVAILABLE  FOR SALE**

 

 

 

 

 

  
 

 

 

 

 

 
  Federal  agencies

 

 

 

 

 

 
    Within  one year

$    29,047

$     53

$         153

$  28,947

4.08%

 
    One  to five years

   132,739

       10

  3,209

  129,540

    3.41%

  
   161,786

       63

  3,362

  158,487

    3.53%

  
 

 

 

 

 

 
  Mortgage  Backed Securities

 

 

 

 

 

 
     Over  ten years

         684

          -

       45

         639

    3.62%

  
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

2,689

 7

1

2,695

5.72%

 
    One  to five years

10,454

192

-

10,646

6.10%

 
    Six  to ten years

      3,438

     131

         2

      3,567

   6.86%

  
    16,581

     330

         3

    16,908

   6.20%

  
 

 

 

 

 

 
  Other-CRA  Qualified Investment Fund

         329

          -

          -

         329

        -%

  
 

 

 

 

 

 
  Total  available for sale

$179,380

$   393

$3,410

$176,363

   3.78%

  
 

 

 

 

 

 
**HELD TO  MATURITY**

 

 

 

 

 

  
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

$       935

$       5

$        -

$       940

7.55%

 
    One  to five years

      3,185

       93

          -

      3,278

7.20%

  
      4,120

       98

          -

      4,218

7.28%

  
 

 

 

 

 

  
 

 

 

 

 

 
  Total  held to maturity

$    4,120

$      98

$        -

$    4,218

  7.28%

  
 

 

 

 

 

 
 

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

 Asof the year ended December 31, 2005, the Bank did not hold any securities of anissuer that exceeded10% of stockholders' equity.

12

**INVESTMENT SECURITIES, continued**

 

**                               December  31, 2004                               **

**(Dollars in Thousands)**

** **

**Book**

**Unrealized Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

 

 

 

 

 

 

**AVAILABLE  FOR SALE**

 

 

 

 

 

 
 

 

 

 

 

 
  Federal  agencies

 

 

 

 

 

 
    Within  one year

$  22,082

$   354

$         -

$  22,436

5.33%

 
    One  to five years

  167,860

     883

      799

  167,944

    3.56%

 
  189,942

  1,237

      799

  190,380

    3.76%

 
 

 

 

 

 

 
  Mortgage  Backed Securities

 

 

 

 

 

 
    Over  ten years

      1,013

          -

        40

         973

   3.62%

 
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

480

1

-

481

5.33%

 
    One  to five years

11,780

450

-

12,230

5.85%

 
    Six  to ten years

      5,234

     374

          -

      5,608

    6.91%

 
    17,494

     825

          -

    18,319

    6.16%

 
 

 

 

 

 

 
  Other-CRA  Qualified Investment Fund

         322

          -

          -

         322

        - %

 
 

 

 

 

 

 
  Total  available for sale

$208,771

$2,062

$   839

$209,994

   3.96%

 
 

 

 

 

 

 
**HELD TO  MATURITY**

 

 

 

 

 

 
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

$       400

$      4

$        -

$       404

7.49%

 
    One  to five years

      3,477

     187

          -

      3,664

   7.24%

 
    Six  to ten years

         642

       55

          -

         697

   7.25%

 
      4,519

     246

          -

      4,765

   7.27%

 
 

 

 

 

 

 
    Total  held to maturity

$    4,519

$   246

$        -

$    4,765

  7.27%

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

As of the year ended December 31, 2004, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity.

13

**INVESTMENT SECURITIES, continued**

**                               December  31, 2003                               **

**(Dollars in Thousands)**

** **

**Book**

**Unrealized Holding**

**Fair**

** **

** **

**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

 

 

 

 

 

 

**AVAILABLE  FOR SALE**

 

 

 

 

 

 
 

 

 

 

 

 
  Federal  agencies

 

 

 

 

 

 
    Within  one year

$    8,809

$   174

$         -

$    8,983

4.36%

 
    One  to five years

  149,917

  3,484

      273

  153,128

    4.00%

 
  158,726

  3,658

      273

  162,111

    4.02%

 
 

 

 

 

 

 
  Mortgage  Backed Securities

 

 

 

 

 

 
    Over  ten years

      1,071

          -

        19

      1,052

   3.59%

 
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

185

1

-

186

7.03%

 
    One  to five years

10,283

522

-

10,805

5.68%

 
    Six  to ten years

      6,961

492

          -

      7,453

    6.81%

 
    Over  ten years

         288

         4

          -

         292

   5.92%

 
    17,717

  1,019

          -

    18,736

   6.14%

 
 

 

 

 

 

 
  Other-CRA  Qualified Investment Fund

         311

          -

          -

         311

        -%

 
 

 

 

 

 

 
  Total  available for sale

$177,825

$4,677

$    292

$182,210

   4.23%

 
 

 

 

 

 

 
**HELD TO  MATURITY**

 

 

 

 

 

 
 

 

 

 

 

 
  Federal  agencies

 

 

 

 

 

 
    Within  one year

$    2,000

$     55

$        -

$   2,055

6.44%

 
 

 

 

 

 

 
  State,  county and municipal

 

 

 

 

 

 
    Within  one year

1,562

     30

          -

1,592

6.98%

 
    One  to five years

3,086

     227

          -

3,313

   7.40%

 
    Six  to ten years

      1,433

     123

          -

      1,556

   6.97%

 
      6,081

     380

          -

      6,461

   7.19%

 
 

 

 

 

 

 
    Total  held to maturity

$    8,081

$   435

$        -

$    8,516

  7.01%

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

As of theyear ended December 31, 2003, the Bank did not hold any securities of an issuerthat exceeded 10% of stockholders' equity.

14

**LOAN PORTFOLIOLENDING ACTIVITIES**

The Company engages, through the Bank, in a full compliment of lendingactivities, including commercial, consumer, installment and real estate loans.

**Real Estate Loans**

One of the primary components of the Bank's loan portfolio are loans secured byfirst or second mortgages on residential and commercial real estate. These loans will generally consist of commercial real estate loans,construction and development loans and residential real estate loans (includinghome equity and second mortgage loans).  Interest rates are generallyfixed but adjustable rates are utilized, in part, for commercial purpose loans. The bank seeks to manage credit risk in the commercial real estate portfolio byemphasizing loans on owner-occupied office and retail buildings.   In addition,the Bank typically requires personal guarantees of the principal owners of theproperty.  The Bank may also facilitate mortgage loans funded and owned byinvestors in the secondary market, earning a fee, but avoiding the interestrate risk of holding long-term, fixed-rate loans. The principal economic riskassociated with all loans, including real estate loans, is the creditworthinessof the Bank's borrowers.  The ability of a borrower to repay a real estateloan will depend upon a number of economic factors, including employment levelsand fluctuations in the value of real estate.  In the case of a realestate construction loan, there is generally no income from the underlyingproperty during the construction period, borrowings may exceed the currentvalue of the improvements to the property, and the developer's personalobligations under the loan may be limited.  Each of these factorsincreases the risk of nonpayment by the borrower.  In the case of a realestate purchase loan and other first mortgage real estate loans structured witha balloon payment, the borrower may be unable to repay the loan at the end ofthe loan term and may thus be forced to refinance the loan at a higher interestrate, or, in certain cases, the borrower may default as a result of aninability to refinance the loan.  In either case, the risk of nonpaymentby the borrower is increased.  The Bank will also face additional creditrisks to the extent that it engages in making adjustable rate mortgage loans("ARMs").  In the case of an ARM, as interest rates increase,the borrower's required payments increase periodically, thus increasing thepotential for default  (See ARM Loans below). The marketability of allreal estate loans, including ARMs, is also generally affected by the prevailinglevel of interest rates.    Bank management monitors loans with loan-to-valueratios in excess of regulatory guidelines and secured by real estate inaccordance with guidance as set forth by regulatory authorities.  Aggregatelevels of both commercial and residential real estate loans with loan-to-valueratios above regulatory guidelines are reported to the Bank's Board ofDirectors on a quarterly basis in total dollars and as a percent of capital. As well, loans in excess of $500,000 with a loan-to-value ratio exception are simultaneouslyreported on an individual basis.  The total of loans with loan-to-value ratioexceptions are maintained within regulatory limitations.  The total amount ofloans with loan-to-value ratios in excess of regulatory guidelines totaled$32,484,000 and $22,928,000 or 6.5% and 5.6% of total loans at fiscal year-endsDecember 31, 2005 and 2004, respectively.

**Commercial Loans**

The Bank makes loans for commercial purposes in various lines ofbusiness.  The commercial loans will include both secured and unsecuredloans for working capital (including inventory and receivables), loans forbusiness expansion (including acquisition of real estate and improvements), andloans for purchases of equipment.  When taken, security usually consistsof liens on inventories, receivables, equipment, and furniture andfixtures.  Unsecured business loans are generally short-term with emphasison repayment strengths and low debt-to-worth ratios.  Commercial lendinginvolves significant risk because repayment usually depends on the cash flowsgenerated by a borrower's business, and debt service capacity can deterioratebecause of downturns in national and local economic conditions. Management generally controls risks by conducting more in-depth and ongoingfinancial analysis of a borrower's cash flows and other financial information.

**Consumer Loans**

The Bank makes a variety of loans to individuals for personal and householdpurposes, including secured and unsecured installment and term loans, homeequity loans and lines of credit and unsecured revolving lines of credit suchas credit cards.  The secured installment and term loans to consumers willgenerally consist of loans to purchase automobiles, boats, recreationalvehicles, mobile homes and household furnishings, with the collateral for eachloan being the purchased property.  The underwriting criteria for homeequity loans will generally be the same as applied by the Bank when making afirst mortgage loan, as described above, but more restrictive for home equitylines of credit. Consumer loans generally involve more credit risks than otherloans because of the type and nature of the underlying collateral or because ofthe absence of any collateral.  Consumer loan repayments are dependent onthe borrower's continuing financial stability and are likely to be adverselyaffected by job loss, divorce and illness.  Furthermore, the applicationof various federal and state laws, including federal and state bankruptcy andinsolvency laws, may limit the amount which can be recovered on such loans inthe case of default.  In most cases, any repossessed collateral will notprovide an adequate source of repayment of the outstanding loan balance. Although the underwriting process for consumer loans includes a comparison ofthe value of the security, if any, to the proposed loan amount, the Bank cannotpredict the extent to which the borrower's ability to pay, and the value of thesecurity, will be affected by prevailing economic and other conditions.

15

**LOAN PORTFOLIOLENDING ACTIVITIES (Continued)**

**Adjustable Rate Mortgage Loans  **

TheBank offers adjustable rate mortgages (ARMs)(as defined by regulatoryauthorities) for consumer purpose real estate loans only in the form ofrevolving equity lines of credit.  ARMs are typically offered as an alternativestructuring only on commercial purpose real estate loans and often commercialpurpose loans.  Variable rate loans, the majority of which are real estatesecured, totaled $131,538,000 and $120,065,000 or 26.1% and 29.5% of total loansat fiscal year-ends December 31, 2005 and 2004, respectively.  (The Bank doesnot offer any loan products which provide for planned graduated payments orloans which allow negative amortization.)

**Loan Approval and Review**

The Bank's loan approval policies provide for various levels of officer lendingauthority. When the amount of aggregate loans to a single borrower exceeds anindividual officer's lending authority, the loan request will be considered andapproved by an officer with a higher lending limit or by the Credit Committeeas established by the Board of Directors. The Loan Committee of the Board ofDirectors recommends to the Board of Directors the lending limits for theBank's loan officers.  The Bank has an in-house lending limit to a singleborrower, group of borrowers, or related entities, of the lesser of $10,000,000or 15% of capital.  An unsecured limit (aggregate) for the Bank is set at100% of total capital. 

**CLASSIFICATION OF LOANS**

The following is asummary of loans, in thousands of dollars, at December 31, 2005, 2004, 2003,2002, 2001 by major classification:

**  2005   **

**  2004   **

**  2003   **

**  2002   **

**  2001   **

**Real Estate Loans  - mortgage**

$324,475

$262,543

$228,556

$214,554

$187,808

**                                - construction**

 50,210

  39,525

  44,099

  28,297

  28,324

**Loans to farmers**

   1,912

1,582

   1,537

   1,674

   1,316

**Commercial and  industrial loans**

84,474

66,184

  53,559

  47,631

  44,351

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

  41,400

    35,583

    32,884

    31,953

    32,015

**All other loans,  including**

 

 

 

 

 

**  Overdrafts**

     1,455

     1,566

     1,399

      1,513

     2,800

**  Gross  Loans**

 503,926

 406,983

 362,034

 325,622

 296,614

**    Less  unearned income**

            0

            0

             0

             0

          (7)

**   Less  reserve for loan losses**

   (5,918)

  (5,104)

   (4,524)

   (4,155)

   (3,763)

**    Net  loans**

$498,008

$401,879

$357,510

$321,467

$292,844

**MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES**

**(Thousands ofDollars)**

** **The Company's loanportfolio contained approximately $371,983 and $286,918 in fixed rate loans asof December 31, 2005 and 2004, respectively. At December 31, 2005, and 2004,fixed rate loans with maturities in excess of one year amounted toapproximately $284,363 and $228,454, respectively. As of December 31, 2005,fixed rate loans due after one year through five years totaled $209,459 andfixed rate loans due after five years totaled $74,904.  Variable rateloans due after one year totaled $47,425.  Variable rate loans are thoseon which the interest rate can be adjusted to changes in the Bank's primerate.  Fixed rate loans are those on which the interest rate generallycannot be changed for the term of the loan.

16

**NONACCRUAL,PAST DUE AND RESTRUCTURED LOANS**

The following schedule summarizes the amount of nonaccrual, past due, andrestructured loans, in thousands of dollars, for the periods ended December 2005,2004, 2003, 2002, 2001:

**  2005**

**  2004**

**  2003**

**  2002**

**  2001**

** **

** **

** **

** **

** **

**   Nonaccrual  loans**

$  405

$  880

$  351

$  697

$  633

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

  $   277

  $   93

  $   130

  $  118

  $  138

**   Restructured troubled debt**

  None

  None

  None

  None

  None

Information relating to interest income on nonaccrual and renegotiated loansoutstanding for the year ended December 31, 2005, 2004, 2003, 2002, and 2001 isas follows:

**2005**

**2004**

**2003**

**2002**

**2001**

** **

** **

** **

** **

** **

**   Interest included in income during  the year**

$   7

$ 28

$  9

$ 19

$ 12

**   Interest which would have been included at the original     contract rates**

  $ 34

  $ 69

  $ 26

  $ 63

  $ 66

Accruing loans which are contractually past due 90 days or more are gradedsubstandard within the Bank's internal loan grading system and come underheightened scrutiny. Typically, a loan will not remain in the 90 days past duecategory, but will either show improvement or be moved to non-accrualloans.  Loans are placed in a non-accrual status when, in the opinion ofmanagement, the collection of additional interest is questionable. Thereafterno interest is taken into income unless received in cash or until such time asthe borrower demonstrates the ability to pay principal and interest.

**POTENTIAL PROBLEM LOANS**

In addition to those loans disclosed under "Nonaccrual, Past Due, andRestructured Loans", there are certain loans in the portfolio which arepresently current but about which management has concerns regarding the abilityof the borrower to comply with present loan repayment terms.  Managementmaintains a loan review of the total loan portfolio to identify loans wherethere is concern that the borrower will not be able to continue to satisfypresent loan repayment terms.  Such problem loan identification includesthe review of individual loans, loss experience, and economic conditions. Problem loans include both current and past due loans.

As of December 31, 2005, all loans which management had serious concerns aboutthe borrower being able to repay were put into non-accrual status and aredisclosed under "Nonaccrual, Past Due and Restructured Loans" andthere were no other potential problem loans known to management.

**FOREIGN OUTSTANDINGS**

As of the year ended December 31, 2005, the Company had no foreign loansoutstanding.

**LOAN CONCENTRATIONS**

As of the year ended December 31, 2005, the Company did not have anyconcentration of loans to multiple borrowers engaged in similar activities thatwould cause them to be similarly affected by economic or other conditions exceeding10% of total loans which are not otherwise disclosed as a category of loans inthe tables above.

****

17

**SUMMARY OF LOAN LOSS EXPERIENCE**

**ALLOWANCE FOR LOAN LOSSES**

The table, "Summary of Loan Loss Experience," summarizes loan balances as ofthe end of each period indicated, averages for each period, changes in theallowance for loan losses arising from charge-offs and recoveries by loancategory, and additions to the allowance which have been charged to expense.

The allowance for loan losses is increased by the provision for loan losses,which is a direct charge to expense.  Losses on specific loans are chargedagainst the allowance in the period in which management determines that suchloans become uncollectible.  Recoveries of previously charged-off loansare credited to the allowance.
 
**                          Years  Ended December 31,                          **
 
**  2005  **

**  2004  **

**  2003  **

**  2002  **

**  2001  **
 
**(Thousands of Dollars)**

**Loans:**

 

 

 

 

 

  Average  loans outstanding for the period   

$453,610

$386,899

$346,110

$309,351

$294,837

**Allowance  for loan losses:**

 

 

 

 

 

**  **

 

 

 

 

 

**Balance at  the beginning of period**

$  5,104

$   4,524

$   4,155

$    3,763

$    3,782

**  **

 

 

 

 

 

**  Charge-offs:**

 

 

 

 

 

    Commercial,  financial, and agricultural

$      324

$      281

$      431

$       412

$    383

    Real  Estate - construction and mortgage

52

22

59

97

96

    Loans  to individuals

        445

        514

        392

         447

     470
 
 

 

 

 

 

**      Total  charge-offs**

$      821

$      817

$      882

$       956

$    949

**  **

 

 

 

 

 

  **Recoveries**:

 

 

 

 

 

   Commercial,  financial, and agricultural

$        72

$        45

$      115

$       191

$    106

   Real  Estate - construction and mortgage

85

1

26

30

31

   Loans  to individuals

        203

        196

         150

         142

     168
 
 

 

 

 

 

**     Total  recoveries**

$      360

$      242

$       291

$       363

$    305

** **

 

 

 

 

 

**Net  charge-offs**

$      461

$      575

$       591

$       593

$    644

**Additions  charged to operations**

$   1,275

$   1,155

$       960

$       985

$    625

**Balance at  end of period**

$   5,918

$   5,104

$    4,524

$    4,155

$ 3,763

** **

 

 

 

 

 

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

   .10%  

   .15%   

   .17%   

   .19%   

   .22%

Theallowance for loan losses is maintained at a percent of net loans or an amountbased on considerations of classified and internally-identified problem loans,the current trend in delinquencies, the volume of past-due loans, and currentor expected economic conditions. In addition, the Asset/Liability ManagementCommittee and the Loan Committee review the adequacy of the allowance quarterlyand make recommendations as to the desired amount of the allowance.

The Board of Directors maintains an independent Loan Review function which hasestablished controls and procedures to monitor loan portfolio risk on anon-going basis.  Credit reviews on all major relationships are conductedon a continuing basis as is the monitoring of past-due trends and classifiedassets.  The function utilizes various methodologies in its assessment ofthe adequacy of the Allowance for Loan Losses.  Three primary measurementsare reported to the Board of Directors on a quarterly basis, the Graded LoanMethod based on a bank-wide risk grading model, the Migration Analysis Methodwhich tracks risk patterns on charged-off loans for the previous 10 years, andthe Percentage of Net Loans Method.  Additionally, the function annually reviewsthe economic assessment conducted by Loan Administration, addresses portfoliorisk by industry concentration, reviews loan policy changes and marketingstrategies for any effect on portfolio risk, and conducts tests addressingportfolio performance by type of portfolio, collateral type, and loan officerperformance.

18

**DEPOSITS**

**AVERAGE DEPOSITS BY CLASSIFICATION**

The following table sets forth the classification of average deposits for theindicated period, in thousands of dollars:
 
**                   Years  Ended December 31,               **
 
**   2005   **

**   2004   **

**   2003  **
 
** **

** **

** **

**Noninterest  bearing demand deposits**

$129,833

$118,149

$   101,310

**Interest bearing  demand deposits**

91,795

72,240

63,437

**Savings deposits**

53,392

47,998

44,899

**Time deposits**

 338,264

   317,152

    283,520

**  Total deposits**

$613,284

$555,539

$493,166

**AVERAGE RATES PAID ON DEPOSITS**

Thefollowing table sets forth average rates paid on categories of interest-bearingdeposits for the periods indicated:
 
**               Years  Ended December 31,                    **
 
**   2005   **

**   2004   **

**   2003   **
 
** **

** **

** **

**Interest bearing  demand deposits**

.33%

.29%

.29%

**Savings Deposits**

1.40%

1.16%

1.26%

**Time deposits**

2.60%

1.83%

2.16%

**MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE**

The following table sets forth the maturity of time deposits of $100,000 ormore, in thousands of dollars, at December 31, 2005: 

**Maturity within 3 months or less**

$55,305

**Over 3 through 6 months**

58,390

**Over 6 through 12 months**

19,813

**Over 12 months**

    16,126

**    Total**

$149,634

19

**RETURNON EQUITY AND ASSETS**

The following table presents certain ratios relating to the Company's equityand assets:
 
**             Years  Ended December 31,           **
 
**  2005  **

**  2004  **

**  2003  **
 
 

 

 

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

1.30%

1.26%

1.29%

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

13.41%

12.23%

11.86%

**   Cash  dividend payout ratio(3)**

41.60%

40.47%

37.44%

**   Average equity to average assets  ratio**

9.70%

10.29%

10.91%

**  **

 

 

 

**(1) Net income divided by average total assets.**

 

 

 

**(2) Net income divided by average equity.**

 

 

 

**(3) Dividends per share divided by net income per share**

 

 

 

**SHORT-TERM BORROWINGS**

Federal funds purchased and securities sold under repurchase agreements areshort-term borrowings which generally mature within 90 days from the dates ofissuance.  No other category of short-term borrowings had an averagebalance outstanding during the reported period which represented 30 percent ormore of stockholders' equity at the end of the period.

The following is a summary of federal funds purchased and securities sold underrepurchase agreements outstanding at December 31 of each reported period, inthousands of dollars:
 
**                        December  31,                       **
 
**  2005  **

**  2004  **

**  2003  **

**Federal funds purchased and securities sold under    agreement to repurchase**

  $43,296

  $33,950

  $24,760

The following information relates to outstanding federal funds purchased andsecurities sold under repurchase agreements during 2005, 2004, 2003, inthousands of dollars:
 
**Maximum Amount               Outstanding in Any                                 Month  End                    **

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

** **

**2005**

**2004**

**2003**

**2005**

**2004**

**2003**
 
**  Federal funds purchased      and securities sold under      agreement to repurchase**

  $43,296

  $33,950

  $32,256

  2.29%

  1.43%

  .96%
 
**              Years  ended December 31,            **
 
**2005  **

**2004  **

**2003 **

**  Federal funds purchased and securities sold under     agreement to repurchase average daily amount     outstanding**

$33,167 

$29,194 

$28,752 
 
 

 

 

**   Weighted average interest rate paid**

1.92%

1.19%

1.13%

20

**ITEM1A.   RISK FACTORS**

An investment in our common stock involves a significant degree of risk.  Anyof the following risks could adversely affect our business, our results ofoperations and our financial condition, as well as the price of our commonstock.  The risks discussed below also include forward-looking statements, andour actual results may differ substantially from those discussed in theseforward-looking statements.

**Risks Related to OurBusiness**

**Our growth strategy may notbe successful.**

We have plans to maintain our recent asset and deposit growth through theopening of additional branch locations and the hiring of additional bankers. Wemay not be successful in identifying or obtaining suitable new branch locationsor receiving regulatory approval for them, or employing and retaining suitablebankers, on terms that we can afford and that are attractive to us. Even if wesuccessfully open additional branch locations and hire additional bankers, wemay not achieve the asset and deposit growth that we seek because ofcompetition or poor economic conditions, or for other reasons.

**Our growth strategy may reduce our earnings in the near term.**

We expect each newoffice we open to take several years to become profitable and we cannotguarantee that any new office will ever become profitable.  We expect that byhaving a number of new offices at any given time, our ability to operate athigher levels of profitability will be reduced until our new offices canoperate at levels of profitability that equal or exceed our older offices.

**Our growth strategy may require future increases in capital that we may not beable to accomplish.**

We are required bybanking regulators to maintain various ratios of capital to assets. As ourassets continue to grow we expect our capital ratios to decline unless we canalso continue to increase our earnings or raise sufficient new capital to keeppace with asset growth.  Our ability to raise additional capital, if needed,will depend, among other things, on conditions in the capital markets at thattime, which are outside our control, and on our financial condition andperformance.  If we are unable to limit a capital ratio decline by increasingour capital, we will have to restrict our asset growth to the amount ourearnings will support. 

**We may be unable to manage our sustained growth successfully.**

We have grown substantially in the last several years.  Although we may notcontinue to grow as fast as we have in the past, we intend to expand our assetbase.  Our future profitability will depend in part on our ability to managegrowth successfully.  Our ability to manage growth successfully will depend onour ability to maintain cost controls and asset quality while attractingadditional loans and deposits, as well as on factors beyond our control, suchas economic conditions and interest rate trends.  If we grow quickly and arenot able to control costs and maintain asset quality, growth could materiallyadversely affect our financial performance.  

**We depend on the services of a number of key personnel, and a loss of any ofthose personnel could disrupt our operations and result in reduced revenues. **

We are a relationship-driven organization.  Our growth and development inrecent years have depended in large part on the efforts of several members ofour senior management team.  These senior officers have primary contact withour customers and are extremely important in maintaining personalizedrelationships with our customer base, which are key aspects of our businessstrategy, and in increasing our market presence.  The unexpected loss ofservices of one or more of these key employees could have a material adverseeffect on our operations and possibly result in reduced revenues if we wereunable to find suitable replacements promptly.

**If our loan customers do not pay us as they have contracted to, we mayexperience losses.**

Our principal revenueproducing business is making loans.  If our customers do not repay the loans,we will suffer losses. Even though we maintain an allowance for loan losses,the amount of the allowance may not be adequate to cover the losses weexperience.  We attempt to mitigate this risk by a thorough review of the creditworthinessof loan customers. Nevertheless, there is risk that our credit evaluations willprove to be inaccurate due to changed circumstances or otherwise.

21** **

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

**Risks Related to Our Business - Continued**

**Our business is concentrated in Horry County and the "Waccamaw Neck"region of Georgetown County, and a downturn in the economy of the Horry Countyand the Waccamaw Neck area, a decline in real estate values in the Horry Countyand the Waccamaw Neck areas or other events in our market area may adverselyaffect our business.**

Substantially all of our business is located in the Horry County and the"Waccamaw Neck" region of Georgetown County area in coastal SouthCarolina.  As a result, our financial condition and results of operations maybe affected by changes in the Horry County and the Waccamaw Neck economy.  Aprolonged period of economic recession, a general decline in Horry County andthe Waccamaw Neck area real estate values or other adverse economic conditionsin Horry County and the Waccamaw Neck and South Carolina may result indecreases in demand for our services, increases in nonpayment of loans anddecreases in the value of collateral securing loans, which could have amaterial adverse effect on our business, future prospects, financial conditionor results of operations.  

**We operate in an area susceptible to hurricane and other weather related damagewhich could disrupt our business and reduce our profitability.**

Nearly all of our business and our customers are located in coastal SouthCarolina, an area that often experiences damage from hurricanes and otherweather phenomena.  We attempt to mitigate such risk with insurance and byrequiring insurance on property taken as collateral.  However, catastrophicweather damage to a large portion of our market area could cause substantialdisruptions to our business and our customers' businesses which would reduceour profitability for some period.

**We face strong competition from larger, more established competitors which mayadversely affect our ability to operate profitably.**

We encounter strong competition from financial institutions operating in thegreater Horry/Georgetown County and Grand Strand area of South Carolina.  Inthe conduct of our business, we also compete with credit unions, insurancecompanies, money market mutual funds and other financial institutions, some ofwhich are not subject to the same degree of regulation as we are.  Many ofthese competitors have substantially greater resources and lending abilitiesthan we have and offer services, such as investment banking, insurance, trust andinternational banking services that we do not provide.  We believe that we havebeen able to, and will continue to be able to, compete effectively with theseinstitutions because of our experienced bankers and personalized service, aswell as through loan participations and other strategies and techniques.  However, we cannot promise that we are correct in our belief.  If we are wrong,our ability to operate profitably may be negatively affected.

**Risks Related to Our Common Stock**

**Our common stock has a limited trading market, which may make the promptexecution of sale transactions difficult.**

Although our common stockmay be traded from time to time on an individual basis, no active tradingmarket has developed and none is expected to develop in the foreseeablefuture.  Our common stock is not traded on any exchange or on the Nasdaq National Market System.  Accordingly, shareholders who wish to sell sharesmay experience a delay or have to sell them at a lower prices than they seek inorder to sell them promptly, if at all.

**There is no guarantee we will continue to pay cash dividends in the future atthe same or any level.**

Declaration and payment of dividends are within the discretion of our board ofdirectors.  Our bank is currently our only source of funds with which to paycash dividends.  Our bank's declaration and payment of future dividends to usare within the discretion of the bank's board of directors, and are dependentupon its earnings, financial condition, its need to retain earnings for use inthe business and any other pertinent factors.  The bank's payment of dividendsis also subject to various regulatory requirements and the ability of thebank's regulators to forbid or limit its payment of dividends.

**Provisions in our articles of incorporation and South Carolina law maydiscourage or prevent takeover attempts, and these provisions may have theeffect of reducing the market price for our stock.**

Our articles of incorporation include several provisions that may have theeffect of discouraging or preventing hostile takeover attempts. The provisionsinclude staggered terms for our board of directors and requirements ofsupermajority votes to approve certain business transactions.  In addition, South Carolina law containsseveral provisions that may make it more difficult for a third party to acquirecontrol of us without the approval of our board of directors, and may make itmore difficult or expensive for a third party

22

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

**Risks Related to Our Common Stock - Continued**

to acquire a majority ofour outstanding common stock.  To the extentthat these provisions are effective in discouraging or preventing takeoverattempts, they may tend to reduce the market price for our stock.

**Our common stock is not insured, so shareholders could lose their totalinvestments.**

Ourcommon stock is not a deposit or savings account, and is not insured by theFederal Deposit Insurance Corporation or any other government agency.  Shouldour business fail, shareholders could lose their total investments.

**Risks Related to Our Industry**

**We are subject to governmental regulation which could change and increase ourcost of doing business or have an adverse affect on our business.**

Weoperate in a highly regulated industry and are subject to examination,supervision and comprehensive regulation by various federal and stateagencies.  Our compliance with the requirements of these agencies is costly andmay limit our growth and restrict certain of our activities, including, paymentof dividends, mergers and acquisitions, investments, loans and interest ratescharged, and locations of offices.  We are also subject to capitalizationguidelines established by federal authorities and our failure to meet thoseguidelines could result, in an extreme case, in our bank's being placed inreceivership.  We have also recently been subjected to the extensive andexpensive requirements imposed on public companies by the Sarbanes-Oxley Act of2002 and related regulations.

The laws and regulations applicable to the banking industry could change at anytime, and we cannot predict the impact of these changes on our business orprofitability.  Because government regulation greatly affects the business andfinancial results of all commercial banks and bank holding companies, our costof compliance could adversely affect our ability to operate profitably. 

**We are susceptible to changes in monetary policy and other economic factorswhich may adversely affect our ability to operate profitably.**

Changes in governmental, economic and monetary policies may affect the abilityof our bank to attract deposits and make loans.  The rates of interest payableon deposits and chargeable on loans are affected by governmental regulation andfiscal policy as well as by national, state and local economic conditions.  Allof these matters are outside of our control and affect our ability to operateprofitably.

**ITEM1B.   UNRESOLVED STAFF COMMENTS**

TheCompany is an accelerated filer as defined by Rule 12(b)(2) of the ExchangeAct.  The Company has received no written comments from the SEC staff regardingits 1934 Act filings in the 180 days prior to fiscal year-end December 31, 2005which remain unresolved.

****23** **

**ITEM2.   PROPERTIES**

The Company's subsidiary, The Conway National Bank, has eleven permanentbanking offices in Horry County and two permanent banking offices in Georgetown County, for a total of thirteen banking offices.  In addition, the Bank hasan Operations and Administration Building, located at 1400 Third Avenue in Conway, which houses the Bank's administrative offices and data processingfacilities.  This three-story structure, which was significantly expandedin 1982, contains approximately 33,616 square feet.  Adjacent to theOperations and Administration Building, the Bank opened a new 24,000 squarefoot banking office in 2004, known as the Conway Banking Office, which providesretail banking functions at the Bank's principal site.  In addition, theBank has a 1,450 square foot building for express banking services adjacent tothe Conway Banking Office.  The Bank has a two-story office on Main Street in Conway containing 8,424 square feet. Bank offices are housed in one-storyfacilities at the Coastal Centre in Conway (3,500 square feet with an adjacent675 square foot building for express banking services), Red Hill in Conway(3,760 square feet) West Conway in Conway (3,286 square feet), Surfside inSurfside Beach (6,339 square feet), Northside, north of Myrtle Beach (2,432square feet), Socastee in the southern portion of Myrtle Beach (3,498 squarefeet), Aynor in The Town of Aynor (2,809 square feet), Myrtle Beach in the Cityof Myrtle Beach (12,000 square feet), Murrells Inlet in Murrells Inlet,Georgetown County (3,600 square feet), North Myrtle Beach in the City of NorthMyrtle Beach (3,600 square feet), and Pawleys Island (3,900 square feet) inPawleys Island, Georgetown County.  Of the thirteen banking offices and theOperations and Administration Building, the bank owns the Operations and Administration Building, the Conway Banking Office and Express, the banking offices at RedHill, West Conway, Surfside Beach, Northside, Main Street, Socastee, Aynor, Myrtle Beach, Murrells Inlet, North Myrtle Beach, and Pawleys Island.  One facility,Coastal Centre in Conway, is leased by the Bank under a long-term lease withrenewal options. In addition to the existing facilities, the Company haspurchased three future office sites.  The sites consist of 1.1 acres onHighway 701 north of Conway, 2.01 acres on Highway 9 west of North MyrtleBeach, and 1.63 acres at Loop Road and River Oaks Drive, Carolina Forest,Myrtle Beach.  The Company presently has a banking office under construction atthe Highway 701 North of Conway site and anticipates building a banking officeon the other sites within the next two to six years, depending on marketconditions. The physical addresses of each location are as follows:  TheOperations and Administration Building at 1400 Third Avenue, Conway; Conway BankingOffice at 1411 Fourth Avenue, Conway; Coastal Centre at 16th Ave.,Conway; Main Street at 309 Main Street, Conway; West Conway at Highway 501& Cultra Road, Conway; Surfside at Highway 17 & 5th AvenueNorth, Surfside Beach; Northside at 9726 Highway 17 North, Myrtle Beach; RedHill at Highways 544 & 501, Conway; Socastee at Highway 17 Bypass, South atthe "Back Gate", Myrtle Beach; Aynor at 2605 Highway 501, Aynor; Myrtle Beachat 1353 21st Avenue North, Myrtle Beach; Murrells Inlet at 4345Highway 17 Bypass, Murrells Inlet;  North Myrtle Beach at 110 Highway 17 North,North Myrtle Beach; and Pawleys Island at 10608 Ocean Highway, Pawleys Island.  TheBank owns all of its offices except one branch office, which is leased.

**ITEM 3.   LEGAL PROCEEDINGS**

On September 6, 2005, Willis J. Duncan and W. Jennings Duncan, both currentdirectors of the Company, together with Harriette B. Duncan, the wife of WillisJ. Duncan, the three of whom together own over 5% of the Company's outstandingcommon stock, commenced a lawsuit in the Court of Common Pleas for theFifteenth Judicial Circuit of the State of South Carolina against H. BuckCutts, Paul R. Dusenbury, Robert P. Hucks, Richard M. Lovelace, Jr. and HowardB. Smith, III, all of whom are directors of the Company and the Bank, andagainst the Company and the Bank.  The lawsuit arises principally from theadoption of resolutions by the directors comprising a majority of the membersof the Board of Directors of the Company or the Bank (including the DefendantDirectors), as applicable, at a joint meeting of the Boards of Directors of theCompany and the Bank on June 14, 2005, authorizing the following actions:  (i)the removal of Willis J. Duncan from his position as Chairman of the Board ofDirectors of  the Company and the removal of W. Jennings Duncan from hisposition as President of the Company; (ii) the removal of Willis J. Duncan andW. Jennings Duncan from all committees of the Board of Directors of theCompany; (iii) the election of H. Buck Cutts as Interim Chairman of the Boardof Directors of  the Company and the election of Robert P. Hucks as Presidentof the Company; (iv) the removal of Willis J. Duncan from his position asChairman of the Board of Directors of  the Bank and the removal of W. JenningsDuncan from his position as President of the Bank; (v) the election of H. BuckCutts as Interim Chairman of the Board of Directors of  the Bank and theelection of Robert P. Hucks as President of the Bank; (vi) the removal (by theCompany, as sole shareholder of the Bank acting through a majority of theDirectors of the Company) of Willis J. Duncan and W. Jennings Duncan asdirectors of the Bank; (vii) the removal of Willis J. Duncan and W. JenningsDuncan as members of committees of the Board of Directors of the Bank; (viii)the establishment of a Compensation Committee of each of the Company and theBank, and appointment of H. Buck Cutts, Howard B. Smith, III and Richard M.Lovelace, Jr., as members of such Compensation Committees; (ix) theestablishment of an Audit Committee of each of the Company and the Bank, andthe appointment of Harold G. Cushman, Jr., H. Buck Cutts and Howard B. Smith,III, as members of such Audit Committees; (x) the establishment of a Governanceand Nominating Committee of each of the Company and the Bank, and appointmentof Harold G. Cushman, H. Buck Cutts and Howard B. Smith, III, as members ofsuch Governance and Nominating Committees; (xi) the promotion of Paul R.Dusenbury to the position of Executive Vice President of the Company and theBank; (xii) execution of Executive Employment Agreements with Messrs. Hucks andDusenbury; and (xiii)  amendments to certain provisions of the Company'sBylaws.  At the meeting on June 14, 2005, a majority of the members of theBoards of Directors of the Company and the Bank also elected William R. Bensento fill the vacancies on the Boards of Directorsof the Company and the Bank created by the death of John K. Massey.  TheComplaint alleges civil conspiracy and breaches of fiduciary duty against theDirector Defendants.  The Complaint alleges that the Bank and the Company are"Nominal Defendants" because the nature of certain of the actions and certainof the relief sought would affect them.  Portions of the Complaint purport toconstitute  shareholder derivative actions. 

24

**ITEM 3. LEGAL PROCEEDINGS - Continued**

The Plaintiffs seek a declaratory judgment:  (i) finding that Willis J. Duncanand W. Jennings Duncan are entitled to their respective positions with theCompany and the Bank, and that a majority of the directors of the Company andthe Bank did not have power or authority to remove Willis J. Duncan  and W.Jennings Duncan from their respective positions with the Company and the Bank;and (ii) voiding certain of the amendments to the Bylaws of the Company adoptedby a majority of the directors of the Company.  The Plaintiffs further seek ajudgment in favor of themselves and the Company and the Bank against theDefendant Directors: (a) removing the Defendant Directors from the Board ofDirectors of the Company; (b) voiding the actions taken by a majority of theBoards of Directors of the Company and the Bank, respectively, discussed in theparagraph above;  (c) awarding actual and punitive damages, special damages andattorneys fees and costs, and such other legal and equitable relief and damagesas may be proper under South Carolina law.  

The Defendant Directors filed their Answer to the Complaint on October 6,2005.  The Answer of the Defendant Directors denies all allegations ofinappropriate conduct, civil conspiracy or breach of  fiduciary duties.  TheDefendant Directors' Answer seeks dismissal of all counts of the Complaint, andfurther asserts, among other things, that: (i) the Defendant Directorsexercised sound business judgment and due care, in good faith, honestly, andwith strict loyalty to their obligations to the Company, the Bank and theirrespective shareholders, in adopting the resolutions and taking all otheractions at the June 14, 2005 meetings of the Boards of Directors of the Companyand the Bank; (ii) the actions of the Defendant Directors were proper and inaccordance with the Bylaws and Articles of Incorporation of the Company and theBank and applicable South Carolina corporate law; and (iii) the actions of theDefendant Directors were consistent with their fiduciary duties to, and fair toand in the best interests of, the Company and the Bank.  The DefendantDirectors further assert that the Plaintiffs actions may not properly bebrought as shareholder derivative actions.  On November 8, 2005, the DefendantDirectors filed their First Amended Answer and Counterclaim which, in additionto the foregoing, asserts a counterclaim against  Willis J. Duncan and W.Jennings Duncan for defamation arising from a letter sent by Messrs. Duncan toshareholders of the Company on or about September 12, 2005, and seeks actualand punitive damages against Messrs. Duncan.

On December 8, 2005, the Plaintiffs filed their Reply to the DefendantDirectors' First Amended Answer and Counterclaim, and on January 6, 2006, thePlaintiffs filed their Amended Reply to the Defendant Directors' First AmendedAnswer and Counterclaim.  The Plaintiffs' Reply, as amended, denies that thePlaintiffs have defamed the Defendant Directors and seeks dismissal of theCounterclaim.

The Company and the Bank filed their Answer to the Complaint on October 7,2005.  The Answer of the Company and the Bank seeks dismissal of the Complaintto the extent it calls for any action that would alter or disrupt the corporateoperations and affairs of the Company and the Bank, and asserts, among otherthings, that: (a) the Company and the Bank have a vital interest in the outcomeof the litigation and in preserving sound management and practices; (b) theCompany and the Bank have no need of the assistance of the Plaintiffs asminority shareholders to run their businesses; (c) Plaintiffs' efforts to upsetthe election of William R. Benson to fill the vacancies on the Boards ofDirectors of the Company and the Bank created by the death of John K. Masseyare unreasonable; (d) the Company and the Bank recognize the results of thevotes and actions taken at the June 14, 2005 meetings; and (e) the Plaintiffsare not shareholders of the Bank and, therefore, have no standing or right underSouth Carolina law to bring a stockholder derivative action on behalf of theBank.  The Answer of the Company and the Bank further asserts that Plaintiffscan address their grievances through procedures provided in the Bylaws of theCompany and the laws of South Carolina, including proposing actions to beconsidered by the shareholders of the Company at the next annual meeting ofshareholders.  

Other than the payment of legal fees and costs, it does not appear that thelitigation will be a direct economic cost to the Company or the Bank.

**ITEM4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of security holders in the fourth quarterof 2005.

****25

**PART II**

**ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY ANDRELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

As of December 31, 2005, there were approximately 776 holders of record ofCompany stock. There is no established market for shares of Company stock andonly limited trading in such shares has occurred since the formation of theCompany on June 10, 1985.  During 2004 and 2005, management was aware of afew transactions in which the Company's common stock traded at the prices setforth below, adjusted for the effect of a 10% stock dividend paid in2004.  However, management has not ascertained that these transactionsresulted from arm's length transactions between the parties involved, andbecause of the limited number of shares involved, these prices may not beindicative of the value of the common stock.

**2005**

**2004**

  First  Quarter  Second Quarter  Third  Quarter  Fourth Quarter

**High**  $133.00  $140.00  $140.00  $155.00

**Low**  $133.00  $133.00  $140.00  $140.00

**High**  $128.18  $131.82  $131.82  $133.00

**Low**  $128.18  $128.18  $131.82  $132.00

Holdersof shares of Company stock are entitled to such dividends as may be declaredfrom time to time by the Board of Directors of the Company. The Company paid anannual cash dividend of $5.00 per share in 2005 and $4.25 per share in 2004. Inaddition, the Company may from time to time pay stock dividends. The Companypaid a 10% stock dividend in September 2004.  The 2004 high and low stockprices in the table above have been adjusted to give effect to this stockdividend.  There can be no assurance, however, as to the payment of dividendsby the Company in the future.  Payment of dividends is within the discretion ofthe Board of Directors, and is dependent upon the earnings and financialcondition of the Company and the Bank and other related factors.  The Company'sprimary source of funds with which to pay dividends are dividends paid to theCompany by the Bank.  There are legal restrictions on the Bank's abilityto pay dividends.  See "Supervision and Regulation-Payment of Dividends"under Item 1, Part I of this Form 10-K for a description of these legalrestrictions.

The information required to be disclosed by Item 201(d) of Regulation S-K isset forth in Item 12 of this Form 10-K.

The Company made only one sale of securities during 2005.  On November 18, 2005the Company sold 362 shares of treasury stock to The Conway National BankSavings and Profit Sharing Plan in the amount of $50,680, $140.00 per share. Purchases of stock during 2005 are outlined in the following table:

**Period**

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

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

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

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

January 1 - January 31, 2005

9

$133.00

-

-

February 1, - February 28, 2005

19

$133.00

-

-

March 1 - March 31, 2005

85

$133.00

-

-

April 1 - April 30, 2005

37

$133.00

-

-

May 1 - May 31, 2005

30

$133.00

-

-

June 1 - June 30, 2005

38

$140.00

-

-

July 1 - July 31, 2005

8

$140.00

-

-

August 1 - August 30, 2005

7

$140.00

-

-

September 30 - September 30, 2005

1

$140.00

-

-

October 1 - October 31, 2005

6

$140.00

-

-

November 1 - November 30, 2005

173

$155.00

-

-

December 1 - December 31, 2005

60

$155.00

-

-

Total

473

$144.73

-

-

26

**ITEM6. SELECTED FINANCIAL DATACNB CorporationFINANCIAL SUMMARY(All Dollar Amounts, Except Per Share Data, in Thousands)**

The following table sets forth certain selected financial data relating to theCompany and subsidiary and is qualified in its entirety by reference to themore detailed financial statements of the Company and subsidiary and notesthereto included elsewhere in this report.
 
**                                               Years  Ended December 31,                                                          **
 
**  2005  **

**  2004  **

**  2003  **

**  2002  **

**  2001  **

**Selected  Income Statement Data:**

 

 

 

 

 

**Total  Interest Income**

$ 39,079

$  32,291

$   30,466

$  31,344

$  33,963

**Total  Interest Expense**

   10,459

      6,938

       7,224

      9,068

    14,822

**Net  Interest Income**

   28,620

    25,353

     23,242

    22,276

    19,141

**Provisions  for Possible Loan Losses**

     1,275

      1,155

          960

         985

         625

**Net Interest  Income Possible**

 

 

 

 

 

**  after  Provision for Loan Losses**

   27,345

     24,198

     22,282

    21,291

    18,516

**Total Other  Operating Income**

   6,411

   6,257

   6,117

   5,463

   5,337

**Total Other  Operating Expense**

   19,530

     18,246

     17,237

    16,159

    14,606

**Income Before  Income Taxes**

   14,226

     12,209

     11,162

    10,595

      9,247

**Income Taxes**

     4,748

       3,927

       3,497

      3,413

      2,812

**Net Income**

$   9,478

$     8,282

$     7,665

$    7,182

$    6,435

**  **

 

 

 

 

 

***Per Share:**

 

 

 

 

 

**Net Income Per  Weighted Average**

 

 

 

 

 

**  Shares  Outstanding**

$   12.02

$     10.50

$      9.71

$      9.11

$      8.18

**Cash Dividend Paid  Per Share**

$     5.00

$       4.25

$      3.64

$      3.41

$      3.18

**Weighted Average  Shares Outstanding**

 788,496

 789,006

 789,290

 788,553

 786,080

** **

 

 

 

 

 

***Restated for a 10% stock dividend issued during 2004.**

**Selected Balance Sheet Data:**

 

 

 

 

 

**Assets**

$793,349

$671,569

$599,978

$569,490

$505,725

**Net Loans**

 498,008

 401,879

 357,510

 321,467

 292,844

**Investment Securities**

 181,942

 215,827

 191,575

 180,413

 162,106

**Federal Funds Sold**

       46,000

   -

   1,000

  22,000

   3,950

**Deposits:**

 

 

 

 

 

**  Non-Interest-Bearing**

$135,082

$118,580

$101,684

$100,225

$  88,995

**  Interest-Bearing**

  532,023

  441,784

  401,429

  368,084

  321,648

**   Total Deposits**

$667,105

$560,364

$503,113

$468,309

$410,643

**Stockholders' Equity**

$  70,559

$  67,585

$  64,623

$  61,125

$  53,996

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

"Management's Discussion and Analysis" isprovided to afford a clearer understanding of the major elements of theCompany's financial condition, results of operations, liquidity, and capitalresources. The following discussion should be read in conjunction with theCompany's financial statements and notes thereto and other detailed informationappearing elsewhere in this report.  References to dollar amounts in thissection are in thousands, except per share data.

****27

**CRITICALACCOUNTING POLICIES**

The Company has adopted various accounting policies which govern the application of accountingprinciples generally accepted in the United States in the preparation of theCompany's financial statements. The significant accounting policies of theCompany are described in the footnotes to the consolidated financial statements.

Certain accounting policies involve significant judgments and assumptions bymanagement which have a material impact on the carrying value of certain assetsand liabilities; management considers such accounting policies to be criticalaccounting policies. The judgments and assumptions used by management are basedon historical experience and other factors, which are believed to be reasonableunder the circumstances. Because of the nature of the judgments and assumptionsmade by management, actual results could differ from these judgments andestimates which could have a material impact on the carrying values of assetsand liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accountingpolicy that requires the most significant judgments and estimates used inpreparation of its consolidated financial statements. Refer to the MD&Aunder Provision and Allowance for Loan Losses section for a detaileddescription of the Company's estimation process and methodology related to theallowance for loan losses.

Distribution of Assets and Liabilities

The Company maintains a conservative approach in determining the distributionof assets and liabilities.  Loans increased 12.4% from $362,034 at December31, 2003 to $406,983 at December 31, 2004; and 23.8% from December 31, 2004 to$503,926 at December 31, 2005.  Loan growth is attributed to overallbusiness development efforts to meet business and personal loan demand in ourmarket area. Also, during the second half of 2005, the Board of directorsincreased the loan to asset target ratio to a 60% to 70% range.  Loan demand inour market area has remained solid in 2004 and 2005 in part due to overalllower interest rates coupled with a strong coastal real estate market. Loans increased as a percentage of total assets from 60.3% at year-end 2003 to60.6% at year-end 2004 and increased to 63.5% at year-end 2005. Correspondingly, investment securities and federal funds sold decreasedas a percentage of total assets from 32.1% at year-end 2003 and 2004 to 28.7%at year-end 2005. Investments and federal funds sold provide for an adequatesupply of secondary liquidity.  Year-end other assets as a percentage oftotal assets has remained relatively constant over the previous threeyears.  Management has sought to build the deposit base with stable,relatively non-interest-rate sensitive deposits by offering the small to mediumaccount holders a wide array of deposit instruments at competitive rates. Non-interest-bearingdemand deposits have remained in a 16.9% to 17.7% range over the previous threeyears, but are expected to decline over the long-term as more customers utilizeinterest-bearing deposit accounts and repurchase agreements.  Interest-bearingliabilities as a percentage of total assets have risen from 71.2% at December31, 2003 to 72.9% at December 31, 2005.  Stockholders' equity as a percentageof total assets has moved closer to the Board's long-term guideline ratio of  8.50%from 10.8%  at December 31, 2003 to 8.9% at December 31, 2005.  The Bankremains well-capitalized (see Note 15 to the consolidated financial statements,contained elsewhere in this report) and the lower ratio is intended to enhancethe return to shareholders.

The following table sets forth the percentage relationship to total assets ofsignificant components of the Company's balance sheet as of December 31, 2005,2004, 2003:
 
**                             December  31,                             **

**Assets:**

**2005**

**2004**

**2003**

**   Earning assets:**

** **

** **

** **

**     Loans**

63.5%

60.6%

60.3%

**     Investment securities:**

 

 

 

**     Taxable**

20.2   

28.7   

27.8   

**     Tax-exempt**

2.7   

3.4   

4.1   

**     Federal funds sold and  securities purchased**

 

 

 

**       under agreement  to resell**

    5.8   

        -   

      .2   

**        Total  earning assets**

  92.2   

  92.7   

  92.4   

**     Other assets**

    7.8   

    7.3   

    7.6   

**        Total  assets**

100.0%

100.0%

100.0%

**  **

 

 

 

**Liabilities and stockholders' equity:**

 

 

 

**     Interest-bearing liabilities:**

 

 

 

**       Interest-bearing  deposits**

67.1%

65.8%

66.9%

**       Federal funds  purchased and securities sold**

 

 

 

**         under  agreement to resell**

5.5   

5.1   

4.1   

**       Other short-term  borrowings**

      .3   

      .4   

      .2   

**         Total  interest-bearing liabilities**

  72.9   

  71.3   

  71.2   

**     Non-interest-bearing  deposits**

 17.0   

 17.7   

 16.9   

**     Other liabilities**

1.2   

1.0   

1.1   

**     Stockholders' equity**

    8.9   

  10.0   

  10.8   

**       Total  Liabilities and stockholders' equity**

100.0%

100.0%

100.0%

28

**Results of Operations**

CNBCorporation and subsidiary recognized earnings in 2005, 2004, 2003 of $9,478,$8,282, and $7,665, respectively, resulting in a return on average assets of 1.30%,1.26%, and 1.29% and a return on average stockholders' equity of 13.41%, 12.23%and 11.86%. The earnings were primarily attributable to favorable net interestmargins in each period (see Net Income-Net Interest Income). Other factorsinclude management's ongoing effort to maintain other income at adequate levels(see Net Income ‐ Other Income) and to control other expenses (see NetIncome - Other Expenses).  These strong earnings, coupled with a moderatedividend policy, have supplied the necessary capital funds to support bankoperations. Total assets were $793,349 at December 31, 2005 as compared to$671,569 at December 31, 2004 and $599,978 at December 31, 2003.  The followingtable sets forth the financial highlights for fiscal years 2005, 2004, 2003.

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

**  **

**December 31,  2005  **

** 2004   to   2005  Percent  Increase(Decrease)**

**December 31,  2004  **

** 2003   to   2004  Percent  Increase(Decrease)**

**December 31,  2003  **

**Net interest income**

 

 

 

 

 

 
**     after provision for loan  losses**

$  27,345

13.0% 

$  24,198

8.6% 

$  22,282

 
**Income before income taxes**

14,226

16.5    

12,209

9.4    

11,162

 
**Net Income**

9,478

14.4    

8,282

8.0    

7,665

 
**Per Share (1)**

 

 

 

 

 

 
**  (weighted average of shares outstanding)**

$    12.02

14.5    

$    10.50

8.1    

$      9.71

 
**  **

 

 

 

 

 

 
**Cash dividends declared**

3,942

17.6    

3,352

16.8    

2,870

 
**  **

 

 

 

 

 

 
**  Per Share (1)**

$      5.00

17.6    

$      4.25

16.8    

$      3.64

 
**  **

 

 

 

 

 

 
**Total assets**

$793,349

18.1% 

$671,569

11.9% 

$599,978

 
**Total deposits**

667,105

19.0    

560,364

11.4    

503,113

 
**Loans**

503,926

23.8    

406,983

12.4    

362,034

 
**Investment securities**

181,942

(15.7)  

215,827

12.7    

191,575

 
**Stockholders' equity**

70,559

4.4    

67,585

4.6    

64,623

 
**    Book value per share (1)**

 

 

 

 

 

 
**   (actual number of shares outstanding)**

$    89.48

4.4    

$    85.70

4.7    

$    81.89

 
**  **

 

 

 

 

 

 
**(1) Adjusted for the effect of a 10% stock**

 

 

 

 

 

 
**     dividend paid in 2004.**

 

 

 

 

 

 
**  **

 

 

 

 

 

 
**Ratios (2):**

 

 

 

 

 

 
**Return on average total assets**

1.30%

3.2   

1.26%

(2.3)  

1.29%

 
**Return on average stockholders' equity**

13.41%

9.6   

12.23%

3.1   

11.86%

  
(2)  For the fiscal years endedDecember 31, 2005, 2004, 2003, average total assets amounted to $729,163, $657,645,and $592,671 with average stockholders' equity totaling$70,699, $67,700, $64,650, respectively.

29

**NET INCOME**

**Net Interest Income**

Earnings aredependent to a large degree on net interest income, defined as the differencebetween gross interest and fees earned on earning assets, primarily loans andinvestment securities, and interest paid on deposits and borrowed funds. Net interest income is affected by the interest rates earned or paid and byvolume changes in loans, investment securities, deposits, and borrowed funds.

The Bank maintained net interest margins in 2005, 2004, 2003 of 4.31%, 4.23%,and 4.30%, respectively, as compared to management's long-term target of 4.35%.Net interest margins have been compressed at the bank and industry-wide as wehave recently experienced almost fifty-year lows in market interest rates. The bank has sought to increase the volume of loan outstandings, andcorrespondingly reduce the amount of investments held, to enhance interest incomethrough having more assets in the higher-earning loan category.  Fully-tax-equivalentnet interest income grew from $23,774 in 2003 to $25,846 in 2004 and $29,074 in2005.  During the three-year period, total fully-tax-equivalent interestincome increased by 5.7% from $30,998 in 2003 to $32,784 in 2004 and increased 20.6%in 2005 to $39,533.  Over the same period, total interest expensedecreased 4.0% from $7,224 in 2003 to $6,938 in 2004 and increased 50.7% to $10,459in 2005. Fully-tax-equivalent net interest income as a percentage of averagetotal earning assets was 4.30% in 2003, 4.2% in 2004 and 4.31% in 2005.

Interest rates paid on deposits and borrowed funds and earned on loans andinvestments have generally followed the fluctuations in market interest ratesin 2005, 2004, 2003. However, fluctuations in market interest rates do notnecessarily have a significant impact on net interest income, depending on theBank's rate sensitivity position.  A rate sensitive asset (RSA) is anyloan or investment that can be repriced up or down in interest rate within acertain time interval.  A rate sensitive liability (RSL) is an interestpaying deposit or other liability that can be repriced either up or down ininterest rate within a certain time interval. When a proper balance between RSAand RSL exists, market interest rate fluctuations should not have a significantimpact on earnings.  The larger the imbalance, the greater the interestrate risk assumed by the Bank and the greater the positive or negative impactof interest rate fluctuations on earnings.  When RSA's exceed RSL's for aspecific repricing period, a positive interest sensitive gap results.  The gapis negative when interest-sensitive liabilities exceed interest-sensitiveassets.  For a bank with a positive gap, rising interest rates would beexpected to have a positive effect on net interest income and falling rateswould be expected to have the opposite effect.  However, gap analysis, such asset forth in the table below, does not take into account actions by a bank orits customers during periods of changing rates, which could significantlychange the effects of rate changes than would otherwise be expected.  The Bankseeks to manage its assets and liabilities in a manner that will limit interestrate risk and thus stabilize long-term earning power. The following table setsforth the Bank's static gap rate sensitivity position at each of the timeintervals indicated.  The table illustrates the Bank's rate sensitivityposition on specific dates and may not be indicative of the position at otherpoints in time. Management believes that a 200 basis point rise or fall ininterest rates will have less than a 10 percent effect on before-tax netinterest income over a one-year period which is within bank guidelines.

Interest Rate Sensitivity AnalysisDecember 31, 2005(Dollars in Thousands)
 
**1 Day**

**90 Days**

**180 Days**

**365 Days**

**Over 1    to  5 Years**

**  Over  5 Years**

**Rate Sensitive Assets (RSA)**

** **

** **

** **

** **

** **

** **

**  Federal Funds Sold**

$  46,000

$           0 

$            0 

$            0 

$            0

$            0

**  Investment Securities**

       0

  9,099 

  7,449 

 19,428 

 145,186

   2,338

**  Loans (net of  non-accruals $405)**

  131,538

    30,034 

    25,848 

    31,738 

  209,459

    74,904

**Total, RSA**

$177,538

$  39,133 

$  33,297 

$  51,166 

$354,645

$  77,242

**  **

 

 

 

 

 

 

**Rate Sensitive Liabilities (RSL)**

 

 

 

 

 

 

**  **

 

 

 

 

 

 

**Deposits:**

 

 

 

 

 

 

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

$           0

$ 55,305 

  58,390 

  19,813 

  16,126

       0

**All Other Time Deposits**

       0

  37,374 

  35,749 

  55,493 

  15,036

       0

**Federal Funds Purchased and    Securities Sold under Repurchase    Agreements**

  40,165

   3,131 

       0 

       0 

       0

       0

**  **

 

 

 

 

 

 

**  **

               

                

                

                 

               

               

**Total RSL**

$  40,165

$  95,810 

$  94,139 

$ 75,306 

$  31,162

$            0

**RSA-RSL**

$137,373

$(56,677)

$(60,842)

$(24,140)

$323,483

$  77,242

**Cumulative RSA-RSL**

$137,373

$  80,696 

$  19,854 

$  (4,286)

$319,197

$396,439

**Cumulative RSA/RSL**

   4.42

    1.59 

    1.09 

    .99 

    1.95

    2.18

 

30

**NET INCOME(continued)**

**Provision for Loan Losses**

It is the policy ofthe Bank to maintain the allowance for loan losses at a percentage of net loansor the percentage deemed appropriate by management to cover estimated losses inherentin the portfolio.  The Company includes the provisions of SFAS No. 114,"Accounting by Creditors for Impairment of a Loan", as amended bySFAS 118, in the allowance for loan losses (see NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES).  The provision for loan losses was $1,275 in 2005, $1,155in 2004, $960 in 2003. Net loan charge-offs totalled $461 in 2005, $575 in2004, $591 in 2003 with net charge-offs being centered in consumer purposeloans and commercial and industrial loans in 2005, and consumer purposeloans in 2004 and 2003. The allowance for loan losses as a percentage of netloans was 1.19% at December 31, 2005, 1.27% at December 31, 2004, and 1.27% atDecember 31, 2003. The higher provision during 2005 was due to an increase inthe rate of loan growth.

**Securities Transactions**

Net unrealizedgains/(losses) in the investment securities portfolio were $(2,919) at December31, 2005, $1,469 at December 31, 2004, and $4,820 at December 31, 2003.  Themarket value of investment securities has declined due to rising short-termmarket rates.  Security gains of $153 and $2 were realized in 2003 and 2005on sales of $6,376 and $4,000 in short-term available-for-sale securities tosupplement liquidity.  No security gains/(losses) were realized in 2004.

**Other Income**

Other income, net ofany securities gains/(losses), increased by 4.9% from $5,964 in 2003 to $6,257in 2004 and grew 2.4% from $6,257 in 2004 to $6,409 in 2005.  Other incomerose in 2003 primarily due to growth in secondary market mortgage loanincome.  Mortgage loan activity declined in 2004, but the Bank experiencedstrong growth in merchant discount income due to higher merchant accountvolumes.  During 2005, deposit service charge income declined as the economystrengthened and demand deposit balances grew, and higher earnings allowancecredits were paid on commercial balances.  This decline was offset by stronggrowth in secondary market mortgage loan income as we expanded our secondarymarket mortgage loan program during the second half of 2005.

**Other Expenses**

Other expensesincreased by 5.9% from $17,237 in 2003 to $18,246 in 2004 and 7.0% from $18,246in 2004 to $19,530 in 2005.  The components of other expenses are salariesand employee benefits of $10,961, $11,359, and $12,459; occupancy and furnitureand equipment expenses of $2,171, $2,509, and $2,727; and other operatingexpenses of $4,105, $4,378, and $4,344 for 2003, 2004, and 2005, respectively.

The increase in salary and employee benefits reflects compensation increases,the increased costs of providing employee benefits, and an increase from 224 to249 full-time equivalent employees over the three-year period. Also, during2005, the Job Evaluation Salary Administration Program (JESAP) managementcommittee, with the help of an outside compensation consultant, revised jobdescriptions and revised salary ranges based on peer bank data.  The JESAPcommittee was concerned that the bank's employee compensation has trailed themarket and, since July, 2005, the committee has moved aggressively to implementa competitive compensation scale that positions the Bank to compete for thebest banking talent in our region.  In addition, in June, 2005, thirty-fiveemployees were paid below the minimum salary established for their jobposition.  It is now the Bank's general practice to pay employees at least theminimum.

The addition of the $5.3 million Conway Banking Office in 2004; theconstruction, equipping and staffing of the Pawleys Island Banking Office inlate 2005; and the 2005 expenditure of approximately $1 million for imaging anddata processing equipment and software have impacted occupancy and furnitureand equipment expenses.

Non-interest expense should grow in 2006 due to the addition of a new NorthConway Banking Office which is under construction.  Also, the examination andprofessional fees expense category is expected to increase in 2006 due to anincrease in legal fees pertaining to the Duncan lawsuit (see Item 1. LegalProceedings), and due to anticipated Company SEC counsel fees associated with aproxy contest over the election of Directors at the May 9, 2006 Annual Meeting.

**Income Taxes**

Provisions forincome taxes increased 12.3% from $3,497 in 2003 to $3,927 in 2004 andincreased 20.9% from $3,927 in 2004 to $4,748 in 2005.  Income taxliability has increased in 2004 and 2005 as income before income taxes hasincreased 9.4% and 16.5%, respectively.

**LIQUIDITY**

The bank's liquidity position is primarily dependent on short-term demands forfunds caused by customer credit needs and deposit withdrawals and upon theliquidity of bank assets to meet these needs.  The bank's liquiditysources include cash and due from banks, federal funds sold and short-term investments. In addition, the bank has established federal funds lines of credit fromcorrespondent banks; has the ability, on a short-term basis, to borrow fundsfrom the Federal Reserve System; and has a line of credit from the Federal HomeLoan Bank of Atlanta (see NOTE 8 to the Consolidated Financial Statements-LINESOF CREDIT).  The Company had cash balances on hand of $6,623, $7,485, and$5,719 at December 31, 2005, 2004, 2003 with liabilities, consisting of cashdividends payable, totalling $3,942, $3,352, and $2,870, respectively. Management feels that liquidity sources are more than adequate to meet fundingneeds.

31

**OFF BALANCE SHEET RISK**

The Company, through the operations of the Bank, makescontractual commitments to extend credit in the ordinary course ofbusiness.  These commitments are legally binding agreements to lend moneyto customers of the Bank at predetermined interest rates for a specified periodof time.  In addition to commitments to extend credit, the Bank alsoissues standby letters of credit which are assurances to a third party thatthey will not suffer a loss if the Bank's customer fails to meet itscontractual obligation to a third party.  The Bank may also haveoutstanding commitments to buy/sell securities.  At December 31, 2005, theBank had issued commitments to extend credit of $61.5 million, standby lettersof credit of $6.5 million, and no commitments to purchase securities (see NOTE10 to the Consolidated Financial Statements-FINANCIAL INSTRUMENTS WITHOFF-BALANCE SHEET RISK). The majority of the commitments and standby letters ofcredit typically mature within one year and past experience indicates that manyof the commitments and standby letters of credit will expire unused. However, through its various sources of liquidity, the Bank believes that itwill have the necessary resources to meet these obligations should the needarise.

Neither the Company nor the Bank is involved in other off-balance sheetcontractual relationships, unconsolidated related entities that have off-balancesheet arrangements, or transactions that could result in liquidity needs orother commitments or significantly impact earnings.

Obligations under noncancelable operating lease agreements totaled $19 thousandat December 31, 2005.  These obligations are payable over several years asshown in NOTE 11 to the Consolidated Financial Statements - COMMITMENTS ANDCONTINGENCIES.

**CAPITAL RESOURCES**

Total stockholders' equity was $70,559, $67,585, $64,623 at December 31, 2005,2004, 2003, representing 8.89%, 10.06%, and 10.73% of total assets,respectively. At December 31, 2005, the Company and the Bank exceededquantitative measures established by regulation to ensure capital adequacy (seeNOTE 15 to the Consolidated Financial Statements - REGULATORY MATTERS). Capital is considered sufficient by management to meet current and prospectivecapital requirements and to support anticipated growth in bank operations.

**EFFECTS OF INFLATION**

Inflation normally has the effect of accelerating the growth of both a bank'sassets and liabilities.  One result of this inflationary effect is anincreased need for equity capital.  Income is also affected byinflation.  While interest rates have traditionally moved with inflation,the effect on net income is diminished because both interest earned on assetsand interest paid on liabilities vary directly with each other.  In somecases, however, rate increases are delayed on fixed-rate instruments. Loan demand normally declines during periods of high inflation. Inflation has adirect impact on the Bank's non-interest expense. The Bank responds toinflation changes through re-adjusting non-interest income by repricingservices.

**ACCOUNTING ISSUES**

Accounting standards that have been issued or proposed by the FinancialAccounting Standards Board that do not require adoption until a future date arenot expected to have a material impact on the consolidated financial statementsupon adoption.  (See NOTE 1 to the Consolidated Financial Statements -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES).

**RISKS AND UNCERTAINTIES**

In the normal course of its business the Company encounters two significanttypes of risks: economic and regulatory.  There are three main componentsof economic risk: interest rate risk, credit risk and market risk.  TheCompany is subject to interest rate risk to the degree that itsinterest-bearing liabilities mature or reprice at different speeds, or ondifferent basis, than its interest-earning assets.  Credit risk is therisk of default on the Company's loan portfolio that results from borrower'sinability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loansreceivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmentalagencies.  These regulations can and do change significantly from periodto period.  The Company also undergoes periodic examinations by theregulatory agencies, which may subject it to further changes with respect toasset valuations, amounts of required loss allowances and operatingrestrictions from the regulators' judgments based on information available tothem at the time of their examination.

**ITEM 7.AQUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk is the risk of loss from adverse changes in market prices andrates. The Company's market risk arises principally from interest rate riskinherent in its lending, deposit and borrowing activities.  Managementactively monitors and manages its interest rate risk exposure.  Inaddition to other risks which the Company manages in the normal course ofbusiness, such as credit quality and liquidity risk, management considersinterest rate risk to be a significant market risk that could potentially havea material effect on the Company's financial condition and results ofoperations (See Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS - Net Income - Net Interest Income). Other types of market risks, such as foreign currency risk and commodity pricerisk, do not arise in the normal course of the Company's business activities.

32

**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**CNB CORPORATION AND SUBSIDIARYREPORTON CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDDECEMBER 31, 2005, 2004 AND 2003**33

***CNB CORPORATION AND SUBSIDIARYCONWAY, SOUTH CAROLINA*****CONTENTS**

**PAGE**
 
** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  FINANCIAL STATEMENTS     **Consolidated balance sheets     Consolidated statements of income     Consolidated statements of stockholders' equity     Consolidated statements of comprehensive income     Consolidated statements of cash flows**NOTES TO FINANCIAL STATEMENTS**

1 - 2  3  4  5  6  7  8 - 25

****34

**Elliott Davis, LLCAdvisors-CPAs-Consultants1901 Main Street, Suite 1650P.O. Box 2227Columbia, SC  29202-2227****REPORT OF****INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

The Directors and Stockholders***CNB Corporation***Conway, South Carolina

We have audited the consolidated balance sheets of CNB Corporation andsubsidiary as of December 31, 2005 and 2004, and the related consolidatedstatements of income, stockholders' equity, comprehensive income and cash flowsfor each of the three years in the period ended December 31, 2005.  We also have auditedmanagement's assessment, included in the accompanying Management's Report onInternal Control Over Financial Reporting, that CNB Corporation maintainedeffective internal control over financial reporting as of December 31, 2005,based on criteria established in Internal Control - Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financialstatements, an opinion on management's assessment, and an opinion on theeffectiveness of the Company's internal control over financial reporting basedon our audits.

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit of consolidated financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financialreporting, evaluating management's assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  We believethat our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reporting andthe preparation of consolidated financial statements for external purposes inaccordance with generally accepted accounting principles.  A company's internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of consolidated financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company's assets that could have a material effecton the consolidated financial statements.

35

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of CNB Corporation asof December 31, 2005 and 2004, and the results of their operations and theircash flows for each of the years in the three-year period ended December 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion, management's assessment that CNBCorporation  maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, inour opinion, CNB Corporation maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).

/s/Elliott Davis, LLC

Columbia, South CarolinaJanuary 26, 2006

36

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

** **

**          December  31,         **

**                                                     *ASSETS*  CASH AND DUE FROM BANKS  FEDERAL FUNDS SOLD  INVESTMENT SECURITIES AVAILABLE FOR SALE  INVESTMENT SECURITIES HELD TO MATURITY**   (Fair  value $4,218 in 2005 and $4,765 in 2004)**OTHER INVESTMENTS, AT COST****LOANS     **Less allowance for loan losses        Net loans**PREMISES AND EQUIPMENT  ACCRUED INTEREST RECEIVABLE  OTHER ASSETS                                          *LIABILITIES  AND STOCKHOLDERS' EQUITY*  LIABILITIES     **Deposits        Noninterest-bearing        Interest-bearing           Total deposits     Securities sold under repurchase agreements     United States Treasury demand notes     Dividends payable     Other liabilities           Total liabilities**COMMITMENTS AND CONTINGENT LIABILITIES -**Notes 10 and 11**STOCKHOLDERS' EQUITY    **Common stock - $10 par value; authorized 1,500,000 shares;        issued 789,774 shares in 2005 and 2004     Capital in excess of par value of stock     Retained earnings     Accumulated other comprehensive income (loss)     Less 1,240 in 2005 and 1,129 in 2004 shares held in  Treasury at cost           Total stockholders'  equity

**    2005    **$   33,461  46,000  176,363  4,120  1,459  503,926      5,918498,008  20,574  5,454        7,910**$  793,349**  $  135,082    532,023667,105  43,296  2,197  3,942        6,250      722,7907,898  43,547  21,094      (1,810)70,729             170        70,559**$  793,349**

**     2004    **$  25,793 -    209,994 4,519   1,314 406,983     5,104 401,87917,6284,682      5,760**$671,569**  $ 118,580   441,784  560,36433,9502,895  3,352      3,423    603,9847,898  43,543  15,558       73467,733       148       67,585**$ 671,569**

The accompanying notes are an integral part of these consolidated financialstatements.******37

***CNB CORPORATION ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(amounts, except per share data, in thousands) ***

 

**      For  the years ended December 31,     **

**INTEREST INCOME**   Loans  and fees on loans     Investment securities        Taxable        Nontaxable           Total interest on  investment securities     Federal funds sold           Total interest income**INTEREST EXPENSE     **Deposits     Securities sold under repurchase agreements     United States Treasury demand notes           Total interest expense           Net interest income**PROVISION FOR LOAN LOSSES**         Net interest income  after provision for loan losses**NONINTEREST INCOME**   Service charges on deposit accounts     Other service and exchange charges     Gain on sale of investment securities available for sale           Total noninterest  income**NONINTEREST EXPENSES**   Salaries and wages     Pensions and other employee benefits     Occupancy     Furniture and equipment     Examination and professional fees     Office supplies     Credit card operations     Other operating expenses           Total noninterest  expenses           Income before provision  for income taxes**PROVISION FOR INCOME TAXES**         Net income**NET INCOME PER SHARE OF COMMON STOCK (1)**  (1) Adjusted for effects of 10% stock dividend paid in  2004.

**     2005   **** **$   30,953  6,463          8817,344          782       39,0799,779  649            31       10,45928,620       1,275       27,3453,410  2,999              2         6,4119,484  2,975  1,185  1,542  513  514  1,045       2,272       19,53014,226       4,748**$     9,478  $     12.02**

**    2004    **$   24,351  6,656          9577,613          327       32,2916,578  348            12         6,93825,353       1,155       24,1983,504  2,753           -            6,2578,682  2,677  1,130  1,379  447  445  1,228       2,258       18,24612,209       3,927**$     8,282  $     10.50**

**    2003  **$   22,565  6,623       1,0327,655          246       30,4666,877  334            13         7,22423,242          960       22,2823,443  2,521         153        6,1178,295  2,666  1,027  1,144  308  507  1,077     2,213     17,23711,162     3,497**$   7,665  $     9.71**

******Theaccompanying notes are an integral part of these consolidated financialstatements.******38

***CNB CORPORATION ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the years ended December 31, 2005, 2004, and 2003(amounts, except share data, in thousands)***

** **

   **Common stock Shares    Amount**

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

**Retainedearnings **

**Accumu-  lated  other  compre-  hensive income**

**Treasury   stock   **

**Total   stock-  holders'  equity **

**BALANCE, DECEMBER 31, 2002**   Net  income     Cash dividend declared, $4.00 per share     Treasury stock transactions, net     Gain on sale of treasury stock     Net change in unrealized holding         loss, net of income taxes of ($875)**BALANCE, DECEMBER 31, 2003**     Net income     Cash dividend declared, $4.25 per share     10% stock dividend     Cash paid for fractional shares     Treasury stock transactions, net     Gain on sale of treasury stock     Net change in unrealized holding         loss, net of income taxes of ($1,075)**BALANCE, DECEMBER 31, 2004**     Net income     Cash dividend declared, $5 per share     Treasury stock transactions, net     Gain on sale of treasury stock     Net change in unrealized holding         gain, net of income taxes of $1,697**BALANCE, DECEMBER 31, 2005**

  718,246  -     -     -     -            -   718,246  -     -     71,528  -     -     -           -   789,774  -     -     -     -           -   **789,774**

  $ 7,182  -     -     -     -           -    7,182  -     -     716  -     -     -          -   7,898  -     -     -     -           -   **$7,898**

  $  34,783   -     -     -     18           -   34,801  -     -     8,726  -     -     16          -     43,543  -     -     -     4        -   **$43,547**

  $   15,318 7,665   (2,870)  -     -           -    20,113   8,282   (3,352)  (9,442)  (43)  -     -            -   15,558  9,478  (3,942)  -     -           -   **$21,094**

  $  3,944   -     -     -     -   (1,313)  2,631   -     -     -     -     -     -     (1,897)       734   -     -     -     -     (2,544)**$(1,810)**

  $     (102)  -     -     (2)  -            -      (104)  -     -     -     -     (44)  -            -      (148)  -     -     (22)  -           -   **$  (170****)**

  $ 61,125   7,665   (2,870)  (2)  18    (1,313)  64,623   8,282   (3,352)  -     (43)  (44)  16    (1,897)   67,585   9,478  (3,942)  (22)  4 (2,544)**$70,559**

Theaccompanying notes are an integral part of these consolidated financialstatements.39

**CNB CORPORATION ANDSUBSIDIARYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(amounts in thousands) **

 

**        For  the years ended December 31,      **

**NET INCOME****OTHER COMPREHENSIVE INCOME, NET OF TAX**     Unrealized holding gains (losses) on investment securities        available for sale     Reclassification adjustments for gains included in net  income**COMPREHENSIVE INCOME**

**   2005**     $  9,478   (2,543)         (1)**$   6,934**

**    2004    ******  $  8,282   (1,897)         -   **$   6,385**

**   2003    **** **  $  7,665   (1,209)     (104)**$  6,352** 

** **

Theaccompanying notes are an integral part of these consolidated financialstatements.40 

**CNB CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)**

 

**        For  the years ended December 31,        **

**OPERATING ACTIVITIES**   Net income     Adjustments to reconcile net income to net cash provided        by operating activities        Depreciation and amortization        Provision for loan losses        Provision for deferred income taxes        Loss on disposal of equipment        Gain on sale of investment securities  available for sale        Gain on sale of foreclosed assets        Writedown on foreclosed assets        Changes in assets and liabilities:           (Increase) decrease in  accrued interest receivable           Increase in other  assets           Increase (decrease) in  other liabilities              Net  cash provided by operating activities**INVESTING  ACTIVITIES**   Proceeds from sales of investment  securities available for sale     Proceeds from maturities and calls of investment securities  held to maturity     Proceeds from maturities and calls of investment securities  available for sale     Purchases of investment securities available for sale     Proceeds from sales of premises and equipment     Proceeds from sales of foreclosed assets     Net increase in loans     Purchase of equity securities     Premises and equipment expenditures              Net  cash used for investing activities**FINANCING  ACTIVITIES**   Dividends paid     Net increase in deposits     Increase in securities sold under repurchase agreements     Increase (decrease) in United States Treasury demand notes     Cash paid for fractional shares     Treasury stock transactions, net              Net  cash provided by financing activities              Net  increase (decrease) in cash and due from banks**CASH  AND CASH EQUIVALENTS, BEGINNING OF YEAR****CASH AND CASH EQUIVALENTS, END OF YEAR****CASH PAID FOR**   Interest     Income taxes

**   2005    ****  $   9,478   983   1,275   (613)  -     (2)  (23)  14   (772)  (409)       3,315      13,246   4,005   399   26,394   (1,006)  -      103   (97,418)  (145)   (3,929) (71,597)  (3,352)  106,741   9,346   (698)  -            (18) 112,019   53,668    25,793 **$ 79,461 ****$   9,418 ****$   5,038 **

**     2004   **   $   8,282   895   1,155   219   -     -     -     -     (324)  (1,188)      (219)     8,820   -     3,562   72,102   (103,048)  532   231   (45,835)  (30)   (1,987) (74,473)  (2,870)  57,251   9,190   1,925   (43)        (28)  65,425   (228)   26,021 **$ 25,793 $   6,787 $   3,911 **

**     2003****   **  $   7,665  739  960  (255)  10  (153)  -     -     169  (30)      135     9,2406,529  5,134  80,913  (105,773)  -     -     (37,003)  -     (5,368)(55,568)  (2,690)  34,804  (1,459)  (5,539)  -           16   25,132(21,196)   47,217**$ 26,021  $  7,552  $  3,695******

Theaccompanying notes are an integral part of these consolidated financialstatements.41

***CNBCORPORATION AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS***

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES*Principles of consolidation and nature of operations**

Theconsolidated financial statements include the accounts of***CNB Corporation***("the Company") and its wholly-owned subsidiary, The Conway National Bank ("theBank").  The Company operates as one business segment.  All significantintercompany balances and transactions have been eliminated.  The Bank operatesunder a national bank charter and provides full banking services to customers. The Bank is subject to regulation by the Office of the Comptroller of theCurrency and the Federal Deposit Insurance Corporation.  The Company is subjectto regulation by the Federal Reserve Board.

**Estimates**

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the datesof the consolidated balance sheets and the consolidated statements of incomefor the periods covered.  Actual results could differ from those estimates.

**Concentrations of credit risk**

Financial instruments, whichpotentially subject the Company to concentrations of credit risk, consistprincipally of loans receivable, investment securities, federal funds sold andamounts due from banks. 

The Company makes loans to individuals and small businesses for variouspersonal and commercial purposes primarily in Horry County, South Carolina andthe Waccamaw Neck area of Georgetown County, South Carolina.  The Company'sloan portfolio is not concentrated in loans to any single borrower or arelatively small number of borrowers. The Company monitors concentrations ofloans to classes of borrowers or industries that would be similarly affected byeconomic conditions.  As of December 31, 2005, the Company had concentrationsof loans to the following classes of borrowers or industries: Land Subdivisionand Development, Single Family Housing, and Lessors of Non-ResidentialBuildings.  The amount of commercial purpose loans outstanding to these groupsof borrowers as of December 31, 2005 was $19,518,000 $22,538,000 and$24,724,000 respectively.  These amounts represented 26.86%, 31.02%, and 34.03%of Total Capital, as defined for regulatory purposes, for the same period, alsorespectively.

In addition to monitoring potential concentrations of loans to particularborrowers or groups of borrowers, industries and geographic regions, Managementmonitors exposure to credit risk from concentrations of lending products andpractices such as loans with high loan-to-value ratios, interest-only paymentloans, and balloon payment loans. Management monitors loans with loan-to-valuesin excess of regulatory guidelines and secured by real estate in accordancewith guidance as set forth by regulatory authorities and maintains total loanswith loan-to-value exceptions within regulatory limitations. Managementmonitors and manages other loans with high loan-to-value ratios, interest-onlypayment loans, and balloon payment loans within levels of risk acceptable toManagement.  The Bank does not offer any loan products which provide forplanned graduated payments or loans which allow negative amortization.

The Company's investment portfolio consists principally of obligations of theUnited States, its agencies or its corporations and general obligationmunicipal securities.  In the opinion of Management, there is no concentrationof credit risk in its investment portfolio.  The Company places its depositsand correspondent accounts with and sells its federal funds to high qualityinstitutions.  Management believes credit risk associated with correspondentaccounts is not significant.

*(Continued)*

42

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND ACTIVITIES, Continued***

**Cash and cashequivalents**

Cash and cash equivalents include cash and due from banksand federal funds sold.  Generally, both cash and cash equivalents areconsidered to have maturities of three months or less, and accordingly, thecarrying amount of such instruments is deemed to be a reasonable estimate offair value. 

Investment securities

The Company accounts for investment securities inaccordance with Statement of Financial Accounting Standards ("SFAS")No. 115*, "Accounting for Certain Investments in Debt and EquitySecurities."*  This statement requires that the Company classify debtsecurities upon purchase as available for sale, held to maturity or trading. Such assets classified as available for sale are carried at fair value. Unrealized holding gains or losses are reported as a component of stockholders'equity (accumulated other comprehensive income) net of deferred income taxes. Securities classified as held to maturity are carried at cost, adjusted for theamortization of premiums and the accretion of discounts into interest incomeusing a method which approximates a level yield. To qualify as held to maturitythe Company must have the intent and ability to hold the securities tomaturity. Trading securities are carried at market value.  The Company has notrading securities.  Gains or losses on disposition of securities are based onthe difference between the net proceeds and the adjusted carrying amount of thesecurities sold, using the specific identification method.

**Loans and interest income**

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

The Company accounts for impaired loans in accordancewith SFAS No. 114, "*Accounting by Creditors for Impairment of a Loan".* This standard requires that all creditors value loans at the loan's fair valueif it is probable that the creditor will be unable to collect all amounts dueaccording to the terms of the loan agreement. Fair value may be determinedbased upon the present value of expected cash flows, market price of the loan,if available, or value of the underlying collateral. Expected cash flows arerequired to be discounted at the loan's effective interest rate.  SFAS No. 114 wasamended by SFAS No. 118 to allow a creditor to use existing methods forrecognizing interest income on an impaired loan and by requiring additionaldisclosures about how a creditor recognizes interest income on an impairedloan.

Under SFAS No. 114, as amended by SFAS No. 118, when theultimate collectibility of an impaired loan's principal is in doubt, wholly orpartially, all cash receipts are applied to principal.  When this doubt doesnot exist, cash receipts are applied under the contractual terms of the loanagreement. Once the reported principal balance has been reduced to zero, futurecash receipts are applied to interest income, to the extent that any interesthas been foregone. Further cash receipts are recorded as recoveries of anyamounts previously charged off.

A loan is also considered impaired if its terms aremodified in a troubled debt restructuring.  For these accruing impaired loans,cash receipts are typically applied to principal and interest receivable inaccordance with the terms of the restructured loan agreement.  Interest incomeis recognized on these loans using the accrual method of accounting. 

**Allowance for loan losses**

The allowance for loan losses is based on management'songoing evaluation of the loan portfolio and reflects an amount that, inmanagement's opinion, is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerousfactors, including current economic conditions, prior loan loss experience, thecomposition of the loan portfolio, and management's estimate of anticipatedcredit losses.  Loans are charged against the allowance at such time as theyare determined to be losses.  Subsequent recoveries are credited to theallowance.  Management considers the year-end allowance adequate to coverlosses in the loan portfolio; however, management's judgment is based upon anumber of assumptions about future events, which are believed to be reasonable,but which may or may not prove valid. Thus, there can be no assurance thatcharge-offs in future periods will not exceed the allowance for loan losses orthat additional increases in the allowance for loan losses will not berequired.

*(Continued)*

43

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

**Non-performing assets**

Non-performing assets include real estate acquiredthrough foreclosure or deed taken in lieu of foreclosure, and loans onnon-accrual status.  Loans are placed on non-accrual status when, in theopinion of management, the collection of additional interest is questionable. Thereafter no interest is taken into income unless received in cash or untilsuch time as the borrower demonstrates the ability to pay principal andinterest.

**Premises and equipment**

Premises and equipmentare stated at cost less accumulated depreciation and amortization. Depreciationand amortization are computed over the estimated useful lives of the assetsusing primarily the straight-line method. Additions to premises and equipmentand major replacements or improvements are capitalized at cost. Maintenance,repairs and minor replacements are expensed when incurred.  Gains and losses onroutine dispositions are reflected in current operations.

**Advertising expense**

Advertising,promotional and other business development costs are generally expensed asincurred.  External costs incurred in producing media advertising are expensedthe first time the advertising takes place. External costs relating to directmailing costs are expensed in the period in which the direct mailings are sent.Advertising, promotional and other business development costs of $476,000,$426,000 and $504,000, were included in the Company's results of operations for2005, 2004, and 2003, respectively.

**Securitiessold under agreements to repurchase**

TheBank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with theobligation to repurchase securities sold being reflected as a liability and thesecurities underlying the agreements remaining as assets.

**Income taxes**

Income taxes are accounted for in accordance with SFASNo. 109, *"Accounting for Income Taxes".*Under SFAS No. 109,deferred tax liabilities are recognized on all taxable temporary differences(reversing differences where tax deductions initially exceed financialstatement expense, or income is reported for financial statement purposes priorto being reported for tax purposes).  In addition, deferred tax assets arerecognized on all deductible temporary differences (reversing differences wherefinancial statements expense initially exceeds tax deductions, or income isreported for tax purposes prior to being reported for financial statementpurposes). Valuation allowances are established to reduce deferred tax assetsif it is determined to be *"*more likely than not*"* thatall or some portion of the potential deferred tax assets will not be realized.

**Reclassifications**

Certain amounts in the financial statements for the yearsended December 31, 2003 and 2004 have been reclassified, with no effect on netincome to be consistent with the classifications adopted for the year endedDecember 31, 2005.

**Net income per share**

The Company computesnet income per share in accordance with SFAS No. 128, *"Earnings PerShare."*  Net income per share is computed on the basis of the weightedaverage number of common shares outstanding: 788,496 in 2005, 789,006 in 2004and 789,290 in 2003.  The Company does not have any dilutive instruments andtherefore only basic net income per share is presented.  Net income per sharefor 2003 has been adjusted to reflect the 10% stock dividend issued in 2004.

*(Continued)*

44

***NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Fair values offinancial instruments**

SFAS No. 107, *"DisclosuresAbout Fair Value of Financial Instruments,"* as amended by SFAS No. 119and SFAS No. 133, requires disclosure of fair value information for financialinstruments, whether or not recognized in the balance sheet, when it ispracticable to estimate the fair value.  SFAS No. 107 defines a financialinstrument as cash, evidence of an ownership interest in an entity orcontractual obligations which require the exchange of cash or other financialinstruments.  Certain items are specifically excluded from the disclosurerequirements, including the Company's common stock.  In addition, othernonfinancial instruments such as premises and equipment and other assets andliabilities are not subject to the disclosure requirements.

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

***Cash and due frombanks*** - The carrying amounts of cash and due from banks (cash on hand, duefrom banks and interest bearing deposits with other banks) approximate theirfair value.

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

***Investment securities available for sale and held to maturity*** - Fair values forinvestment securities are based on quoted market prices.

***Other investments -***No ready market exists for Federal Reserve and FederalHome Loan Bank Stock and they have no quoted market value.  However, redemptionof this stock has historically been at par value.

***Loans*** - For variable rate loans that reprice frequently and for loans thatmature within one year, fair values are based on carrying values.  Fair valuesfor all other loans are estimated using discounted cash flow analyses, withinterest rates currently being offered for loans with similar terms toborrowers of similar credit quality.  Fair values for impaired loans areestimated using discounted cash flow analyses or underlying collateral values,where applicable.

***Deposits*** - The fair values disclosed for demand deposits are, by definition,equal to their carrying amounts. The carrying amounts of variable rate,fixed-term money market accounts and short-term certificates of depositapproximate their fair values at the reporting date.  Fair values for long-termfixed-rate certificates of deposit are estimated using a discounted cash flowcalculation that applies interest rates currently being offered on certificatesto a schedule of aggregated expected monthly maturities.

***Short-term borrowings*** - The carrying amounts of borrowings under repurchaseagreements, federal funds purchased, and U. S. Treasury demand notesapproximate their fair values.

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

*(Continued)*

45

***NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Recently issued accounting standards**

The following is a summary of recentauthoritative pronouncements that affect accounting, reporting, and disclosureof financial information by the Company:

In December 2004, the FASB issued SFAS No. 153, "Exchanges of NonmonetaryAssets - an amendment of APB Opinion No. 29."  The standard is based on theprinciple that exchanges of nonmonetary assets should be measured based on thefair value of the assets exchanged and eliminates the exception under ABPOpinion No. 29 for an exchange of similar productive assets and replaces itwith an exception for exchanges of nonmonetary assets that do not havecommercial substance.  A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  The standard is effective for nonmonetary exchangesoccurring in fiscal periods beginning after June 15, 2005.  The adoption ofSFAS 153 is not expected to have a material impact on the Company's financialposition or results of operations.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and ErrorCorrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 establishes retrospective application as the required method forreporting a change in accounting principle, unless it is impracticable, inwhich case the changes should be applied to the latest practicable datepresented.  SFAS No. 154 also requires that a correction of an error bereported as a prior period adjustment by restating prior period financialstatements. SFAS No. 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.

In March 2004, the FASB issued Emerging Issues Task Force ("EITF") Issue No.03-1, "The Meaning of Other-Than-Temporary Impairment and its Application toCertain Investments."  This issue addresses the meaning of other-than-temporaryimpairment and its application to investments classified as either availablefor sale or held to maturity under SFAS No. 115 and it also provides guidanceon quantitative and qualitative disclosures.  The disclosure requirements inparagraph 21 of this Issue were effective for annual financial statements forfiscal years ending after December 15, 2003 and were adopted by the Companyeffective December 31, 2003.

The recognition and measurement guidance in paragraphs 6-20 of Issue No. 03-1wasto be applied to other-than-temporary impairment evaluations in reportingperiods beginning after June 15, 2004, but was delayed by FASB action inOctober 2004 through the issuance of a proposed FASB Staff Position ("FSP") onthe issue. In July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1 - "TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments."  This final guidance eliminated paragraphs 10-18 of EITF-03-1(paragraphs 19-20 have no material impact on the financial position or resultsof operations of the Company) and will be effective for other-than-temporaryimpairment analysis conducted in periods beginning after December 15, 2005. The Company has evaluated the impact that the adoption of FSP FAS 115-1 and FAS124-1 and has concluded that the adoption will not have a material impact onfinancial position and results of operations upon adoption.

*(Continued)*

46

***NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued***

**Recentlyissued accounting standards, continued**

In December 2005, the FASB issued FSP SOP94-6-1, "Terms of Loan Products that May Give Rise to a Concentration of CreditRisk."  The disclosure guidance in this FSP is effective for interim and annualperiods ending after December 19, 2005.  The FSP states that the terms ofcertain loan products may increase a reporting entity's exposure to credit riskand thereby may result in a concentration of credit risk as that term is usedin SFAS No. 107 eitheras an individual product type or as a group of products with similar features.SFAS No. 107 requiresdisclosures about each significant concentration, including "information aboutthe (shared) activity, region, or economic characteristic that identifies theconcentration."  The FSP suggests possible shared characteristics on whichsignificant concentrations may be determined which include, but are not limitedto borrowers subject to significant payment increases, loans with terms thatpermit negative amortization and loans with high loan-to-value ratios.

This FSP requires entities to provide the disclosures required by SFAS No. 107for loan products that are determined to represent a concentration of creditrisk in accordance with the guidance of this FSP for all periods presented. The Company adopted this disclosure standard effective December 31, 2005.

Other accounting standards that have been issued or proposed by the FASB orother standards-setting bodies that do not require adoption until a future dateare not expected to have a material impact on the consolidated financialstatements upon adoption.

**Risks and uncertainties**

In the normal course of its business theCompany encounters two significant types of risks: economic and regulatory.There are three main components of economic risk: interest rate risk, creditrisk and market risk.  The Company is subject to interest rate risk to thedegree that its interest-bearing liabilities mature or reprice at differentspeeds, or on different basis, than its interest-earning assets.  Credit riskis the risk of default on the Company's loan portfolio that results fromborrower's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loansreceivable and the valuation of real estate held by the Company. 

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

***NOTE 2 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS***

The Bank is required to maintain average reserve balances either at the Bank oron deposit with the Federal Reserve Bank.  The average amounts of these reservebalances for the years ended December 31, 2005 and 2004 were approximately$17,493,000 and $15,392,000, respectively.

*(Continued)*

47

***NOTE 3 - INVESTMENT SECURITIES***

          The amortized costand fair value of investment securities are based on contractual maturitydates.  Actual maturities may differ from the contractual maturities becauseborrowers may have the right to prepay obligations with or without penalty. The book value, approximate fair value and expected maturities of investmentsecurities are summarized as follows (tabular amounts in thousands):

** **

**                                December  31, 2005                               Amortized            Unrealized  Holding                 Fair    **

**AVAILABLE FOR SALE**     Federal agencies        Within one year        One to five years     State, county and municipal        Within one year        One to five years        Six to ten years     Mortgage Backed        Over ten years      CRA Qualified Investment Fund        Total available for sale**HELD TO MATURITY**     State, county and municipal        Within one year        One to five years        Total held to maturity

**     Cost      **  $    29,047    132,739      161,7862,689  10,454        3,438        16,581       684           329**$  179,380**$         935        3,185          4,120**$      4,120**

**  Gains   **  $     53      10        637  192     131       330        -          -   **$    393**$        5        93          98**$      98**

** Losses **  $      153     3,209       3,3621  -              2             3 45          -   **$   3,410**$      -           -             -   **$      -   **

**  Value   **  $   28,947   129,540     158,4872,695  10,646       3,567       16,908      639          329**$ 176,363**$         940        3,278          4,218**$      4,218**

*(Continued)*

48

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

** **

**                                  December  31, 2004                                Amortized               Unrealized  Holding                  Fair     **

**AVAILABLE FOR SALE**     Federal agencies        Within one year        One to five years     State, county and municipal        Within one year        One to five years        Six to ten years     Mortgage Backed        Over ten years      CRA Qualified Investment Fund        Total available for sale**HELD TO MATURITY**     State, county and municipal        Within one year        One to five years        Six to ten years        Total held to maturity

**     Cost      **  $    22,082    167,860      189,942480  11,780        5,234        17,494       1,013           322**$  208,771**$         400  3,477           642          4,519**$      4,519**

**  Gains   **  $       354         883        1,2371  450         374           825           -              -   **$     2,062**$             4  187             55             246**$         246**

** Losses **  $      -          799        799-     -             -               -    40          -   **$      839**$      -     -           -             -   **$      -   **

**  Value   **  $   22,436   167,944     190,380481  12,230       5,608       18,319      973          322**$ 209,994**$         404  3,664           697          4,765**$      4,765**

     Thefollowing table shows gross unrealized losses and fair value, aggregated byinvestment category, and length of time that individual securities have been ina continuous unrealized loss position, at December 31, 2005 (tabular amounts inthousands):

**Available for Sale**

** **

** **

** **

** **

** **

** **

** **

**Less  than                   **

**Twelve  months          **

** **

** **

       **twelve  months        ****       **

**              or  more                 **

**                 Total                    **

** **

** **

**Unrealized **

** **

**Unrealized**

** **

**Unrealized**

** **

**Fair value**

**    losses    **

**Fair value**

**    losses    **

**Fair value**

**    losses    **

 

 

 

 

 

 

Federal  agencies

$  18,419

$   290

119,958

3,072

138,377

3,362

 

 

 

 

 

 

Mortgage  backed

      1,495

        3

639

45

2,134

48

** **

** **

** **

** **

** **

** **

Total

**$  19,914**

**293**

**120,597**

**3,117**

**140,511**

**3,410**

     Securities classified as available-for-sale arerecorded at fair market value.  Approximately 91% of the unrealized losses, orforty-nine individual securities, consisted of securities in a continuous lossposition for twelve months or more.  The Company has the ability and intent tohold these securities until such time as the value recovers or the securitiesmature.  The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and not in the credit quality of the issuer and therefore, theselosses are not considered other-than-temporary.

     Investment securities with an aggregate par value$122,980,000 at December 31, 2005 and $99,580,000 at December 31, 2004 werepledged to secure public deposits and for other purposes.

*(Continued)*

49

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

**Other Investments, at Cost** - The Bank, as a memberinstitution, is required to own certain stock investments in the Federal HomeLoan Bank of Atlanta ("FHLB") and the Federal Reserve Bank.  Thestock is generally pledged against any borrowings from these institutions (seeNote 8).  No ready market exists for the stock and it has no quoted marketvalue.  However, redemption of these stocks has historically been at parvalue.  

TheCompany's investments in stock are summarized below (tabular amounts inthousands):

**          December  31,       **

  Federal Reserve Bank  FHLB

**   2005   **$      116     1,343**$   1,459**

**     2004    **  $    116   1,198**$ 1,314**

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

       Following is asummary of loans by major classification (tabular amounts in thousands):

**            December  31,        **

  Real estate - mortgage  Real estate - construction  Commercial and industrial  Loans to individuals for household, family and    other consumer expenditures  Agriculture  All other loans, including overdrafts

**    2005   **  $  324,475  50,210  84,474  41,400  1,912       1,455**$ 503,926**

**     2004   **  $  262,543  39,525  66,184  35,583  1,582       1,566**$ 406,983**

     The Bank's loan portfolioconsisted of $371,983,000 and $286,918,000 in fixed rate loans as of December31, 2005 and 2004, respectively.  Fixed rate loans with maturities in excess ofone year amounted to $284,363,000 and $228,454,000 at December 31, 2005 and2004, respectively.  The Bank has an available line of credit from the FHLB.  Theline is secured by a blanket lien on qualifying 1-4 family mortgages.

       Changes in the allowance for loanlosses are summarized as follows (tabular amounts in thousands):

**               For  the years ended December 31,  **

** **

**   2005  **

**    2004   **

**  2003    **

Balance, beginning of year  Recoveries of loans previously charged    against the allowance  Provided from current year's income  Loans charged against the allowance  Balance, end of year

$  5,104    360    1,275      (821)**$  5,918 **

$  4,524    242    1,155      (817)**$  5,104 **

$  4,155   291   960      (882)**$  4,524 **

     AtDecember 31, 2005 and 2004, non-accrual loans totaled $405,000 and $880,000,respectively.  The total amount of interest earned on non-accrual loans was$7,000 in 2005, $28,000 in 2004 and $9,000 in 2003.  The gross interest incomewhich would have been recorded under the original terms of the non-accrualloans amounted to $34,000 in 2005, $69,000 in 2004 and $26,000 in 2003.  Foregoneinterest on non-accrual loans totaled $26,000 in 2005, $41,000 in 2004, and$19,000 in 2003. As of December 31, 2005 and 2004, the Company had no impairedloans.

50

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

** **

**   2005   **

**   2004   **

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

$ 22,512     6,64229,154     8,81420,340        234**$ 20,574**

$ 20,691     6,82427,515     9,96217,553          75**$ 17,628**

     Depreciationand amortization of premises and equipment charged to operating expense totaled$983,000 in 2005, $895,000 in 2004 and $739,000 in 2003.

***NOTE 6 - DEPOSITS***

     Asummary of deposits, by type, as of December 31 follows (tabular amounts inthousands):

** **

**    2005    **

**    2004   **

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

$ 232,855  55,546  85,418  149,634   143,652**$ 667,105**

$190,005  49,180  90,955  100,042  130,182**$560,364**

     Interestpaid on certificates of deposit of $100,000 or more totaled $3,649,000 in 2005,$2,046,000 in 2004 and $1,929,000 in 2003.

*     AtDecember 31, 2005, the scheduled maturities of time deposits are as follows(dollar amounts in thousands):*

             2006               2007               2008               2009               2010

$ 262,124  16,292  4,901  3,897      6,072**$293,286**

 

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

      Securities sold underrepurchase agreements are summarized as follows (tabular dollar amounts inthousands):

**At and for the  year ended         December  31,        **

  Amount outstanding at year end  Average amount outstanding during year  Maximum outstanding at any month-end  Weighted average rate paid at year-end  Weighted average rate paid during year

**    2005    **** **$   43,296     33,167     43,296  2.29%  1.92%

**    2004    **** **$   33,950     29,194     33,950  1.43%  1.19%** **

*(Continued)*

51

***NOTE 7 - SECURITIES SOLD UNDER REPURCHASEAGREEMENTS, Continued***

     The Bank enters into sales of securities underagreements to repurchase. These obligations to repurchase securities sold arereflected as liabilities in the consolidated balance sheets.  The dollar amountof securities underlying the agreements are book entry securities maintained atThe Bankers Bank.  Federal agency and municipal securities with a book value of$44,052,000 ($43,383,000 fair value) and $38,711,000 ($39,178,000 fair value)at December 31, 2005 and 2004, respectively, are used as collateral for theagreements.

***NOTE 8 - LINES OF CREDIT***

     At December 31, 2005, the Bank had unusedshort-term lines of credit totaling $36,000,000 to purchase Federal Funds fromunrelated banks.  These lines of credit are available on a one to seven daybasis for general corporate purposes of the Bank.  All of the lenders havereserved the right to withdraw these lines at their option.

     The Bank has a demand note through the U.S.Treasury, Tax and Loan system with the Federal Reserve Bank of Richmond.  TheBank may borrow up to $7,000,000 under the arrangement at an interest rate of 3.96percent.  The note is secured by Federal agency securities with a market valueof $3,950,000 at December 31, 2005.  The amount outstanding under the notetotaled $2,197,000 and $2,895,000 at December 31, 2005 and 2004, respectively.

     The Bank also has a line of credit from the FederalHome Loan Bank (FHLB) for $108,795,000 secured by a lien on the Bank'squalifying 1-4 family mortgages and the Bank's investment in FHLB stock. Allowable terms range from overnight to 20 years at varying rates set daily bythe FHLB.  At December 31, 2005 and 2004, respectively, there were noborrowings under the agreement.

***NOTE 9 - INCOMETAXES***

      Theprovision for income taxes is reconciled to the amount of income tax computedat the federal statutory rate on income before income taxes as follows (dollaramounts in thousands):

** **

 **                           For  the years ended December 31,                               **

 

**            2005             **

**          2004             **

**           2003              **

********Tax  expense at statutory rate  Increase (decrease) in taxes resulting from:     Tax exempt interest     State bank tax (net of federal benefit)     Other - net     Tax provision

**Amount**$4,841  (316)   283     (60)**$4,748 **

**   %     **34.0%     (2.22)      1.98       (.38)  **33.38%**

**Amount**$4,151   (347)   248  (125)**$3,927**

**   %       **34.0%   (2.84)    2.03   (1.03)  **32.16%**

**Amount**$3,795   (373)  229   (154)**$3,497 **

**   %   ** ****34.0%   (3.34)     2.05      (1.38)  ** 31.33%**

*(Continued)*

52

**NOTE 9 - INCOME TAXES,Continued**

*** ***         Thesources and tax effects of temporary differences that give rise to significantportions of the deferred tax assets and deferred tax liabilities are as follows(tabular amounts in thousands):

** **

**         December  31,    **

**Deferred tax assets:     **Allowance for loan losses deferred for tax purposes     Deferred compensation     Executive retirement plan     Unrealized net losses on securities available for sale     Other        Gross deferred tax assets        Less valuation allowance        Net deferred tax assets**Deferred tax liabilities:     **Unrealized net gains on securities available for sale     Depreciation for income tax reporting in excess of amount        for financial reporting        Gross deferred tax liabilities        Net deferred tax asset (liability)

**  2005  **  $ 2,030  475  174  1,207       773,963      -       3,963-     (397)  (397)**$3,566 **

**   2004  **** **  $ 1,567  379  151  -          362,133     389    1,744(489)   (428)   (917)**$  827 **

**            **The net deferred taxasset is included in other assets at December 31, 2005 and 2004.

     A portion of the change in net deferred taxesrelates to the change in unrealized net gains and losses on securitiesavailable for sale.  The related 2005 tax benefit of $1,697,000 and the 2004 deferredtax benefit of $1,075,000 have been recorded directly to stockholders' equity. The balance of the change in net deferred taxes results from the current perioddeferred tax benefit.

      The following summary of the provision forincome taxes includes tax deferrals which arise from temporary differences inthe recognition of certain items of revenue and expense for tax and financialreporting purposes (amounts in thousands):

** **

**      For  the years ended December 31,   **

****Income  taxes currently payable    Federal    State  Deferred income taxes      Provision for income taxes

**    2005   **  $ 5,362       429   5,791   (1,043)**$ 4,748 **

**    2004    **  $ 3,383      3253,708      219**$ 3,927**

**    2003    **  $ 3,524      3473,871   (374)**$ 3,497**

53

***NOTE 10 - FINANCIALINSTRUMENTS WITH OFF BALANCE SHEET RISK***

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

      The contract value of the Bank's offbalance sheet financial instruments is as follows as of December 31, 2005(amounts in thousands):

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

**Contract amount **$ 61,536     $    6,522  

     Commitments to extendcredit are agreements to lend as long as there is no violation of any conditionestablished in the contract.  Commitments generally have fixed expiration datesor other termination clauses and may require payment of a fee.  Since many ofthe commitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.  TheBank evaluates each customer's creditworthiness on a case-by-case basis.  Theamount of collateral obtained if deemed necessary by the Bank upon extension ofcredit is based on management's credit evaluation.

***NOTE 11 - COMMITMENTS AND CONTINGENCIES***

      At December 31, 2005, the Bank wasobligated under non-cancelable operating leases on land used for a branch officeand a billboard contract that had initial or remaining terms of more than oneyear.  Future minimum payments under these agreements at December 31, 2005 were(tabular amounts in thousands):

**Payable in year  ending**      2006        2007        2008         2009         2010 and thereafter           Total future minimum  payments required

**Amount   **$     6        6       5       2           -      **$   19     **

      Leasepayments under all operating leases charged to expense totaled $6,000 in 2005, $5,000in 2004 and $5,000 in 2003.  The leases provide that the lessee pay propertytaxes, insurance and maintenance cost.

      The Company is partyto litigation and claims arising in the normal course of business.  Management,after consultation with legal counsel, believes that the liabilities, if any,arising from such litigation and claims will not be material to the Company'sfinancial position.

54

***NOTE 12 - RESTRICTION ON DIVIDENDS***

         Payment of dividends iswithin the discretion of the Board of Directors, and the ability of the Companyto pay cash dividends is dependent upon receiving cash in the form of dividendsfrom the Bank.  Federal banking regulations restrict the amount of dividendsthat can be paid and such dividends are payable only from the retained earningsof the Bank.

***NOTE 13 - TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND ASSOCIATES***

         Directors and executiveofficers of the Company and the Bank and associates of such persons arecustomers of and have transactions with the Bank in the ordinary course ofbusiness.  Additional transactions may be expected to take place in thefuture.  Also, included in such transactions are outstanding loans andcommitments, all of which were made on comparable terms, including interestrates and collateral, as those prevailing at the time for other customers ofthe Bank, and did not involve more than normal risk of collectibility orpresent other unfavorable features. 

         Totalloans to all executive officers and directors, including immediate family andbusiness interests, at December 31, were as follows (tabular amounts inthousands):

** **

**         December  31,     **

**Balance, beginning of year**     New loans     Less loan payments**Balance, end of year**

**  2005  **** **  $  1,269  1,658       658**$  2,269**

**   2004  **** **  $ 1,305  664      700**$  1,269**

        Deposits by directorsand executive officers of the Company and the Bank, and associates of suchpersons, totaled $2,629,000 and $2,622,000 at December 31, 2005 and 2004,respectively.

***NOTE 14 - EMPLOYEE BENEFIT PLAN***

     The Bank has a defined contribution pension plancovering all employees who have attained age twenty-one and have a minimum ofone year of service.  Upon ongoing approval of the Board of Directors, the Bankmatches one-hundred percent of employee contributions up to three percent ofemployee salary deferred and fifty percent of employee contributions in excessof three percent and up to five percent of salary deferred.  The Board ofDirectors may also make discretionary contributions to the Plan.  For the yearsended December 31, 2005, 2004 and 2003, $624,000, $595,000, and $558,000,respectively, were charged to operations under the plan.

     Supplemental benefits are provided to certain keyofficers under The Conway National Bank Executive Supplemental Income Plan(ESI) and the Long-Term Deferred Compensation Plan (LTDC).  These plans are notqualified under the Internal Revenue Code.  The plans are unfunded.  However,certain benefits under the ESI Plan are informally and indirectly funded byinsurance policies on the lives of the covered employees.

      The ESI plan provides a life insurancebenefit on the life of the covered officer payable to the officer'sbeneficiary.  The plan also provides a retirement stipend to certain officers. For the years ended December 31, 2005, 2004, and 2003 the Bank had $61,129,$75,400, and $136,185 in income and $64,089, $48,957, and $50,161 of expenseassociated with this plan, respectively.  The LTDC plan provides cash awards tocertain officers payable upon death, retirement, or separation.  The awards aremade in dollar increments equivalent to the value of the Company's stock at thetime of the award.  The Bank further maintains the value of awards in amountsequal to the future value of the Company' stock plus any cash dividends paid. Such plans are commonly referred to as phantom stock plans.  For the yearsended December 31, 2005, 2004 and 2003, $367,946, $122,278, and $251,506,respectively, was charged to operations under the plan.

55

***NOTE 15 - REGULATORY MATTERS***

     The Company and the Bank are subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Company and the Bank. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Company and the Bank must meet specific capital guidelines that involve quantitativemeasures of assets, liabilities, and certain off-balance-sheet items ascalculated under regulatory accounting practices.  The Company's and the Bank'scapital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulationto ensure capital adequacy require the Bank to maintain minimum amounts andratios (set forth in the table below) of Total and Tier I capital torisk-weighted assets, and of Tier I capital to average assets.  Managementbelieves, as of December 31, 2005, that the Bank meets all capital adequacyrequirements to which it is subject.

     The Bank's actual capital amounts and ratios andminimum regulatory amounts and ratios as of December 31, 2005 and 2004 arepresented as follows (dollar amounts in thousands):

****

**                Actual                      **

**       For capital                    adequacy purposes                             Minimum                    **

**To be well  capitalized         under prompt corrective           action  provisions                                Minimum                    **

**As of December 31, 2005**    Total Capital (to risk      weighted assets)    Tier I Capital (to risk      weighted assets)    Tier I Capital (to average assets)**As of December 31, 2004**    Total Capital (to risk      weighted assets)    Tier I Capital (to risk      weighted assets)    Tier I Capital (to average assets)

**  Amount  **  $   74,461       68,543       68,543  $   67,786       62,682       62,682

**  Ratio  **** ******14.27%  13.18    9.40****15.87%  14.68    9.54

**    Amount  ******$   41,733       20,866       29,161  $   34,162       17,081       26,268

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

**    Amount   **$   52,166       31,300       36,452  $   42,702       25,621       32,835

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

******56

***NOTE 16 - ESTIMATED FAIR VALUE OFFINANCIAL INSTRUMENTS***

         Theestimated fair values of the Company's financial instruments were as follows atDecember 31 (amounts in thousands):

** **

**                   2005 **    **           ****Carrying           **   **Fair     **

**                2004                   ****   Carrying          **  **Fair     **

**FINANCIAL ASSETS**    Cash  and due from banks      Federal funds sold      Investment securities available for sale      Investment securities held to maturity      Other investments      Loans**FINANCIAL LIABILITIES**    Deposits      Securities sold under repurchase agreements      U.S. Treasury demand notes

**  Amount   **  $33,461  46,000  176,363  4,120  1,459  503,926  667,105  43,296  2,197

**   Value   **$33,461  46,000  176,363  4,218  1,459  494,711  666,640  43,296  2,197

**  Amount   **  $25,793  -     209,994  4,519  1,314  406,983  560,364  33,950  2,895

**   Value   **$25,793  -     209,994  4,765  1,314  403,226  560,343  33,950  2,895

** **

** **

** **

** **

** **

** **

**Notional **

**Fair  **

**Notional **

**Fair  **

** **

** Amount **

** Value **

** Amount **

** Value **

OFF BALANCE SHEET INSTRUMENTS
** **

** **

** **

** **

 
** **

** **

** **

** **

Commitments to  extend credit
$61,536

$       -

$45,644

$      -

 
 

 

 

 

Standby letters of  credit
6,522

-

3,328

-

 

***NOTE 17 - PARENT COMPANY INFORMATION***

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

***CONDENSED BALANCE SHEETS***

** **

**             December  31,      **

**ASSETS     **Cash     Investment in subsidiary     Land     Other assets**LIABILITIES AND STOCKHOLDERS' EQUITY**   Dividends payable     Stockholders' equity (net of $170 and $148 of treasury  stock)

**   2005      **$     6,623  66,733  1,109            36**$  74,501**$     3,942     70,559**$   74,501**

**   2004   **$     7,485  63,416  -               36**$  70,937**$     3,352     67,585**$   70,937**

*(Continued)*

57

***NOTE 17- PARENT COMPANY INFORMATION, Continued***

***CONDENSED STATEMENTS OF INCOME***

** **

**      For  the years ended December 31,   **

**INCOME**   Dividend  from bank subsidiary     Other income**EXPENSES**   Sundry        Income before equity in undistributed           net income of bank  subsidiary**EQUITY IN UNDISTRIBUTED NET INCOME OF      SUBSIDIARY**      Net income

**   2005     **$    3,677  2          623,617      5,861**$    9,478**

**    2004   **$    3,387  -             553,332      4,950**$    8,282**

**   2003   **$    3,097  -             543,043     4,622**$   7,665**

***CONDENSED STATEMENTS OF CASH FLOWS* **

** **

**      For  the years ended December 31,    **

**OPERATING ACTIVITIES**   Net  income     Adjustments to reconcile net income to net cash provided        by operating activities        Equity in undistributed net income of  bank subsidiary           Net cash provided by  operating activities**INVESTING ACTIVITIES**   Purchase of land     Proceeds from sale of land           Net cash provided  (used) by investing activities**FINANCING ACTIVITIES     **Dividends paid     Treasury stock transactions, net     Cash paid for fractional shares           Net cash used for  financing activities           Net increase (decrease)  in cash**CASH, BEGINNING OF THE YEAR  CASH, END OF THE YEAR**

**   2005   **** **$    9,478    (5,861)      3,617       (1,109)          -        (1,109)  (3,352)           (18)         -         (3,370)  (862)       7,485 **$     6,623 **

**   2004     **** **  $    8,282   (4,950)      3,332     -         1,812        1,812(2,870)           (28)         (43)    (2,941)  2,203       5,282**$     7,485**

**     2003   **  $  7,665   (4,622)     3,043        (806)          -           (806)  (2,690)           16           -        (2,674)  (437)     5,719 **$   5,282 **

58

***NOTE 18 - QUARTERLYFINANCIAL DATA (UNAUDITED)***

      Unauditedcondensed financial data by quarter for 2005 and 2004 is as follows (amounts,except per share data, in thousands):

** **

**                                           Quarter  ended                                                   **

** **

**  March  31 **

**  June  30  **

**September 30**

**December 31**

**   2005**Interest income  Interest expense     Net interest income  Provision for loan losses     Net interest income after        provision for loan losses  Noninterest income  Noninterest expenses     Income before income taxes  Income taxes     Net income  Net income per share  Weighted average shares outstanding

  $     8,785       2,0056,780          2856,495  1,448       4,5983,345       1,112**$     2,233  $       2.83     788,601**

  $     9,402       2,3737,029         2506,779  1,679      4,8043,654      1,182**$     2,472  $       3.14     788,538**

  $   10,242       2,8887,354          2657,089  1,798       4,8524,035       1,305**$     2,730  $       3.46     788,497**

  $   10,650       3,1937,457          4756,982  1,486       5,2763,192       1,149**$     2,043  $       2.59     788,348**

** **

**                                           Quarter  ended                                                   **

** **

**  March  31 **

**  June  30  **

**September 30**

**December 31**

**   2004**Interest income  Interest expense     Net interest income  Provision for loan losses     Net interest income after        provision for loan losses  Noninterest income  Noninterest expenses     Income before income taxes  Income taxes     Net income  Net income per share (1)  Weighted average shares outstanding (1)

  $     7,636       1,6196,017          2355,782  1,354       4,1952,941          932**$     2,009  $       2.55     789,195**

  $     7,843       1,6506,193         2105,983  1,626      4,4363,173      1,140**$     2,033  $       2.57     789,241**

  $     8,191       1,7746,417          3156,102  1,806       4,5063,402          935**$     2,467  $       3.13     789,124**

  $     8,621       1,8956,726          3956,331  1,471       5,1092,693          920**$     1,773  $       2.25     788,464**

(1) The quarters endedMarch 31 and June 30, 2004 have been adjusted for effects of the 10% stock dividenddeclared in September 2004.

59

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

None.

**ITEM 9A.  CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

(a) Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or240.15d-15(b) of the Corporation's disclosure controls and procedures (asdefined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), theCorporation's chief executive officer and chief financial officer concludedthat the effectiveness of such controls and procedures, as of the end of theperiod covered by this annual report, were effective.

**Internal Control over Financial Reporting**

**(a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

     The management of CNB Corporation is responsiblefor establishing and maintaining adequate internal control over financialreporting for the company.  Internal control over financial reporting is aprocess designed to provide reasonable assurance that assets are safeguardedagainst loss from unauthorized use or disposition, transactions are executed inaccordance with appropriate management authorization and accounting records arereliable for the preparation of financial statements in accordance with generallyaccepted accounting principles.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

     Management has assessed the effectiveness of CNBCorporation's internal control over financial reporting as of December 31, 2005. In making our assessment, management has utilized the framework published bythe Committee of Sponsoring Organizations ("COSO") of the TreadwayCommission "Internal Control-Integrated Framework."  Based on ourassessment, management has concluded that, as of December 31, 2005, internalcontrol over financial reporting was effective.

     Elliott Davis, LLC, the independent registeredpublic accounting firm that audited the Company's consolidated financialstatements included in this report, has issued an attestation report onmanagement's assessment, of the Company's internal control over financialreporting, and a copy of Elliott Davis, LLC's report is included with thisreport.

Date:  January 26, 2006

 /s/R.  Phil Hucks                                     

 /s/Paul  R. Dusenbury                                                                       

R. Phil Hucks

Paul R.  Dusenbury

President and  Chief Executive Officer

Executive Vice  President, Treasurer and Chief Financial Officer

60 

**ITEM 9A.  CONTROLS AND PROCEDURES- Continued**

**(b) REPORT OF INDEPENDENT REGISTERED****PUBLIC ACCOUNTING FIRM**

**Elliott Davis, LLCAdvisors-CPAs-Consultants1901 Main Street, Suite 1650P.O. Box 2227Columbia, SC  29202-2227**

**The Directors and StockholdersCNB CorporationConway, South Carolina**

     We have audited the consolidated balance sheetsof CNB Corporation and subsidiary as of December 31, 2005 and 2004, and therelated consolidated statements of income, stockholders' equity, comprehensiveincome and cash flows for each of the three years in the period ended December31, 2005.  Wealso have audited management's assessment, included in the accompanyingManagement's Report on Internal Control Over Financial Reporting, that CNBCorporation maintained effective internal control over financial reporting asof December 31, 2005, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  The Company's management is responsible for thesefinancial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting.  Our responsibility is to express an opinion on theseconsolidated financial statements, an opinion on management's assessment, andan opinion on the effectiveness of the Company's internal control overfinancial reporting based on our audits.

     We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects.  Our audit of consolidatedfinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, evaluating management's assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our audits provide a reasonable basis for ouropinions.

     A company's internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of consolidated financialstatements for external purposes in accordance with generally acceptedaccounting principles.  A company's internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the consolidated financialstatements.

     Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

     In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of CNB Corporation as of December 31, 2005 and 2004, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2005 in conformity with accountingprinciples generally accepted in the United States of America.  Also in ouropinion, management's assessment that CNB Corporation  maintained effectiveinternal control over financial reporting as of December 31, 2005, is fairlystated, in all material respects, based on criteria established in InternalControl - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Furthermore, in our opinion,CNB Corporation maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).

**/s/Elliott Davis, LLC                                                **

Columbia, South CarolinaJanuary 26, 2006

61

**ITEM 9A.  CONTROLS AND PROCEDURES - Continued**

(c) There has been no change in the Company's internal control over financialreporting identified in connection with management's assessment thereof thatoccurred during the Company's last fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlover financial reporting.

**ITEM 9B. - OTHER INFORMATION**

None.

62

**PART IIIITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

The informationset forth under the captions "Information about Nominees, Directors Whose Termswill Continue after the Annual Meeting of Shareholders and Executive Officers,"and "Section 16(a) Beneficial Ownership Reporting Compliance" set forth in theCompany's Proxy Statement filed in connection with the Company's 2006 AnnualMeeting of the Shareholders (the "2006 Proxy Statement") is incorporated hereinby reference.

**Audit Committee Financial Expert**

The Company'sboard of directors has determined that the Company has at least one "auditcommittee financial expert," as that term is defined by Item 401(h) ofRegulation S-K promulgated by the Securities and Exchange Commission, servingon its audit committee.  Mr. Howard B. Smith, III meets the terms of thedefinition.  Pursuant to the terms of Item 401(h) of Regulation S-K, aperson who is determined to be an "audit committee financial expert"will not be deemed an expert for any purpose as a result of being designated oridentified as an "audit committee financial expert" pursuant to Item401, and such designation or identification does not impose on such person anyduties, obligations or liability that are greater than the duties, obligationsand liability imposed on such person as a member of the audit committee andboard of directors in the absence of such designation or identification. Further, the designation or identification of a person as an "auditcommittee financial expert" pursuant to Item 401 does not affect theduties, obligations or liability of any other member of the audit committee orboard of directors.

**Code of Ethics**

The Company hasadopted a Code of Ethics applicable to its principal executive officer,principal financial officer and principal accounting officer.  The Company willprovide a copy of the Code of Ethics to any person, without charge, uponrequest to: Corporate Secretary, CNB Corporation, 1400 Third Avenue, Conway,South Carolina 29526.

**ITEM11.  COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS**

Theinformation set forth in the 2006 Proxy Statement under the caption"Compensation of Directors and Executive Officers" is incorporated herein byreference; provided, however, the information set forth under the captions"Executive Compensation Committee Report for the period June 14 throughDecember 31, 2005" and "Performance Graphs" is not incorporated herein byreference.

**ITEM12.  SECURITIY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMEENT ANDRELATED STOCKHOLDER MATTERS**

Theinformation set forth in the 2006 Proxy Statement under the captions "SecurityOwnership of Certain Beneficial Owners" and "Security Ownership of Management"is incorporated herein by reference.

The Company does not have any equity compensationplans.

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

Theinformation set forth in the 2006 Proxy Statement under the caption "CertainTransactions" is incorporated herein by reference.

**ITEM14.  PRINCIPLE ACCOUNTING FEES AND SERVICES**

Theinformation set forth in the 2006 Proxy Statement under the caption"Ratification of Appointment of Independent Registered Public Accounting Firm -Fees Billed by Independent Auditors" and "--Audit Committee Pre-Approval ofAudit and Permissible Non-Audit Services of Independent Auditors" isincorporated herein by reference.

63

**PART IV.ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

The following exhibits, financial statements and financial statement schedulesare filed as part of this report:

**(a) FINANCIAL STATEMENTS**

Report of Independent Registered Accounting FirmConsolidated Statements of Condition - December 31, 2005 and 2004Consolidated Statements of Income - Years ended December 31, 2005, 2004, 2003Consolidated Statements of Changes in Stockholders' Equity - Years endedDecember 31, 2005, 2004, and 2003Consolidated Statements of Comprehensive Income - Years ended December 31, 2005,2004, and 2003.Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004,and 2003Notes to Consolidated Financial Statements

**(b) EXHIBITSSee Exhibit Index.(c) FINANCIAL STATEMENT SCHEDULES**

All financial statement schedules have been omitted from this Annual Reportbecause the required information is presented in the financial statements or inthe notes thereto or the required subject matter is not applicable.

64

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

**CNB Corporation                                                              **/s/R.Phil Hucks, President                                                  R. Phil Hucks, President                                                     

Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities indicated on March 14, 2006.

    Signature                                                         Capacity/s/H. Buck Cutts                                                  InterimChairman of the BoardH. Buck Cutts/s/R. Phil Hucks                                                  Presidentand DirectorR. Phil Hucks/s/Paul R. Dusenbury                                         ExecutiveVice President, Chief Financial Officer, Treasurer and DirectorPaul R. Dusenbury/s/Virginia B. Hucks                                           SecretaryVirginia B. Hucks/s/L. Ford Sanders, II                                          AssistantTreasurer and Chief Accounting OfficerL. Ford Sanders, II/s/William R. Benson                                        DirectorWilliam R. Benson/s/Richard M. Lovelace, Jr.                               DirectorRichard M. Lovelace, Jr./s/Howard B. Smith, III                                     DirectorHoward B. Smith, III

65

**EXHIBIT INDEX**

**ExhibitNumber**     **3.1**   Articles ofIncorporation - The Articles of Incorporation of the Company are incorporatedherein by reference to Exhibit 3(a)             whichwas filed with a Form 8-A dated June 24, 1998.

     **3.2**   By-laws of theCompany as amended June 14, 2005.

   **10.1**   Executive Supplemental IncomePlan - The Executive Supplemental Income Plan is incorporated herein byreference to Exhibit             10(a)which was filed with a Form 10-K/A Annual Report dated June 10, 2002

   **10.2**   Deferred Compensation Planentitled "Phantom Stock Plan" - The Phantom Stock Deferred Compensation Plan isincorporated             hereinby reference to Exhibit 10(b) which was filed with a Form 10-K/A Report datedJune 10, 2002.

   **10.3**   Executive CompensationAgreement, dated as of June 14, 2005, between the company and R. Phil Hucks(incorporated by reference             toForm 8-K filed September 12, 2005).

   **10.4**   Executive CompensationAgreement, dated as of June 14, 2005, between the company and Paul R. Dusenbury(incorporated by             referenceto Form 8-K filed September 12, 2005).

   **14.1**   Code of Ethics Policy - TheConway National Bank Code of Ethics Policy is incorporated herein by referenceto Exhibit 99             whichwas filed with a Form 8-K dated August 13, 2004.

**   22**      Subsidiaries ofthe Registrant - Incorporated herein by reference to Exhibit 22 which was filed with a Form 10-K Annual              Reportdated March 28, 1986.

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

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

**   32.1**   Certification of Chief ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-             OxleyAct of 2002.

**   32.2   **Certification of Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-             OxleyAct of 2002. |