| **UNITED STATES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **  **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **  **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Washington, D.C.  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                    For  the fiscal year ended**                                    December  31, 2007                                          **                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                    For  the transition period from                                                    to                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Commission file number:  **000-24523**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ***                              CNB  Corporation                              ***                                                                                                                                                                                                                                                                                                                                                                                                    |
| (Exact name of registrant as specified  in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **                                           South Carolina                                    **                                                                                                                                                                                                                                                                                      |                                                **                       57-0792402                ** |
| (State or other jurisdiction of  incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                               (I.R.S.  Employer Identification No. ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| **1400 Third Avenue, P.O. Box 320****, Conway, South Carolina**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       **                            29528                      ** |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                          (Zip  Code)                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| (Registrant's telephone number,  including area code):  **(843) 248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Securities registered pursuant to  section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Securities registered pursuant to  Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Common Stock, $10.00 par value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (Title of class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      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      .                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      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. [  ]                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, a non-accelerated filer, or a smaller reporting company.   See definitions of "large accelerated filer", "accelerated filer", and  "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

           Large  accelerated filer [  ]      Accelerated  filer [X]      Non-accelerated filer  [  ]      Smaller Reporting Company  [  ]                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  [  ] Yes [X ]  No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     As  of March 1, 2008, 848,741 shares of Common Stock of CNB Corporation were  outstanding.  As of June 30, 2007, the last business day of the registrant's  most recently completed second fiscal quarter, the aggregate market value of the  Common Stock held by nonaffiliates (based upon the price at which stock was last  sold prior to such date) was approximately $110,246,360.                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 13, 2008 are incorporated by  reference in Part III of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |

----

| **CNB CORPORATION AND  SUBSIDIARY  2007 ANNUAL REPORT ON FORM 10-K     ** |
|-------------------------------------------------------------------------------------|
| **TABLE OF CONTENTS**                                                               |
|                                                                                |  | ** ** |
|                                                                                | **PART I** | ** ** |
|                                                                                |  | **Page** |
| **ITEM 1   **                                                                  | **Business** | 2-21 |
| **ITEM 1A   **                                                                 | **Risk Factors** | 22-24 |
| **ITEM 1B   **                                                                 | **Unresolved Staff Comments** | 24 |
| **ITEM 2   **                                                                  | **Properties** | 25 |
| **ITEM 3   **                                                                  | **Legal Proceedings** | 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  Equity Securities** | 26 |
| **ITEM 6   **                                                                  | **Selected Financial Data** | 27 |
| **ITEM 7   **                                                                  | **Management's Discussion and Analysis of Financial Condition and  Results  of Operations** | 27-33 |
| **ITEM 7A   **                                                                 | **Quantitative and Qualitative Disclosures About Market Risk** | 33 |
| **ITEM 8   **                                                                  | **Financial Statements and Supplementary Data** | 34-63 |
| **ITEM 9**                                                                          | **Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure   ** | 64 |
| **ITEM 9A   **                                                                 | **Controls and Procedures** | 64 |
| **ITEM 9B   **                                                                 | **Other Information** |   |

                                                                                               **PART III**

| **ITEM 10   ** | **Directors, Executive Officers, and Corporate Governance**                                         | 65     |
|---------------------|-----------------------------------------------------------------------------------------------------|--------|
| **ITEM 11   ** | **Executive Compensation**                                                                          | 65     |
| **ITEM 12   ** | **Security Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters** | 65     |
| **ITEM 13**         | **Certain Relationships and Related Transactions, and Director Independence     **             | 65     |
| **ITEM 14   ** | **Principal Accountant Fees and Services**                                                          | 65     |
| ** **          | **PART IV**                                                                                         |   |
| ** **          | ** **                                                                                          |   |
| **ITEM 15**         | **Exhibits and Financial Statement Schedules**                                                      | 66     |
| **Signatures**      | 67

                                                                                           |

----

******CAUTIONARYNOTICE WITH RESPECT TOFORWARD LOOKING STATEMENTS**

             Thisreport contains "forward-looking statements" within the meaning ofthe securities laws.  The Private Securities Litigation Reform Act of 1995 providesa safe harbor for forward-looking statements.  In order to comply with theterms of the safe harbor, the Company notes that a variety of factors couldcause the Company's actual results and experience to differ materially from theanticipated results or other expectations expressed in the Company'sforwarding-looking statements.

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

             Theseforward-looking statements are based on current expectations, estimates andprojections about the banking industry, management's beliefs, and assumptionsmade by management.  Such information includes, without limitation, discussionsas to estimates, expectations, beliefs, plans, strategies, and objectivesconcerning future financial and operating performance.  These statements arenot guarantees of future performance and are subject to risks, uncertaintiesand assumptions that are difficult to predict. Therefore, actual results maydiffer materially from those expressed or forecasted in such forward-lookingstatements.  The risks and uncertainties include, but are not limited to:
| ● | future economic and business  conditions;                                                                                                                                                                                                                                                                              |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ● | lack of sustained growth in the  economies of the Company's market areas;                                                                                                                                                                                                                                              |
| ● | government monetary and fiscal  policies;                                                                                                                                                                                                                                                                              |
| ● | the effects of changes in interest  rates on the levels, composition and costs of deposits, loan demand, and the  values of loan collateral, securities, and interest sensitive assets and  liabilities;                                                                                                               |
| ● | the effects of competition from a wide  variety of local, regional, national and other providers of financial,  investment, and insurance services, as well as competitors that offer banking  products and services by mail, telephone, computer and/or the Internet;                                                 |
| ● | credit risks;                                                                                                                                                                                                                                                                                                          |
| ● | the failure of assumptions underlying  the establishment of the allowance for loan losses and other estimates,  including the value of collateral securing loans;                                                                                                                                                      |
| ● | the risks of opening new offices,  including, without limitation, the  related costs and time of building  customer relationships and  integrating operations as part of these endeavors  and the failure to  achieve expected gains, revenue growth and/or expense  savings from  such endeavors; |
| ● | changes in laws and regulations,  including tax, banking and securities laws and regulations;                                                                                                                                                                                                                          |
| ● | changes in accounting policies, rules  and practices;                                                                                                                                                                                                                                                                  |
| ● | changes in technology or products may  be more difficult or costly, or less effective, than anticipated;                                                                                                                                                                                                               |
| ● | the effects of war or other conflicts,  acts of terrorism or other  catastrophic events that may affect general  economic conditions and  economic confidence; and                                                                                                                                           |
| ● | other factors and information described  in this report and in any of the other reports that we file with the  Securities and Exchange Commission under the Securities Exchange Act of 1934.                                                                                                                           |

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

****

----

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

CNB Corporation (the "Company") is a South Carolina business corporation organized in 1985 for the purpose of becoming a bankholding company for The Conway National Bank (the "Bank") under theBank Holding Company Act.  The Company's only business is ownership of theBank.  The activities of the Company are subject to the supervision of theFederal 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 to bankingor to acquire existing businesses already engaged in such activities, theCompany 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 Georgetown County, South Carolina. The Bank was organized in 1903.  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 thirteen other branch offices throughout Horry County and the"Waccamaw Neck" area of Georgetown County.    The Bank employsapproximately 264 full-time-equivalent employees at its Main Office and fourteenbranch 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, 24-hour automatedteller machines on the STAR Network, internet banking, bank by phone, directdeposits, a MasterCard/Visa program, cash management services, and commerciallockbox services. The Bank offers discount brokerage services through acorrespondent relationship.  Additionally, the Bank provides long-termmortgage loans through its secondary mortgage department which acts in anagency only capacity for various investors.  The Bank does not provide trustservices; does not sell annuities; does not sell mutual funds; and does notsell insurance.

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, 2007 the Bank had five 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."

**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, thirteenlocally owned banks in Horry and Georgetown Counties and various otherfinancial and thrift institutions.  At June 30, 2007, the Bank ranked second in Horry County and eleventh in Georgetown County in deposits among its competitors.The Bank also competes with credit unions, money market funds, brokeragehouses, insurance companies, mortgage companies, leasing companies, consumerfinance companies and other financial institutions. Significant competitivefactors include interest rates on loans and deposits, prices and fees forservices, office location, customer service, community reputation, andcontinuity of personnel.

1

----

**SUPERVISION AND REGULATION**

**General**

The Company and the Bank are subject to an extensive array of state and federalbanking 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 bankborrowings, 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 is insolvent. For example, under the policy of the Federal Reserve, a bank holding company isrequired to serve as a source of financial strength to its subsidiarydepository institutions and to commit resources to support such institutions incircumstances where it might not do so absent such policy.  In addition,the "cross-guarantee" provisions of the Federal Deposit Insurance Act, asamended ("FDIA"), require insured depository institutions under common controlto reimburse the FDIC for any loss suffered or reasonably anticipated by theFDIC as a result of the default of a commonly controlled insured depositoryinstitution or for any assistance provided by the FDIC to a commonly controlledinsured depository institution in danger of default.  The FDIC may declineto enforce the cross-guarantee provisions if it determines that a waiver is in itsbest interest.  The FDIC's claim for damages is superior to claims ofstockholders of the insured depository institution or its holding company butis subordinate to claims of depositors, secured creditors and holders ofsubordinated debt (other than affiliates) of the commonly controlled insureddepository institutions.

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.

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.

2

----

**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 thisreport.  The Bank is considered well capitalized.

Failure to meet capital guidelines could subject the Bank to a variety ofenforcement remedies, ranging from, for example, a prohibition on the taking ofbrokered deposits to the termination of deposit insurance by the FDIC or theappointment of a receiver for the Bank.

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 requiredtransfers to surplus.  In addition, national banks can only pay dividendsto the extent 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 dividends by the Company and the Bank may also be affected orlimited by other factors, such as the requirements to maintain adequate capitalabove regulatory guidelines.  In addition, if, in the opinion of theapplicable regulatory authority, a bank under its jurisdiction is engaged in oris about to engage in an unsafe or unsound practice (which, depending on the financialcondition of the Bank, could include the payment of dividends), such authoritymay require, after notice and hearing, that such bank cease and desist fromsuch practice.  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 haveissued policy statements, which provide that bank holding companies and insuredbanks should 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.

**FDIC Insurance Assessments**

The FDIC merged the Bank Insurance Fund and the Savings Association InsuranceFund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in accordancewith the Federal Deposit Insurance Reform Act of 2005.  The FDIC maintains theDIF by assessing depository institutions an insurance premium.  The amount eachinstitution is assessed  is based upon statutory factors that include thebalance of insured deposits as well as the degree of risk the institution posesto the insurance fund.  The FDIC uses a risk-based premium system that assesseshigher rates on those institutions that pose greater risks to the DIF.  Underthe rule adopted by the FDIC in November 2006, as of  January 1, 2007, the FDICbegan placing each institution in one of four risk categories using a two-stepprocess based first on capital ratios (the capital group assignment) and thenon other relevant information (the supervisory group assignment).  As of  January1, 2007, rates ranged between 5 and 43 cents per $100 in assessable deposits.

3

----

**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 Equal CreditOpportunity Act and the Fair Housing Act, prohibiting discrimination on thebasis 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.  The Bank is also subject to provisions of theGramm-Leach-Bliley Act of 1999 (See the section below of the same title); theFair Credit Reporting Act, governing the use and provision of information tocredit reporting agencies; the Bank Secrecy Act, dealing with, among otherthings, the reporting of certain currency transactions; and the USA PatriotAct, dealing with, among other things, requiring the establishment ofanti-money laundering programs, including standards for verifying customerinformation 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.

**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 other state,and a bank holding company located outside South Carolina can acquire any SouthCarolina-based bank, in either case subject to certain deposit percentage andother restrictions.  Riegle-Neal also provides that, in any state that hasnot previously elected to prohibit out-of-state banks from operating interstatebranches within its territory, adequately capitalized and managed bank holdingcompanies can consolidate their multi-state bank operations into a single banksubsidiary and branch interstate through acquisitions.  De novo branchingby an out-of-state bank is permitted only if it is expressly permitted by thelaws of the host state.  The authority of a bank to establish and operatebranches within a state will continue to be subject to applicable statebranching laws.  South Carolina law was amended, effective July 1, 1996,to permit such interstate branching but not de novo branching by anout-of-state bank. 

The Riegle-Neal Act, together with legislation adopted in South Carolina, has resultedin a number of South Carolina banks being acquired by large out-of-state bankholding companies.  Size gives the larger banks certain advantages incompeting for business from larger customers.  These advantages includehigher lending limits and the ability to offer services in other areas of South Carolina and the region.  As a result, the Bank does not generally attempt tocompete for the banking relationships of large corporations, but concentratesits efforts on small to medium-sized businesses and on individuals.  TheCompany believes the Bank has competed effectively in this market segment byoffering quality, personal service.

4

----

**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 and its implementing regulations removeDepression-era barriers that had separated banks and securities firms, and seekto protect the privacy of consumers' financial information.  The Act and itsimplementing regulations set 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 regulations alsogovern the consumer's right to opt-out of further disclosure of nonpublicpersonal financial information and require the Bank to provide initial andannual privacy notices.  The Bank is also required to develop a comprehensiveplan for the safeguarding of customer information which encompasses all aspectsof the Bank's technological environment, business practices, and Bankfacilities.

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 created 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 created 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.

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 newopportunities for the Company to offer expanded services to customers in thefuture, though the Company has not yet determined what the nature of theexpanded services might be or when the Company might find it feasible to offerthem.  The Act has increased competition from larger financial institutionsthat are currently more capable than the Company of taking advantage of theopportunity to provide a broader range of services. However, the Companycontinues to believe that its commitment to providing high quality,personalized service to customers will permit it to remain competitive in itsmarket area.

5

----

**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 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.  For example, numerous bills are pending in Congress and theSouth Carolina Legislature to provide various forms of relief to homeownersfrom foreclosure of mortgages as a result of publicity surrounding economicproblems resulting from subprime mortgage lending and the economic adjustmentsin national real estate markets.  The Companycannot predict the future course of such legislative proposals or their impacton the Company should 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 The Conway National Bank's 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, 2007,2006, 2005.

6

----

|                                                                                            |
|-------------------------------------------------------------------------------------------------|
| **CNB Corporation and Subsidiary  Average Balances, Yields, and Rates  (Dollars in Thousands)** |
|                                                                                            |
|                                                                                            |
|                                                                                                 | **Twelve Months Ended 12/31/07** | ** ** |
|                                                                                                 | ** ** | **Interest** | **Avg. Ann.** | ** ** | ** ** | ** ** |
|                                                                                                 | **Avg.** | **Income/** | **Yield or** | ** ** | ** ** | ** ** |
|                                                                                                 | **Balance** | **Expense** | **     Rate   ** | ** ** | ** ** | ** ** |
| **Assets:**                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |  
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income (1)

$563,864

$  43,878     

7.78%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

175,664

7,440     

4.24   

** **

** **

** **

 
        Tax-exempt

21,972

1,365 (2)

6.21   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    30,246

      1,536     

5.08   

** **

** **

** **

 
          Total  earning assets

$791,746

$  54,219     

6.85   

** **

** **

** **

 
    Other  assets

    55,855

** **

** **

** **

** **

** **

 
          Total  assets

$847,601

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$556,397

$  19,976     

3.59   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

68,276

2,800     

4.10   

** **

** **

** **

 
      Other  short-term borrowings

      1,748

           82     

4.69   

** **

** **

** **

 
          Total  interest-bearing liabilities

$626,421

$  22,858     

3.65   

** **

** **

** **

 
    Noninterest-bearing  deposits

132,765

** **

** **

** **

** **

** **

 
    Other  liabilities

6,973

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    81,442

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$847,601

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$791,746

$  31,361     

3.96%

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Return on  average total assets

** **

** **

1.15%

** **

** **

** **

 
Return on  average stockholders' equity

** **

** **

11.93   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

46.03   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

9.61   

** **

** **

** **

 
  Average  total deposits

** **

** **

11.82   

** **

** **

** **

 
  Average  loans

** **

** **

14.44   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

93.41%

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
(1)

The  Company had no out-of-period adjustments or foreign activities.  Loan fees of  $600 are included in the above interest income.  Loans on a non-accrual  basis for the recognition of interest income totaling $861 as of December 31,  2007 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 $464.

 
7

 

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

 

 

**Twelve Months Ended 12/31/06**

** **

** **

**Interest**

**Avg. Ann.**

** **

** **

** **

**Avg.**

**Income/**

**Yield or**

** **

** **

** **

**Balance**

**Expense**

**   Rate  **

** **

** **

** **

**Assets:**

** **

** **

** **

** **

** **

** **

 
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income (1)

$545,451

$  41,340     

7.58%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

160,220

5,934     

3.70   

** **

** **

** **

 
        Tax-exempt

19,252

1,215 (2)

6.31   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    27,148

      1,335     

4.92   

** **

** **

** **

 
          Total  earning assets

$752,071

$  49,824     

6.62   

** **

** **

** **

 
    Other  assets

    61,051

** **

** **

** **

** **

** **

 
          Total  assets

$813,122

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$533,441

$  16,229     

3.04   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

47,245

1,611     

3.41   

** **

** **

** **

 
      Other  short-term borrowings

      9,679

         556     

5.74   

** **

** **

** **

 
          Total  interest-bearing liabilities

$590,365

$  18,396     

3.12   

** **

** **

** **

 
    Noninterest-bearing  deposits

143,325

** **

** **

** **

** **

** **

 
    Other  liabilities

4,234

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    75,198

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$813,122

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$752,071

$  31,428     

4.18%

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Return on  average total assets

** **

** **

1.24%

** **

** **

** **

 
Return on  average stockholders' equity

** **

** **

13.36   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

41.04   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

9.25   

** **

** **

** **

 
  Average  total deposits

** **

** **

11.11   

** **

** **

** **

 
  Average  loans

** **

** **

13.79   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

92.49%

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
(1)

The  Company had no out-of-period adjustments or foreign activities.  Loan fees of  $743 are included in the above interest income.  Loans on a non-accrual  basis for the recognition of interest income totaling $897 as of December 31,  2006 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 $413.

 
8

 

**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     

3.69   

** **

** **

** **

 
        Tax-exempt

21,464

1,335 (2)

6.22   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

    23,953

         782     

3.26   

** **

** **

** **

 
          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:**

** **

** **

** **

** **

** **

** **

 
Return on  average total assets

** **

** **

1.30%

** **

** **

** **

 
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 totaling $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.

 
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 prior year's volume.  The changes due to volume are the difference betweenthe current and prior year's volume multiplied by rates earned or paid in thecurrent year.  Rate/Volume Variance has been allocated to change due to volume.

**CNB Corporation and Subsidiary   Rate/Volume Variance Analysis   For the Twelve Months Ended December 31, 2007 and 2006   (Dollars in Thousands)**

 
 

 
 

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

 

**2007**

**2006**

**2007**

**2006**

**2007**

**2006**

**Variance**

**Rate**

**Volume**

**Earning   Assets:**
                                    
**Loans ,   Net of unearned Income (1)**

$563,864

$545,451

7.78%

7.58%

$43,878

$ 41,340

$    2,538 

$ 1,105 

$ 1,433 

**  Investment   securities:**
                                    
**    Taxable**

175,664

160,220

4.24%

3.70%

7,440

5,934

1,506 

852 

654 

**    Tax-exempt   (2)**

21,972

19,252

6.21%

6.31%

1,365

1,215

150 

(19)

169 

**  Federal   funds sold and Securities**
                                    
**    purchased   under agreement to resell**

    30,246

   27,148

5.08%

4.92%

    1,536

     1,335

         201 

        44  

       157 

** **
                                    
**Total   Earning Assets**

$791,746

$752,071

6.85%

6.62%

$54,219

$ 49,824

$    4,395 

$  1,982 

$ 2,413 

** **
                                    
**Interest-bearing   Liabilities:**
                                                                            
**  Interest-bearing   deposits**

$556,397

$533,441

3.59%

3.04%

$19,976

$ 16,229

$    3,747 

$  2,923 

$    824 

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

68,276

47,245

4.10%

3.41%

2,800

1,611

1,189 

327 

862  

**  Other   short-term borrowings**

      1,748

      9,679

4.69%

5.74%

         82

        556

        (474)

       (102)

    (372) 

** **
                                    
**Total   Interest-bearing Liabilities**

  626,421

  590,365

3.65%

3.12%

  22,858

   18,396

      4,462 

     3,148 

   1,314  

**Interest-free    Funds Supporting**
                                    
**  Earning   Assets**

165,325

161,706
                            
** **

              

              

          

          

             

              

                

               

              

**Total   Funds Supporting Earning Assets**

$791,746

$752,071

2.89%

2.45%

$22,858

$ 18,396

$    4,462 

$   3,148 

$ 1,314  
                                        
**Interest   Rate Spread**
        
3.20%

3.50%
                    
**Impact of   Noninterest-bearing Funds**
        
 

 
                    
**  on   Net Yield on Earning Assets**
        
  .76%

  .68%

             

              
            
**Net Yield   on Earning Assets**
        
3.96%

4.18%

$31,361

$ 31,428
            
(1)  Includes non-accruing loans which do not have a material effecton 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, 2006 and 2005   (Dollars in Thousands)**

 
 

 
 

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

 

**2006**

**2005**

**2006**

**2005**

**2006**

**2005**

**Variance**

**Rate**

**Volume**

**Earning   Assets:**
                                    
**Loans ,    Net of unearned Income (1)**

$545,451

$453,610

7.58%

6.82%

$41,340

$ 30,953

$ 10,387 

$ 3,426

$6,961 

**  Investment   securities:**
                                    
**    Taxable**

160,220

174,922

3.70%

3.70%

5,934

6,463

 (529)

16

(545)

**    Tax-exempt   (2)**

19,252

21,464

6.31%

6.22%

1,215

1,335

(120)

20

(140)

**  Federal   funds sold and Securities**
                                    
**    purchased   under agreement to resell**

    27,148

   23,953

4.92%

3.27%

    1,335

        782

        553 

       396

     157  
                                        
**Total Earning   Assets**

$752,071

$673,949

6.62%

5.86%

$49,824

$ 39,533

$ 10,291 

$  3,858

$ 6,433  
                                        
**Interest-bearing   Liabilities:**
                                    
** **
                                    
**  Interest-bearing   deposits**

$533,441

$483,451

3.04%

2.02%

$16,229

$   9,779

$     6,450

$  4,929

$ 1,521  

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

47,245

33,699

3.41%

1.93%

1,611

649

962

500

462  

**  Other   short-term borrowings**

      9,679

      1,037

5.74%

2.99%

       556

          31

          525

         29

      496  

** **
                                    
**Total   Interest-bearing Liabilities**

  590,365

  518,187

3.12%

2.02%

  18,396

   10,459

       7,937

    5,458

   2,479  

**Interest-free    Funds Supporting**
                                    
**  Earning   Assets**

161,706

155,762
                            
** **

              

              

          

          

             

              

               

              

              

**Total   Funds Supporting Earning Assets**

$752,071

$673,949

2.45%

1.55%

$18,396

$ 10,459

$    7,937

$   5,458

$  2,479 
                                        
**Interest   Rate Spread**
        
3.50%

3.84%
                    
**Impact of   Noninterest-bearing Funds**
                                    
**  on   Net Yield on Earning Assets**
        
  .68%

  .47%

             

              
            
**Net Yield   on Earning Assets**
        
4.18%

4.31%

$31,428

$ 29,074
            
(1)  Includes non-accruing loans which do 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 adequateliquidity for loan demand, deposit fluctuations, and other changes in balancesheet mix; manage interest rate risk; maximize the institution's overallreturn; provide availability of collateral for pledging; and manageasset-quality diversification of the bank's assets. During 2007 and 2006,investment securities represented 25.0% and 21.5% of total assets, respectively. Loan demand remained solid throughout  2006 but declined in 2007 due primarilyto a decline in  real estate activity.  At December 31, 2007, 2006, and2005, the Loans/Total Assets ratios were 66.3%, 67.7%, and 63.5%, respectively,  Investment securities have correspondingly risen and fallen as a percentageof total assets.

Investment securities with a par value of $182,651,000, $167,829,000, and $122,980,000at December 31, 2007, 2006, 2005, respectively, were pledged to secure publicdeposits and for other purposes as required by law.

The following summaries reflect the book value, unrealized gains and losses,approximate market value, weighted-average tax-equivalent yields , andmaturities on investment securities at December 31, 2007, 2006, 2005.

 

**                               December  31, 2007                               **

**(Dollars in Thousands)**
   
**Book**

**Unrealized Holding**

**Fair**
      
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

**AVAILABLE  FOR SALE**
                              
 
 Government  Sponsored Enterprises

 

 

 

 

 

 
     Within  one year

61,611

2

236

61,377

3.56%

 
     One  to five years

103,464

1,408

8

104,864

5.03%

 
     Six  to ten years

    18,276

      407

         -

    18,683

    5.28%

 
  183,351

   1,817

     244

  184,924

    4.56%

 
  Mortgage  Backed Securities

 

 

 

 

 

 
     Six  to ten years

389

11

-

400

5.77%

 
     Over  ten years

         846

          4

       20

         830

    4.88%

 
      1,235

       15

       20

      1,230

    5.16%

 
  State,  county and municipal
               
 
    Within  one year

209

3

-

212

7.08%

 
    One  to five years

6,244

166

-

6,410

6.98%

 
    Six  to ten years

1,916

16

6

1,926

5.56%

 
    Over  ten years

    10,758

        10

       49

    10,719

    5.60%

 
    19,127

      195

       55

    19,267

    6.06%

 
  Other  Investments
               
 
    CRA  Qualified Investment Fund

701

-

-

701

-%

 
    Mastercard  International Stock

          11

          -

          -

           11

         -%

 
        712

          -

          -

         712

         -%

                
 
  Total  available for sale

$204,425

$ 2,027

$    319

$206,133

   4.71%

                
 
**HELD TO  MATURITY**
               
                
 
  State,  county and municipal
               
 
    Within  one year

$       250

$        -

$        -

$       250

7.56%

 
    One  to five years

1,438

32

-

1,470

6.94%

 
    Six  to ten years

3,764

20

5

3,779

5.52%

 
    Over  ten years

      2,259

          -

       27

      2,232

   5.41%

                 
  Total  held to maturity

$    7,711

$      52

$      32

$    7,731

  5.82%

                  (1) Tax equivalent adjustment on tax exempt obligations based on a 34% taxrate.     
As of the year ended December 31, 2007, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity.
 
12

**INVESTMENT SECURITIES, continued**

**                               December  31, 2006                               **

**(Dollars in Thousands)**
   
**Book**

**Unrealized Holding**

**Fair**
      
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

**AVAILABLE  FOR SALE**
                               
 Government  Sponsored Enterprises
                
     Within  one year

  68,676

-

687

  67,989

3.29%

 
     One  to five years

86,891

14

1,374

85,531

3.96%

 
     Six  to ten years

      1,996

          -

          -

      1,996

    5.29%

 
  157,563

       14

  2,061

  155,516

    3.69%

 
  Mortgage  Backed Securities

 

 

 

 

 

 
     Six  to ten years

456

12

-

468

5.87%

 
     Over  ten years

         389

          -

       27

         362

    3.63%

 
         845

       12

       27

         830

    4.84%

 
  State,  county and municipal

    Within  one year

4,531

1

3

4,529

5.31%

 
    One  to five years

7,931

173

1

8,103

6.97%

 
    Six  to ten years

1,511

34

-

1,545

6.12%

 
    Over  ten years

      2,711

          -

         8

      2,703

    5.66%

 
    16,684

      208

       12

    16,880

    6.23%

 
  Other  Investments
                
    CRA  Qualified Investment Fund

         346

          -

          -

346

        -%

 
    Mastercard  International Stock

          10

          -

          -

           10

         -%

 
        356

          -

          -

         356

         -%

                 
  Total  available for sale

$175,448

$   234

$2,100

$173,582

   3.93%

                
 
**HELD TO  MATURITY**
               
                
 
  State,  county and municipal
               
 
    Within  one year

$    1,345

$       7

$        -

$    1,352

7.38%

 
    One  to five years

      1,841

37

          -

1,878

7.06%

 
    Over  ten years

      1,129

       21

         -

      1,150

   5.98%

                
 
  Total  held to maturity

$    4,315

$      65

$        -

$    4,380

  6.88%

                
 
(1) Tax equivalent adjustment on tax exempt obligations based on a 34% taxrate.
            As of the year ended December 31, 2006, the Bank did not hold any securities ofan issuer thatexceeded 10% of stockholders' equity.  
13

**INVESTMENTSECURITIES, continued**

**                               December  31, 2005                               **

**(Dollars in Thousands)**
   
**Book**

**Unrealized Holding**

**Fair**

 
   
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**
                  
**AVAILABLE  FOR SALE**
                                
 Government  Sponsored Enterprises    

 

 

 

 

 

 
     Within  one year

    29,047

       52

     153

    28,946

   4.08%

 
     One  to five years

  132,739

       11

  3,209

  129,541

   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) Taxequivalent adjustment on tax exempt obligations based on a 34% tax rate.

     As of the year ended December 31, 2005, the Bank did not hold any securities ofan issuer that exceeded 10% of stockholders' equity. 
14

**LOAN PORTFOLIOLENDING ACTIVITIES**

The Company engages, through the Bank, in a full complement 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 also utilized for some 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. Additionally, loans in excess of $500,000 with a loan-to-value ratio exceptionare simultaneously reported on an individual basis.  The total of loans withloan-to-value ratio exceptions are maintained within regulatory limitations. The total amount of loans with loan-to-value ratios in excess of regulatoryguidelines totaled $40,862,000 and $43,429,000 or 7.1% and 7.7% of total loansat fiscal year-ends December 31, 2007 and 2006, 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 of thevalue 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 other commercialpurpose loans.  Variable rate loans, the majority of which are real estatesecured, totaled $149,865,000 and $152,293,000 or 26.1% and 26.8% of total loansat fiscal year-ends December 31, 2007 and 2006, 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 a summary of loans, in thousands of dollars, at December 31,2007, 2006, 2005, 2004, 2003 by major classification:

**  2007   **

**  2006   **

**  2005   **

**  2004   **

**  2003   **

**Real Estate Loans -  mortgage**

$350,138

$361,707

$324,475

$262,543

$228,556

**                                - construction**

 83,398

 74,564

 50,210

  39,525

  44,099

**Loans to farmers**

   3,264

   3,097

   1,912

1,582

   1,537

**Commercial and  industrial loans**

88,106

83,375

84,474

66,184

  53,559

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

  47,731

  44,124

  41,400

    35,583

    32,884

**All other loans,  including**

 

 

 

 

 

**  Overdrafts  and deferred loan costs**

      1,114

         458

      1,455

      1,566

      1,399

**  Gross  Loans**

  573,751

  567,325

  503,926

  406,983

  362,034

**   Less  allowance for loan losses**

   (6,507)

   (6,476)

   (5,918)

   (5,104)

   (4,524)

**    Net  loans**

$567,244

$560,849

$498,008

$401,879

$357,510

** **

 

 

 

 

 

**MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES(Thousands of Dollars)**

The Company's loan portfolio contained approximately $423,025 and $414,155 in totalfixed rate loans and approximately $149,865 and $152,293 in variable rate loansas of December 31, 2007 and 2006, respectively.  At December 31, 2007, and 2006,fixed rate loans with maturities in excess of one year amounted toapproximately $275,452 and $289,839, respectively, and variable rate loans withmaturities in excess of one year amounted to approximately $36,835 and $37, 945for the same periods, respectively.  As of December 31, 2007, fixed rate loansdue after one year through five years totaled $206,141 and fixed rate loans dueafter five years totaled $69,311.  Also as of December 31, 2007,variable rate loans due after one year through five years totaled approximately$36,835 and variable rate loans due after five years totaled $0.  Fixed rateloans are those on which the interest rate generally cannot be changed for theterm of the loan.  Variable rate loans are those on which the interest rate canbe adjusted to changes in the Bank's prime rate.  

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 2007,2006, 2005, 2004, and 2003:

**  2007**

**  2006**

**  2005**

**  2004**

**  2003**
               
**   Nonaccrual  loans**

$   861

$   897

$   405

$   880

$   351

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

  $   147

  $   232

  $   277

  $    93

  $   130

**   Restructured troubled debt**

  None

  None

  None

  None

  None

Information relating to interest income on nonaccrual and renegotiated loansoutstanding for the years ended December 31, 2007, 2006, 2005, 2004, and 2003is as follows:

**2007**

**2006**

**2005**

**2004**

**2003**
               
**   Interest included in income during  the year**

$ 33

$ 27

$   8

$ 28

$  9

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

  $ 94

  $ 65

  $ 34

  $ 69

  $ 26

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 nonaccrualloans.  Loans are placed in a nonaccrual 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, 2007, all loans which management had serious concerns aboutthe borrower being able to repay were put into nonaccrual 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, 2007, the Company had no foreign loansoutstanding.

**LOAN CONCENTRATIONS**

As of the year ended December 31, 2007, 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 following table summarizes loan balances as of the end of each periodindicated, averages for each period, changes in the allowance for loan lossesarising from charge-offs and recoveries by loan category, and additions to theallowance 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,                          **

**  2007  **

**  2006  **

**  2005  **

**  2004  **

**  2003  **

**(Thousands of Dollars)**

**Loans:**
               
  Average  loans outstanding for the period

$563,864

$545,451

$453,610

$386,899

$ 346,110

**Allowance  for loan losses:**
               
** **
               
**Balance at  the beginning of period**

$   6,476

$   5,918

$   5,104

$   4,524

$    4,155

** **
               
**  Charge-offs:**
               
    Commercial,  financial, and agricultural

$      732

$      188

$      324

$      281

$       431

    Real  Estate - construction and mortgage

127

44

52

22

59

    Loans  to individuals

        587

        677

        445

        514

         392
               
**      Total  charge-offs**

$   1,446

$      909

$      821

$      817

$       882

** **
               
  **Recoveries**:
               
   Commercial,  financial, and agricultural

$        96

$      201

$        72

$        45

$       115

   Real  Estate - construction and mortgage

25

154

85

1

26

   Loans  to individuals

        211

        304

        203

        196

         150
               
**     Total  recoveries**

$      332

$      659

$      360

$      242

$       291

** **
               
**Net  charge-offs**

$   1,114

$      250

$      461

$      575

$       591

**Additions  charged to operations**

$   1,145

$      808

$   1,275

$   1,155

$       960

**Balance at  end of period**

$   6,507

$   6,476

$   5,918

$   5,104

$    4,524

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

    .20%  

   .05%  

   .10%  

   .15%   

   .17%   

Theallowance for loan losses is maintained at an amount based on considerations ofclassified and internally-identified problem loans, the current trend indelinquencies, the volume of past-due loans, historical loss experience,current economic conditions, over-margined real estate loans, if any, theeffects of changes in risk selection or underwriting practices, the experience,ability and depth of lending management and staff, industry conditions, theeffect of changes in concentrations of credit, and loan administration risks.  Inaddition, the Asset/Liability Management Committee and the Credit Committeereview the adequacy of the allowance quarterly and make recommendations regardingthe appropriate degree of consideration to be given the various factorsutilized in determining the allowance and to make recommendations as to theappropriate 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.

Management utilizes the best information available to establish the allowancefor loan losses.  However, future adjustments to the allowance or to thereserve  adequacy methodology  may be necessary if economic conditions differsubstantially, or  the required methodology is altered by regulatoryauthorities governing the Company or the Bank, or alternative accountingmethodologies are promulgated by the Public Company Accounting  OversightBoard.

18

The following table presents an estimated allocation of the allowance for loanlosses at December 31, 2007, 2006, 2005, 2004, and 2003. This table ispresented based on the regulatory reporting classifications of the loans.  Thisallocation of the allowance for loan and lease losses is calculated on anapproximate basis and is not necessarily indicative of future losses orallocations.  The entire amount of the allowance is available to absorb lossesoccurring in any category of loans and leases.

**ALLOCATION OF ALLOWANCE FOR LOAN LOSSES**

**(Dollars in Thousands)**

** **
               
** **

**2007**

**2006**

**2005**

**2004**

**2003**

** **

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Balance applicable to:**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Commercial    Industrial,    Farm Loans**

$1,527  

17.3%

$1,265  

16.0%

$1,217  

16.7%

$   936  

16.8%

$1,088  

16.3%

** **

 

 

 

 

 

 

 

 

 

 

**Real Estate -     Construction    and Mortgage**

584  

74.0%

507  

75.5%

367  

73.1%

320  

72.9%

276  

73.8%

** **

 

 

 

 

 

 

 

 

 

 

**Loans to     Individuals**

866  

7.7%

1,090  

7.4%

978  

7.9%

728  

8.6%

693  

8.9%

** **

 

 

 

 

 

 

 

 

 

 

**Other Loans**

21  

1.0%

23  

1.1%

50  

2.3%

25  

1.7%

15  

1.0%

** **
                              
**Environmental  Factors**

  3,469  

    -

  3,452  

    -

3,155  

  -

2,721  

-

2,401  

  -

** **
                              
**Unallocated**

       40  

     -  

    139  

     -  

     151  

     -  

     374  

  -  

        31  

     -  

** **

 

 

 

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

**Total**

$6,507  

100%

$6,476  

100%

$5,918  

100%

$5,104  

100%

$4,504  

100%

****19

**DEPOSITSAVERAGE DEPOSITS BY CLASSIFICATION**

The following table sets forth the classification of average deposits for theindicated period, in thousands of dollars:

**                Years  Ended December 31,               **

**   2007   **

**   2006   **

**   2005   **
         
**Noninterest bearing  demand deposits**

$132,765

$143,325  

$129,833  

**Interest bearing  demand deposits**

91,948

100,392  

91,795  

**Savings deposits**

49,088

54,146  

53,392  

**Time deposits**

  415,361

  378,903  

  338,264  

**  Total deposits**

$689,162

$676,766

$613,284

**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,                    **

**   2007   **

**   2006   **

**   2005   **
         
**Interest bearing  demand deposits**

.38%

.38%  

 .33%  

**Savings Deposits**

1.68%

1.91%  

1.40%  

**Time deposits**

4.53%

3.95%  

2.60%  

**MATURITIES OF TIME DEPOSITS**

The following table sets forth the maturity of time deposits in thousands ofdollars, at December 31, 2007: 

** **

**Time   Deposits of $100,000 or more**

**Time Deposits  of Less Than  $100,000**

**Total  Time    Deposits**

**Maturity within 3 months or less**

$  69,155      

$  44,674      

$ 113,829    

**Over 3 through 6 months**

66,218      

40,799      

107,017    

**Over 6 through 12 months**

53,072      

59,094      

112,166    

**Over 12 months**

    13,410      

    16,467      

    29,877    

**    Total**

$201,855      

$161,034      

$362,889    

**RETURN ON EQUITY AND ASSETS**

The following table presents certain ratios relating to the Company's equityand assets:

**             Years  Ended December 31,           **

**  2007  **

**  2006  **

**  2005  **
         
**   Return  on average total assets(1)**

1.15%

1.24%  

1.30%  

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

11.93%

13.36%  

13.41%  

**   Cash  dividend payout ratio(3)**

46.50%

45.26%  

45.75%  

**   Average equity to average assets  ratio (4)**

9.61%

9.25%  

9.70%  

** **

 

 

 

**   (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**

 

 

 

**   (4) Average equity divided by average  total assets.**

 

 

 

20

**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,                       **

**  2007  **

**  2006  **

**  2005  **

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

  $60,936

  $72,330

  $43,296

The following information relates to outstanding federal funds purchased andsecurities sold under repurchase agreements during 2007, 2006, and 2005, inthousands of dollars:

**Maximum  Amount                    Outstanding in Any                                      Month  End                        **

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

** **

**2007**

**2006**

**2005**

**2007**

**2006**

**2005**

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

  $72,927

  $72,330

  $43,296

  4.20%

  4.39%

  2.29%

 

**                Years   ended December 31,            **

**2007  **

**2006  **

**2005  **

**Federal funds purchased and securities sold under     agreement to repurchase - average daily     amount outstanding during the year.**

$68,276 

$47,245 

$33,699 

 

 

 

**  Weighted average interest rate paid**

4.10%

3.41%

1.93%

 21

**ITEM 1A.   RISK FACTORS**

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

**Risks Related to Our Business**

**Our growth strategy may not be successful.**

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

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

We expect each new office we open to take several years to become profitable and we cannot guarantee that any new office will ever become profitable.  We expect that by having a number of new offices at any given time, our ability to operate at higher levels of profitability will be reduced until our new offices can operate at levels of profitability that equal or exceed our older offices.

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

We are required by banking regulators to maintain various ratios of capital to assets. As our assets continue to grow we expect our capital ratios to decline unless we can also continue to increase our earnings or raise sufficient new capital to keep pace with asset growth.  Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.  If we are unable to limit a capital ratio decline by increasing our capital, we will have to restrict our asset growth to the amount our earnings will support. 

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

We have grown substantially in the last several years.  Although we may not continue to grow as fast as we have in the past, we intend to expand our asset base.  Our future profitability will depend in part on our ability to manage growth successfully.  Our ability to manage growth successfully will depend on our ability to maintain cost controls and asset quality while attracting additional loans and deposits, as well as on factors beyond our control, such as economic conditions and interest rate trends.  If we grow quickly and are not able to control costs and maintain asset quality, growth could materially adversely affect our financial performance.

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

We are a relationship-driven organization.  Our growth and development in recent years have depended in large part on the efforts of several members of our senior management team.  These senior officers have primary contact with our customers and are extremely important in maintaining personalized relationships with our customer base, which are key aspects of our business strategy, and in increasing our market presence.  The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly.

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

Our principal revenue producing 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 we experience.  We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless, there is risk that our credit evaluations will prove to be inaccurate due to changed circumstances or otherwise.

 22

**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 County and the Waccamaw Neck area, a decline in real estate values in the Horry County  and the Waccamaw Neck areas or other events in our market area may adversely affect our business.**

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

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

Nearly all of our business and our customers are located in coastal South Carolina, an area that often experiences damage from hurricanes and other weather phenomena.  We attempt to mitigate such risk with insurance and by requiring insurance on property taken as collateral.  However, catastrophic weather damage to a large portion of our market area could cause substantial disruptions to our business and our customers' businesses which would reduce our profitability for some period.

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

We encounter strong competition from financial institutions operating in the greater Horry/Georgetown County and Grand Strand area of South Carolina.  In the conduct of our business, we also compete with credit unions, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation as we are.  Many of these competitors have substantially greater resources and lending abilities than we have and offer services, such as investment banking, insurance, trust and international banking services that we do not provide.  We believe that we have been able to, and will continue to be able to, compete effectively with these institutions because of our experienced bankers and personalized service, as well 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.

**Technological changes affect our business, and we may have fewer resources than many of our competitors to invest in technological improvements.**

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services.  In addition to enabling financial institutions to serve clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs.  Our future success may depend, in part, upon our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations.  We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services.  Many of our competitors have substantially greater resources to invest in technological improvements.

**Our profitability and liquidity may be affected by changes in interest rates and economic conditions.**

Our profitability depends upon our net interest income, which is the difference between interest earned on our interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and borrowings.  Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments, or, conversely, if the interest earned on loans and investments decreases faster than the interest we pay on deposits and borrowings.  Interest rates, and consequently our results of operations, are affected by general economic conditions (domestic and foreign) and fiscal and monetary policies.  Monetary and fiscal policies may materially affect the level and direction of interest rates.  Beginning in June 2004 through June 2006, the Federal Reserve raised rates 17 times for a total increase of 4.25%.  Increases in interest rates generally decrease the market values of interest earning investments and loans held and therefore may adversely affect our liquidity and earnings.  Increased interest rates also generally affect the volume of mortgage loan originations, the resale value of mortgage loans originated for resale, and the ability of borrowers to perform under existing loans of all types.  Beginning September 18, 2007, the Federal Reserve has decreased interest rates five times through February 29, 2008 for a total decrease of 2.25%.  Decreases in interest rates generally have the opposite affect on market values of interest-bearing assets, the volume of mortgage loan originations, the resale value of mortgage loans originated for resale, and the ability of borrowers to perform under existing loans of all types from the effect of increases in interest rates.

23

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

**Risks Related to Our Common Stock**

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

Although our common stock may be traded from time to time on an individual basis, no active trading market has developed and none is expected to develop in the foreseeable future.  Our common stock is not traded on any exchange.  Accordingly, shareholders who wish to sell shares may experience a delay or have to sell them at lower prices than they seek in order to sell them promptly, if at all.

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

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

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

Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions.  In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock.  To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.

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

Our common stock is not a deposit or savings account, and is not insured by the Federal Deposit Insurance Corporation or any other government agency.  Should our business fail, shareholders could lose their total investments.

**Risks Related to Our Industry**

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

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies.  Our compliance with the requirements of these agencies is costly and may limit our growth and restrict certain of our activities, including, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and locations of offices.  We are also subject to capitalization guidelines established by federal authorities and our failure to meet those guidelines could result, in an extreme case, in our bank's being placed in receivership.  We have also recently been subjected to the extensive and expensive requirements imposed on public companies by the Sarbanes-Oxley Act of 2002 and related regulations.

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

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

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

**ITEM 1B.   UNRESOLVED STAFF COMMENTS**

The Company has no unresolved comments from the SEC staff regarding its 1934 Act filings in the 180 days prior to fiscal year-end December 31, 2007.

 24  

**ITEM 2.   PROPERTIES**

The Company's subsidiary, The Conway National Bank, has eleven permanent banking offices in Horry County and two permanent banking offices in Georgetown County, for a total of thirteen banking offices.  In addition, the Bank has an Operations and Administration Building, located at 1400 Third Avenue in Conway, which houses the Bank's administrative offices and data processing facilities.  This three-story structure contains approximately 33,616 square feet.  Adjacent to the Operations and Administration Building is a 24 ,000 square foot banking office, known as the Conway Banking Office, which provides retail banking functions at the Bank's principal site.  In addition, the Bank has a 1,450 square foot building for express banking services adjacent to the Conway Banking Office.  The Bank has a two-story office on Main Street in Conway containing 8,424 square feet, an express banking services facility (675 square foot building) at the Coastal Centre in Conway, banking offices located at Red Hill in Conway (3,760 square feet), West Conway in Conway (3,286 square feet), North Conway in Conway (3,600 square feet), Surfside in Surfside Beach (6,339 square feet), Northside, north of Myrtle Beach (2,432 square feet), Socastee in the southern portion of Myrtle Beach (3,498 square feet), Aynor in The Town of Aynor (2,809 square feet), Myrtle Beach in the City of Myrtle Beach (12,000 square feet), Murrells Inlet in Murrells Inlet, Georgetown County (3,600 square feet), North Myrtle Beach in the City of North Myrtle Beach (3,600 square feet), and Pawleys Island (3,900 square feet) in Pawleys Island, Georgetown County.  Of the thirteen banking offices and the Operations and Administration Building, the bank owns the Operations and Administration Building, the Conway Banking Office and Express, the banking offices at Red Hill, 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 with renewal options. In addition to the existing facilities, the Company has purchased two future office sites.  The sites consist of 1.83 acres on Highway 9 west of North Myrtle Beach and 1.63 acres at Loop Road and River Oaks Drive, Carolina Forest, Myrtle Beach.  The Company is constructing a 3,900 square foot branch office facility on the 1.83 acres on Highway 9 west of North Myrtle Beach which expects to open in the first calendar quarter of 2008.  This office will be known as the Little River branch office.  The Company anticipates building a banking office on the other site within the next two to six years, depending on market conditions. The physical addresses of each location are as follows:  The Operations and Administration Building at 1400 Third Avenue, Conway; Conway Banking Office at 1411 Fourth Avenue, Conway; Coastal Centre Express at 16th Ave., Conway; Main Street at 309 Main Street, Conway; West Conway at Highway 501 & Cultra Road, Conway; North Conway at 2601 Main Street, Conway; Surfside at Highway 17 & 5th Avenue North, Surfside Beach; Northside at 9726 Highway 17 North, Myrtle Beach; Red Hill at Highways 544 & 501, Conway; Socastee at 3591 North Gate Road, Myrtle Beach; Aynor at 2605 Highway 501, Aynor; Myrtle Beach at 1353 21st Avenue North, Myrtle Beach; Murrells Inlet at 4345 Highway 17 Bypass, Murrells Inlet;  North Myrtle Beach at 110 Highway 17 North, North Myrtle Beach; and Pawleys Island at 10608 Ocean Highway, Pawleys Island.  The physical address of the new Little River branch office will be 2380 Highway 9 East, Longs, S.C. The Bank owns all of its offices except one express banking services facility, which is leased.

**ITEM 3.   LEGAL PROCEEDINGS**

There were no material legal proceedings against the Company or its subsidiary, The Conway National Bank, as of December 31, 2007.

**ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

No matters were submitted to a vote of security holders in the fourth quarter of 2007.

 25

**PART II**

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

As of March 1, 2008, there were approximately 845 holders of record of Company stock. There is no established market for shares of Company stock and only limited trading in such shares has occurred since the formation of the Company on June 10, 1985.  During 2006 and 2007, management was aware of a few transactions, including some transactions in which the Company was the purchaser and one transaction in which the Company was the seller, in which the Company's common stock traded in the ranges set forth below. However, management has not ascertained that these transactions resulted from arm's length transactions between the parties involved, and because of the limited number of shares involved, these prices may not be indicative of the value of the common stock.

**2007(1)**

**2006(1)**

   First  Quarter   Second Quarter   Third  Quarter   Fourth Quarter

**High**   $181.82   $181.82   $204.55   $190.00

**Low**   $147.27   $147.27   $167.27   $162.50

**High**   $140.91   $142.27   $186.36   $147.27

**Low**   $140.91   $140.91   $142.27   $142.27
 (1)  Market prices have been adjusted to give retroactive effect to stock dividend declared September 11, 2007 and distributed September        28, 2007.
Holders of shares of Company stock are entitled to such dividends as may be declared from time to time by the Board of Directors of the Company. The Company paid an annual cash dividend of $5.25 per share in 2007 and $5.25 per share in 2006. In addition, the Company distributed a 10% stock dividend on September 28, 2007.  There can be no assurance, however, as to the payment of dividends by the Company in the future.  Payment of dividends is within the discretion of the Board of Directors, and is dependent upon the earnings and financial condition of the Company and the Bank, and other related factors.  The Company's primary source of funds with which to pay dividends are dividends paid to the Company by the Bank.  There are legal restrictions on the Bank's ability to pay dividends.  See "Supervision and Regulation-Payment of Dividends" under Item 1, Part I of this Form 10-K for a description of these legal restrictions.

The Company does not have any equity compensation plans.  Accordingly, no information is required to be disclosed pursuant to Item 201(d) of Regulation S-K. 

The Company made only one sale of securities during 2007.  On September 20, 2007 the Company sold 304 shares of common stock to The Conway National Bank Profit Sharing and Savings and Profit Sharing Plan for a price of $55,936, or $167.27 per share, adjusted for the effect of a 10% stock dividend distributed September 28, 2007.  This sale was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because no public offering was involved.

Purchases of stock during the fourth quarter of 2007 are outlined in the below table.  Information about all other purchases during 2007 has been previously reported on Forms 10-Q, filed May 9, 2007, August 9, 2007, and November 9, 2007, and is incorporated herein by reference.

**Period**

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

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

**(c) Total Number   of Shares   Purchased as   Part of Publicly   Announced Plans   or Programs**

**(d) Maximum   Number (or   approximate   dollar amount) of   Shares that May   Yet Be Purchased   Under the Plans   or Programs**

October 1 - October 31, 2007

165             

$167.25

-

-

November 1 - November 30, 2007

7,017             

$167.25

-

-

December 1 - December 31, 2007

329             

$162.50

-

-

Total

7,511             

$167.04

-

-

 26

**ITEM 6. SELECTED FINANCIAL DATA CNB Corporation FINANCIAL SUMMARY (All Dollar Amounts, Except Per Share Data, in Thousands)**

The following table sets forth certain selected financial data relating to the Company and subsidiary and is qualified in its entirety by reference to the more detailed financial statements of the Company and subsidiary and notes thereto included elsewhere in this report.

**                                               Years   Ended December 31,                                               **

**  2007  **

**  2006  **

**  2005  **

**  2004  **

**  2003  **

**Selected   Income Statement Data:**
                    
**Total   Interest Income**

$ 53,755

$ 49,411

$ 39,079  

$  32,291

$   30,466

**Total   Interest Expense**

   22,858

   18,396

   10,459  

      6,938

       7,224

**Net   Interest Income**

   30,897

   31,015

   28,620  

    25,353

     23,242

**Provision   for Loan Losses**

     1,145

          808

     1,275  

      1,155

          960

**Net Interest   Income**
                    
**  after   Provision for Loan Losses**

   29,752

   30,207

   27,345  

     24,198

     22,282

**Total Noninterest   Income**

   7,002

   6,958

   6,411  

   6,257

   6,117

**Total Noninterest   Expenses**

   22,019

   22,339

   19,530  

     18,246

     17,237

**Income Before   Income Taxes**

   14,735

   14,826

   14,226  

     12,209

     11,162

**Income Taxes**

     5,015

     4,780

     4,748  

       3,927

       3,497

**Net Income**

$   9,720

$ 10,046

$   9,478  

$     8,282

$     7,665

** **
                    
***Per Share:**
                    
**Net Income Per   Weighted Average**
                    
**  Shares   Outstanding**

$   11.29

$   11.60

$   10.93  

$      9.54

$      8.83

**Cash Dividend   Paid Per Share**

$     5.25

$     5.25

$     5.00  

$      4.25

$      4.00

**Weighted Average   Shares Outstanding**

861,065

865,589

867,346  

867,907

868,219

** **

 

 

 

 

 
***Adjusted for a 10% stock dividend issued during 2007.**    
**Selected Balance Sheet Data:**

 

 

 

 

 

**Assets**

$865,638

$837,622

$792,720

$671,569

$599,978

**Net Loans**

567,244

560,849

498,008

401,879

357,510

**Investment Securities**

216,141

179,598

181,942

215,827

191,575

**Federal Funds Sold**

26,000

26,000

46,000

-

1,000

**Deposits:**

 

 

 

 

 

**  Noninterest-Bearing**

$112,450

$129,763

$134,475

$118,580

$101,684

**  Interest-Bearing**

  579,839

  545,289

  532,001

  441,784

  401,429

**   Total Deposits**

$692,289

$675,052

$666,476

$560,364

$503,113

**Stockholders' Equity**

$  82,112

$  76,663

$  70,559

$  67,585

$  64,623

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

"Management's Discussion and Analysis" is provided to afford a clearer understanding of the major elements of the Company's financial condition, results of operations, liquidity, and capital resources. The following discussion should be read in conjunction with the Company's financial statements and notes thereto and other detailed information appearing elsewhere in this report.  References to dollar amounts in this section are in thousands, except per share data.

****27

**CRITICAL ACCOUNTING POLICIES**

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

Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements. Refer to "Provision for Loan Losses" below for a detailed description of the Company's estimation process and methodology related to the allowance for loan losses.

Distribution of Assets and Liabilities

The Company maintains a conservative approach in determining the distribution of assets and liabilities.  Loans increased 12.6% from $503,926 at December 31, 2005 to $567,325 at December 31, 2006; and 1.1% from December 31, 2006 to $573,751 at December 31, 2007.  Loan growth is attributed to overall business development efforts to meet business and personal loan demand in our market area. Loan demand in our market area remained solid in 2006 but softened in 2007 primarily due to a decline in real estate activity.  Loans increased as a percentage of total assets from 63.5% at year-end 2005 to 67.7% at year-end 2006 but decreased to 66.3% at year-end 2007.  Investment securities and federal funds sold decreased as a percentage of total assets from 29.1% at year-end 2005 to 24.5% at year-end 2006 but increased to 28.0% at year-end 2007.  Investments and federal funds sold provide for an adequate supply of secondary liquidity.  Year-end other assets as a percentage of total assets rose from 7.4% at year-end 2005 to 7.8% at year-end 2006, and decreased to 5.7% at year-end 2007.  Management has sought to build the deposit base with stable, relatively noninterest-rate sensitive deposits by offering the small to medium account holders a wide array of deposit instruments at competitive rates. Noninterest-bearing demand deposits, as a percent of total assets, have declined over the previous three years from 17.0% at year-end 2005 to 15.5% at year-end 2006 and to 13.0% at year-end 2007. The Company has anticipated a decline over the long-term as more customers utilize interest-bearing deposit accounts and repurchase agreements.  Interest-bearing liabilities as a percentage of total assets have risen from 72.9% at December 31, 2005 to 74.0% at December 31, 2006 and to 76.0% at December 31, 2007.  Stockholders' equity as a percentage of total assets increased from 8.9% at December 31, 2005 to 9.2% at December 31, 2006 and to 9.5% at December 31, 2007.  The Bank remains well-capitalized (see Note 15 to the consolidated financial statements, contained elsewhere in this report).

The following table sets forth the percentage relationship to total assets of significant components of the Company's balance sheet as of December 31, 2007, 2006, and 2005:

**                                December   31,                               **

**Assets:**

**2007  **

**2006  **

**2005  **

**   Earning assets:**

** **

** **

** **

**     Loans**

66.3%

67.7%

63.5%

**     Investment securities:**

 

 

 

**     Taxable**

21.9   

18.9   

20.6   

**     Tax-exempt**

3.1   

2.5   

2.7   

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

    3.0   

    3.1   

    5.8   

**        Total   earning assets**

  94.3   

  92.2   

  92.6   

**     Other assets**

    5.8   

    7.8   

    7.4   

**        Total   assets**

100.0%

100.0%

100.0%

** **
            
**Liabilities and stockholders' equity:**
            
**     Interest-bearing   liabilities:**
            
**       Interest-bearing   deposits**

67.0%

65.1%

67.1%

**       Federal funds   purchased and securities sold**

 

 

 

**         under   agreement to resell**

7.0   

8.6   

5.5   

**       Other   short-term borrowings**

    2.0   

      .3   

      .3   

**         Total   interest-bearing liabilities**

  76.0   

  74.0   

  72.9   

**     Noninterest-bearing   deposits**

13.0   

15.5   

  17.0   

**     Other liabilities**

1.5   

1.3   

1.2   

**     Stockholders' equity**

    9.5   

    9.2   

    8.9   

**       Total   Liabilities and stockholders' equity**

100.0%

100.0%

100.0%

 28

**Results of Operations**

CNB Corporation and subsidiary recognized earnings in 2007, 2006, and 2005 of $9,720, $10,046, and $9,478, respectively, resulting in a return on average assets of 1.15%, 1.24%, and 1.30%, and a return on average stockholders' equity of 11.93%, 13.36%, and 13.41%. The earnings were primarily attributable to favorable but declining net interest margins in each period (see "Net Income-Net Interest Income"). Other factors include management's ongoing effort to maintain other income at adequate levels (see "Net Income ‐ Noninterest Income") and to control other expenses (see "Net Income - Noninterest Expenses").  Earnings, coupled with a moderate dividend policy, have supplied the necessary capital funds to support bank operations. Total assets were $865,638 at December 31, 2007 as compared to $837,622 at December 31, 2006 and $792,720 at December 31, 2005.  The following table sets forth the financial highlights for fiscal years 2007, 2006, and 2005.

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

 
** **

**December 31,  2007  **

** 2006    to    2007   Percent   Increase(Decrease)**

**December 31,  2006  **

** 2005    to    2006   Percent   Increase(Decrease)**

**December 31,  2005  **

**Net interest income**

 

 

 

 

 

 
**     after provision for loan   losses**

$  29,752

(1.5)% 

$  30,207

10.5% 

$  27,345

 
**Income before income taxes**

14,735

( .6)    

14,826

4.2    

14,226

 
**Net Income**

9,720

(3.2)    

10,046

6.0    

9,478

 
** **

 

 

 

 

 

 
**Per Share (1)**

 

 

 

 

 

 
**  (weighted average of shares outstanding)**

$    11.29

(2.7)    

$    11.60

6.1    

$    10.93

 
** **

 

 

 

 

 

 
**Cash dividends declared**

4,475

8.5     

4,123

4.6    

3,942

 
** **

 

 

 

 

 

 
**  Per Share**

$      5.25

0     

$      5.25

.1    

$      5.00

 
** **

 

 

 

 

 

 
**Total assets**

$865,638

3.3%  

$837,622

5.7% 

$792,720

 
**Total deposits**

692,289

2.6     

675,052

1.3    

666,476

 
**Loans**

573,751

1.1     

567,325

12.6    

503,926

 
**Investment securities**

216,141

20.3     

179,598

(1.3)   

181,942

 
**Stockholders' equity**

82,112

7.1     

76,663

8.7    

70,559

 
**    Book value per share (1)**

 

 

 

 

 

 
**   (actual number of shares outstanding)**

$    96.36

7.6     

$    88.75

9.1    

$    81.35

 
** **

 

 

 

 

 

 
**Ratios (2):**

 

 

 

 

 

 
**Return on average total assets**

1.15%

( 7.3)    

1.24%

(4.6)   

1.30%

 
**Return on average stockholders' equity**

11.93%

(10.7)    

13.36%

(.4)   

13.41%

 
** **

 

 

 

 

 

 
   (1) Adjusted for the effect of a 10% stock dividend paid in 2007.

 
 

 

 

 

 

 
(2)  For   the fiscal years ended December 31, 2007, 2006, and 2005 average total assets   amounted to $847,601,          $813,122, and $729,163,   respectively, with average stockholders' equity totaling $81,442, $75,198, and   $70,669,          for the same periods.

 
 29

**NET INCOME**

**Net Interest Income**

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

The Bank maintained net interest margins in 2007, 2006, and 2005 of 3.96%, 4.18%, and 4.31%, respectively, as compared to management's long-term target of 4.20%. Net interest margins have been compressed at the Bank and industry-wide, as a result of strong competition for deposits and competitive lending practices.  The Bank has sought to increase the volume of outstanding loans, while correspondingly reducing the amount of investments held, in order to enhance interest income. Loan demand remained strong throughout 2005 and 2006 but declined in 2007 due primarily to a decline in real estate activity.   Fully-tax-equivalent net interest income grew from $29,074 in 2005 to $31,428 in 2006 and remained steady at $31,361 in 2007.  During the three-year period, total fully-tax-equivalent interest income increased by 26.0% from $39,533 in 2005 to $49,824 in 2006 and increased 8.8% in 2007 to $54,219.  Over the same period, total interest expense increased 75.9% from $10,459 in 2005 to $18,396 in 2006 and increased 24.3% to $22,858 in 2007. Fully-tax-equivalent net interest income as a percentage of average total earning assets was 4.31% in 2005, 4.18% in 2006, and 3.96% in 2007.

Interest rates paid on deposits and borrowed funds and earned on loans and investments have generally followed the fluctuations in market interest rates in 2007, 2006, and 2005.  However, fluctuations in market interest rates may not necessarily have a significant impact on net interest income, depending on the Bank's rate sensitivity position.  A rate sensitive asset (RSA) is any loan or investment that can be re-priced up or down in interest rate within a certain time interval.  A rate sensitive liability (RSL) is an interest paying deposit or other liability that can be re-priced either up or down in interest rate within a certain time interval. When a proper balance between RSA and RSL exists, market interest rate fluctuations should not have a significant impact on earnings.  The larger the imbalance, the greater the interest rate risk assumed by the Bank and the greater the positive or negative impact of interest rate fluctuations on earnings.  When RSAs exceed RSLs for a specific repricing period, a positive interest sensitive gap results.  The gap is negative when interest-sensitive liabilities exceed interest-sensitive assets.  For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income and falling rates would be expected to have the opposite effect.  However, gap analysis, such as set forth in the table below, does not take into account actions a bank or its customers may take during periods of changing rates, which could significantly change the effects of rate changes that would otherwise be expected.  The Bank seeks to manage its assets and liabilities in a manner that will limit interest rate risk and thus stabilize long-term earning power. The following table sets forth the Bank's static gap rate sensitivity position at each of the time intervals indicated.  The table illustrates the Bank's rate sensitivity position on specific dates and may not be indicative of the position at other points in time. Management believes that a 200 basis point rise or fall in interest rates will have less than a 10 percent effect on before-tax net interest income over a one-year period, which is within bank guidelines.

**Interest Rate Sensitivity Analysis December 31, 2007 (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**

$  26,000

$           0 

$            0 

$            0 

$            0

$            0

**  Investment Securities   (net of      FRB and FHLB stock in the      amount of $2,297)**

0

13,224 

16,298 

32,317 

112,712

38,581

**  Loans (net of non-accruals of      $861 and deferred loan costs of      $321)**

149,865               

47,196                 

38,368                 

62,009                 

206,141               

68,990               

**Total, RSA**

$175,865

$  60,420 

$  54,666 

$  94,326 

$318,853

$107,571

** **
                        
**Rate Sensitive Liabilities (RSL)**
                        
**Deposits:**
                        
**Certificates of Deposit of $100,000      or more**

$          0

$ 69,155 

66,218 

53,072 

13,410

0

**All Other Time Deposits**

2,760

41,914 

40,799 

59,094 

16,467

0

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

25,275

29,444 

3,217 

3,000 

0

0

**Federal Home Loan Bank Advances**

             0

    15,000 

             0 

             0 

             0

             0

**Total RSL**

$  28,035

$155,513 

$ 110,234 

$115,166 

$  29,877

$           0

**RSA-RSL**

$147,830

$ (95,093)

$  (55,568)

$ (20,840)

$288,976

$107,571

**Cumulative RSA-RSL**

$147,830

$  52,737 

$    (2,831)

$ (23,671)

$265,305

$372,876

**Cumulative RSA/RSL**

6.27

1.29 

.99 

.94 

1.60

1.85

 30

**NET INCOME (continued)**

**Provision for Loan Losses**

It is the policy of the Bank to maintain the allowance for loan losses in an amount commensurate with management's ongoing evaluation of the loan portfolio and deemed appropriate by management to cover estimated losses inherent in the portfolio.  The Company complies with the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, in connection with the allowance for loan losses (see NOTE 1 to the Consolidated Financial Statements - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES).  The provision for loan losses was $1,145 in 2007, $808 in 2006, and $1,275 in 2005.  Net loan charge-offs totaled $1,114 in 2007, $250 in 2006, and $461 in 2005, with net charge-offs being centered in consumer purpose and commercial and industrial loans in 2007, in consumer purpose loans in 2006, and in consumer purpose and commercial and industrial loans in 2005.  The allowance for loan losses as a percentage of net loans was 1.15% in 2007, 1.15% at December 31, 2006, and 1.19% at December 31, 2005. 

**Securities Transactions**

Net unrealized gains/(losses) in the investment securities portfolio were $1,728 at December 31, 2007, $(1,801) at December 31, 2006, and $(2,919) at December 31, 2005.  The market value of investment securities has increased due to the declines in market interest rates, increased demand for bonds, and the consequent increase in prices. Security gains of $9 were realized in 2007 on sales of $2,315 in short-term available-for-sale securities to supplement liquidity.   Security gains of $2 were realized in 2005 on sales of $4,000 in short-term available-for-sale securities to supplement liquidity.  No security gains/(losses) were realized in 2006.

**Noninterest Income**

Other income, net of any securities gains/(losses), increased by 8.5% from $6,409 in 2005 to $6,958 in 2006 and grew 0.5% from $6,958 in 2006 to $6,993 in 2007.   During 2005, deposit service charge income declined as the economy strengthened and demand deposit balances grew.  Additionally, higher earnings allowance credits were paid on commercial balances.  This decline in deposit service charge income was offset by strong growth in secondary market mortgage loan income as we expanded our secondary market mortgage loan program during the second half of 2005.  The increase in noninterest income in 2006 was attributable to increased loan fee income.  Noninterest income was also enhanced during the same period by two non-recurring items:  the receipt of life insurance proceeds, the income portion of which was $198; and a gain from the sale of real estate in the amount of $277.  During 2007, service charge income on deposit accounts increased due to an increase in charges implemented by the Company, increased commercial services income, and declines in demand deposit balances as the economy slowed.  Other service and exchange charges declined due to the non-recurrence of extraordinary miscellaneous other income experienced in 2006.

**Noninterest Expenses**

Noninterest expenses increased by 14.4% from $19,530 in 2005 to $22,339 in 2006, and decreased 1.4% from $22,339 in 2006 to $22,019 in 2007.  The components of other expenses are salaries and employee benefits of $12,459, $13,684, and $14,044; occupancy and furniture and equipment expenses of $2,727, $3,247, and $3,338; and other operating expenses of $4,344, $5,408, and $4,637 for 2005, 2006, and 2007, respectively. 

The increase in salary and employee benefits reflects compensation increases, the increased costs of providing employee benefits, and an increase from 249 to 264 full-time equivalent employees from year-end 2005 to year-end 2006.   As of year-end 2007, the Company also had 264 full-time equivalent employees.

Occupancy and furniture and equipment expenses were impacted by the construction of the Company's Little River banking office, and renovations to the Company's Operations and Administration building.

Noninterest expense is expected to continue to grow in 2008 due to increased growth in operations.  

**Income Taxes**

Provisions for income taxes increased .7% from $4,748 in 2005 to $4,780 in 2006 and increased 4.9% from $4,780 in 2006 to $5,015 in 2007.  Income tax liability increased in 2005 and 2006, as income before income taxes has increased 16.5% and 4.2%, respectively. Income before income taxes decreased .6% in 2007.  However, the Company's effective tax rate increased during 2007.

**LIQUIDITY**

The Bank's liquidity position is primarily dependent on short-term demands for funds caused by customer credit needs and deposit withdrawals and upon the liquidity of bank assets to meet these needs.  The Bank's liquidity sources include cash and due from banks, federal funds sold and short-term investments.  In addition, the Bank has established federal funds lines of credit from correspondent banks; has the ability, on a short-term basis, to borrow funds from the Federal Reserve System; and has a line of credit from the Federal Home Loan Bank of Atlanta (see NOTE 8 to the Consolidated Financial Statements-LINES OF CREDIT).  The Company had cash balances on hand of $5,837, $6,670, and $6,623 at December 31, 2007, 2006, and 2005 with liabilities, consisting of cash dividends payable, totaling $4,475, $4,123, and $3,942, respectively.  Management feels that liquidity sources are more than adequate to meet funding needs.

31

**OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

The Company, through the operations of the Bank, makes contractual commitments to extend credit in the ordinary course of business.  These commitments are legally binding agreements to lend money to customers of the Bank at predetermined interest rates for a specified period of time.  In addition to commitments to extend credit, the Bank also issues standby letters of credit which are assurances to a third party that they will not suffer a loss if the Bank's customer fails to meet its contractual obligation to a third party.  The Bank may also have outstanding commitments to buy/sell securities.  At December 31, 2007, the Bank had issued commitments to extend credit of $58.0 million, standby letters of credit of $4.1 million, and no commitments to buy or sell securities (see NOTE 10 to the Consolidated Financial Statements-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK). The majority of the commitments and standby letters of credit typically mature within one year and past experience indicates that many of the commitments and standby letters of credit will expire unused.  However, through its various sources of liquidity, the Bank believes that it will have the necessary resources to meet these obligations should the need arise.

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

The following table presents, as of December 31, 2007, the Company's and the Bank's fixed and determinable contractual obligations by payment date.  The payment amounts represent those amounts contractually due to the recipient

**Contractual Obligations and Other   Commitments**
**December 31, 2007**
**(Dollars in Thousands)**    
                 
                 
 
**Less than**
**1 to 3  **
**3 to 5     **    
**Total   **
**One Year**
**Years  **
**Years     ****Contractual   Cash Obligations**
 
 
     
  Operating   leases
$           7
$           5
$         2
$       0      Time deposits
  362,889
  333,012
  25,371
  4,506         Total contractual cash   obligations
$362,896
$333,017
$25,373
$4,506    
Obligations under non-cancelable operating lease agreements totaled $7 at December 31, 2007.  These obligations are payable over two years as shown in NOTE 11 to the Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES.  Further information regarding the nature of time deposits is outlined in NOTE 6 to the Consolidated Financial Statements - DEPOSITS.

**CAPITAL RESOURCES**

Total stockholders' equity was $82,112, $76,663, and $70,559 at December 31, 2007, 2006, and 2005, representing 9.49%, 9.15%, and 8.89% of total assets, respectively.  At December 31, 2007, the Company and the Bank exceeded quantitative measures established by regulation to ensure capital adequacy (see NOTE 15 to the Consolidated Financial Statements - REGULATORY MATTERS).  Capital is considered sufficient by management to meet current and prospective capital 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's assets and liabilities.  One result of this inflationary effect is an increased need for equity capital.  Income is also affected by inflation.  While interest rates have traditionally moved with inflation, the effect on net income is diminished because both interest earned on assets and interest paid on liabilities vary directly with each other.  In some cases, however, rate increases are delayed on fixed-rate instruments.  Loan demand normally declines during periods of high inflation. Inflation has a direct impact on the Bank's noninterest expense. The Bank responds to inflation changes through re-adjusting noninterest income by repricing services.

**ACCOUNTING ISSUES**

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

**** 32

**RISKS AND UNCERTAINTIES**

In the normal course of its business the Company encounters two significant types of risks: economic and regulatory.  There are three main components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets.  Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments.  Market risk, in regard to lending, reflects changes in the value of collateral underlying loans receivable 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.  The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators' judgments based on information available to them at the time of their examination.

**ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk, in regard to interest rate risk, is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from the interest rate risk inherent in its lending, deposit and borrowing activities.  Management actively monitors and manages its interest rate risk exposure.  In addition to other risks which the Company manages in the normal course of business, such as credit quality and liquidity risk, management considers interest rate risk to be a significant market risk that could potentially have a material effect on the Company's financial condition and results of operations (See Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Net Income - Net Interest Income).  Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of the Company's business activities.

 33

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**CNB CORPORATION AND SUBSIDIARY  REPORT ON CONSOLIDATED FINANCIAL STATEMENTS  FOR THE YEARS ENDED  DECEMBER 31, 2007, 2006 and 2005**  34

***CNB CORPORATION AND SUBSIDIARY  CONWAY, SOUTH CAROLINA*CONTENTS   **

**PAGE     **** ****REPORTS 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**
36 - 38      39      40      41      42      43      44 - 63
****35
**Elliott Davis, LLC  Advisors-CPAs-Consultants  1901 Main Street, Suite 1650  P.O. Box 2227  Columbia, SC  29202-2227REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM**

The Directors and Stockholders***CNB Corporation***Conway, South Carolina  We have audited the consolidated balance sheets of CNB Corporation and  subsidiary as of December 31, 2007 and 2006, and the related consolidated  statements of income, stockholders' equity, and comprehensive income and cash  flows for each of the three years in the period ended December 31, 2007.   These consolidated financial statements are the responsibility of the  Company's management.  Our responsibility is to express an opinion on  these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company  Accounting Oversight Board (United States).  Those standards require that  we plan and perform the audits to obtain reasonable assurance about whether  the consolidated financial statements are free of material misstatement.   An audit includes examining, on a test basis, evidence supporting the amounts  and disclosures in the financial statements.  An audit also includes  assessing the accounting principles used and significant estimates made by  management as well as evaluating the overall financial statement presentation.   We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above  present fairly, in all material respects, the financial position of CNB  Corporation and subsidiary as of December 31, 2007 and 2006, and the results  of their operations and their cash flows for each of the three years in the  period ended December 31, 2007 in conformity with U.S. generally accepted  accounting principles.

We also have audited, in accordance with the standards of the Public Company  Accounting Oversight Board (United States), CNB Corporation and subsidiary's  internal control over financial reporting as of December 31, 2007, based on  criteria established in "Internal Control-Integrated Framework" issued by the  Committee of Sponsoring Organizations of the Treadway Commission (COSO) and  our report dated March 13, 2008 expressed an unqualified opinion thereon.

**Elliott Davis LLC**/s/ Elliott Davis LLC  Columbia, South Carolina  March 13, 2008****

****36

**Elliott Davis, LLC  Advisors-CPAs-Consultants  1901 Main Street, Suite 1650  P.O. Box 2227  Columbia, SC  29202-2227UNQUALIFIED OPINION ON INTERNAL  CONTROL OVER FINANCIAL REPORTING REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders***CNB Corporation***Conway, South Carolina

We have audited CNB Corporation and subsidiary's internal control over  financial reporting as of December 31, 2007, based on criteria established in  "Internal Control-Integrated Framework," issued by the Committee of Sponsoring  Organizations of the Treadway Commission (COSO)*.*  CNB  Corporation's management is responsible for maintaining effective internal  control over financial reporting and for its assessment of the effectiveness  of internal control over financial reporting included in the accompanying  Management's Report on Internal Control Over Financial Reporting.  Our  responsibility is to express an opinion on the effectiveness of the company's  internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company  Accounting Oversight Board (United States).  Those standards require that  we plan and perform the audit to obtain reasonable assurance about whether  effective internal control over financial reporting was maintained in all  material respects. Our audit included obtaining an understanding of internal  control over financial reporting, assessing the risk that a material weakness  exists, and testing and evaluating the design and operating effectiveness of  internal control based on the assessed risk.  Our audit also included  performing such other procedures as we considered necessary in the  circumstances.  We believe that our audit provides a reasonable basis for  our opinion.

A company's internal control over financial reporting is a process designed to  provide reasonable assurance regarding the reliability of financial reporting  and the preparation of financial statements for external purposes in  accordance with generally accepted accounting principles.  A company's  internal control 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  assets of the company; (2) provide reasonable assurance that transactions are  recorded as necessary to permit preparation of financial statements in  accordance with generally accepted accounting principles, and that receipts  and expenditures of the company are being made only in accordance with  authorizations of management and directors of the company; and (3) provide  reasonable assurance regarding prevention or timely detection of unauthorized  acquisition, use, or disposition of the company's assets that could have a  material effect on the financial statements.

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

  37

In our opinion, CNB Corporation maintained, in all material  respects, effective internal control over financial reporting as of December  31, 2007, based on criteria established in Internal Control-Integrated  Framework issued by the Committee of Sponsoring Organizations of the Treadway  Commission (COSO).

We have also audited, in accordance with the standards of the Public Company  Accounting Oversight Board (United States), the consolidated balance sheets of  CNB Corporation and subsidiary as of December 31, 2007 and 2006, and the  related consolidated statements of income, stockholders' equity, and  comprehensive income and cash flows for each of the three years in the period  ended December 31, 2007, and our report dated March 13, 2008 expressed an  unqualified opinion thereon.

**Elliott Davis LLC**/s/Elliott Davis LLC  Columbia, South Carolina  March 13, 2008

  38
***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED 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 $7,731 in 2007 and $4,380 in      2006)**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         Federal Home Loan Bank advances         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 868,422 and 789,774 shares in 2007 and 2006, respectively         Capital in excess of par value of stock         Retained earnings         Accumulated other comprehensive income (loss)         Less 16,316 in 2007 and 4,495 in 2006 shares held in Treasury, at cost               Total stockholders' equity
**    2007    **      $   20,941      26,000      206,133      7,711      2,297      573,751      6,507567,244      22,928      7,396      4,988**$  865,638**$  112,450    579,83992,289      60,936      2,377      15,000      4,475       8,449         783,5268,684      55,939      19,047        1,02584,695              2,583            82,112**$  865,638**
**     2006    **$   34,872      26,000      173,582      4,315      1,701      567,325      6,476560,849      22,988      6,571        6,744**$  837,622**      $  129,763    545,289675,052      72,330      2,865      -      4,123        6,589          760,9597,898      43,555      27,017     (1,120)77,350                 687            76,663**$  837,622**
The accompanying notes are an integral part  of these consolidated financial statements.  39
***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED 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         Non-marketable equity securities            Federal Reserve Bank dividend income            Federal Home Loan Bank dividend income               Total income on non-marketable equity securities         Federal funds sold               Total interest income**INTEREST EXPENSE         **Deposits         Securities sold under repurchase agreements         United States Treasury demand notes         Federal Home Loan Bank advances               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**Adjusted for the effect of a 10% stock dividend issued during 2007.
**     2007   **$   43,878      7,337          9018,238      7                  96103             1,536           53,75519,976      2,800      74             8          22,85830,897      1,145          29,7523,621      3,372             9            7,00210,453      3,591      1,313      2,025      662      490      953       2,532           22,01914,735       5,015**$    9,720      $    11.29**
**    2006    **$   41,340      5,825          8026,627      10                  99109             1,335           49,41116,229      1,611      52          504           18,39631,015          808           30,2073,279      3,679             -               6,95810,696      2,988      1,372      1,875      760      562      1,048       3,038           22,33914,826       4,780**$   10,046      $     11.60**
**    2005    **$   30,953      6,405          8817,286      7                  5158                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      $     10.93**
The accompanying notes are an integral part  of these consolidated financial statements.  40
***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  For the years ended December 31, 2007, 2006, and 2005  (amounts, except share data, in thousands)***
** **
** Common stock          Shares    Amount**
**Capital in        excess of        par value     of stock  **
**Retained  earnings **
**Accumulated      other            comprehensiveincome    **
**Treasury     stock     **
**Total              stockholders  equity      ****BALANCE, DECEMBER 31, 2004**         Net income         Cash dividend declared, $5.00 per share         Treasury stock transactions, net         Gain on sale of treasury stock         Net change in unrealized holding            loss, net of income taxes of ($1,697)**BALANCE, DECEMBER 31, 2005**         Net income         Cash dividend declared, $5.25 per share         Treasury stock transactions, net         Gain on sale of treasury stock         Net change in unrealized holding             gain, net of income taxes of $460**BALANCE, DECEMBER 31, 2006**   Net income         Cash dividend declared, $5.25 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             gain, net of income taxes of $1,429**BALANCE, DECEMBER 31, 2007**
      789,774      -         -         -         -           -   789,774      -         -         -         -           -   789,774      -         -         78,648      -         -         -           -   **868,422**
      $ 7,898      -         -         -         -          -   7,898      -         -         -         -           -   7,898      -         -         786      -         -         -           -   **$8,684**
      $43,543      -         -         -         4          -   43,547      -         -         -         8        -   43,555      -         -         12,368      -         -         16        -   **$55,939**
      $15,558        9,478        (3,942)       -          -             -    21,094        10,046        (4,123)       -          -            -    27,017        9,720        (4,475)       (13,154)       (61)       -          -            -    **$19,047 **
      $     734           -             -             -             -         (2,544)          (1,810)          -             -             -             -            690     (1,120)          -             -             -             -             -             -            2,145    **$   1,025    **
      $   (148)          -             -             (22)          -               -       (170)          -             -             (517)          -               -       (687)          -             -             -             -             (1,896)          -                -       **$ (2,583)    **
      $67,585           9,478           (3,942)          (22)          4        (2,544)          70,559           10,046           (4,123)          (517)          8            690     76,663           9,720           (4,475)          -             (61)          (1,896)          16        2,145     **$82,112    **
  The accompanying notes are an integral part of these consolidated financial  statements.  41
***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED 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**
***  2*007**          $  9,720       2,151          (6)**$ 11,865**
**    2006**          $ 10,046       690             - **$ 10,736**
**   2005**          $   9,478       (2,543)           (1)**$   6,934** 
******The accompanying notes are an integral part of  these consolidated financial statements.

42

***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED 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            Discount accretion and premium amortization on investment securities            (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 in accrued interest receivable               (Increase)/decrease in other assets               Increase 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 held to maturity         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/(decrease) in securities sold under repurchase agreements         Increase/(decrease) in United States Treasury demand notes         Increase in Federal Home Loan Bank advances         Cash paid for fractional shares         Treasury stock transactions, net         Gain on sale of treasury stock                  Net cash provided by financing activities                  Net increase/(decrease) in cash and cash equivalents**CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR      CASH AND CASH EQUIVALENTS, END OF YEAR      CASH PAID FOR**         Interest         Income taxes
**    2007***   *      $  9,720       1,285       1,145       16       (324)      (9)      (15)      -       (825)      374      1,860    13,227 2,325       1,500       82,086       (4,895)      (113,055)      -       79       (7,668)      (596)    (1,225)        (41,449)(4,123)      17,237       (11,394)      (488)      15,000      (61)      (1,896           16           14,291 (13,931)   60,872 **$ 46,941**** ****$ 21,480 $   5,086 **
**     2006    **      $  10,046       1,202       808       (212)      54       -         -         -         (1,117)      289          339     11,409       -         935       39,014       (1,128)      (35,139)      305       61       (63,710)      (242)   (3,921) (63,825)      (3,942)      8,576       29,034       66       -        -        (517)           8   33,827       (18,589)   79,461 **$ 60,872 $ 16,294 ****$    5,285**
**     2005****   **      $   9,478       983       1,275       (613)      -        (2)      (23)      14       (772)      (409)     3,315      13,2464,005       399       26,394       -         (1,006)      -         103       (97,418)      (145)   (3,929) (71,597)      (3,352)      106,741       9,346       (698)      -         -         (22)            4  112,019       53,668     25,793**$ 79,461**** $   9,418 $   5,038 **
The accompanying notes are an integral part of these consolidated financial  statements.  43
***CNB CORPORATION AND SUBSIDIARY  NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS***

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

**Principles of consolidation and nature of operations**  The consolidated financial statements include the accounts  of***CNB Corporation*** (the "Company") and its wholly-owned  subsidiary, The Conway National Bank (the "Bank").  The Company operates  as one business segment.  All significant intercompany balances and  transactions have been eliminated.  The Bank operates under a national  bank charter and provides full banking services to customers.  The Bank  is subject to regulation by the Office of the Comptroller of the Currency and  the Federal Deposit Insurance Corporation.  The Company is subject to  regulation by the Federal Reserve Board.

**Estimates**  The preparation of consolidated financial statements in  conformity with accounting principles generally accepted in the United States  of America requires management to make estimates and assumptions that affect  the reported amounts of assets and liabilities and disclosure of contingent  assets and liabilities as of the dates of the consolidated balance sheets and  the consolidated statements of income for the periods covered.  Actual  results could differ from those estimates.

**Concentrations of credit risk**Financial instruments, which potentially subject the  Company to concentrations of credit risk, consist principally of loans  receivable, investment securities, federal funds sold and amounts due from  banks. 

The Company makes loans to individuals and small businesses for various  personal and commercial purposes primarily in Horry County, South Carolina and  the Waccamaw Neck area of Georgetown County, South Carolina.  The  Company's loan portfolio is not concentrated in loans to any single borrower  or a relatively small number of borrowers. The Company monitors concentrations  of loans to classes of borrowers or industries that would be similarly  affected by economic conditions.  As of December 31, 2007, the Company  had concentrations of loans to the following classes of borrowers or  industries: Land Subdivision and Development, Single Family Housing, Lessors  of Residential Buildings, Lessors of Non-Residential Buildings, and Other Real  Estate Related Activities.  The amount of commercial purpose loans  outstanding to these groups of borrowers as of December 31, 2007 was  $24,432,000, $27,013,000, $23,025,000, $30,011,000, and $22,551,000,  respectively.  These amounts represented 28.37%, 31.37%, 26.74%, 34.85%,  and 26.19% of Total Capital, as defined for regulatory purposes, for the same  period, also respectively.

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

The Company's investment portfolio consists principally of obligations of the  United States, its agencies or its corporations and general obligation  municipal securities.  In the opinion of Management, there is no  concentration of credit risk in its investment portfolio.  The Company  places its deposits and correspondent accounts with and sells its federal  funds to high quality institutions.  Management believes credit risk  associated with correspondent accounts is not significant.

  44                                                                                                                                                                                    *Continued*

***NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  AND ACTIVITIES, Continued*Cash and cash equivalents**  Cash and cash equivalents include cash and due from banks  and federal funds sold.  Generally, both cash and cash equivalents are  considered to have maturities of three months or less, and accordingly, the  carrying amount of such instruments is deemed to be a reasonable estimate of  fair value. 

**Investment securities**  The Company accounts for investment securities in accordance  with Statement of Financial Accounting Standards ("SFAS") No. 115*,  "Accounting for Certain Investments in Debt and Equity Securities."*   This statement requires that the Company classify debt securities 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  the amortization of premiums and the accretion of discounts into interest  income using a method which approximates a level yield. To qualify as held to  maturity the Company must have the intent and ability to hold the securities  to maturity. Trading securities are carried at market value.  The Company  has no trading securities.  Gains or losses on disposition of securities  are based on the difference between the net proceeds and the adjusted carrying  amount of the securities 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 nonrefundable fees and certain  direct costs associated with the origination of loans in accordance with SFAS  No. 91, "Accounting for Nonrefundable Fees and Costs Associated with  Originating or Acquiring Loans and Initial Direct Costs of Leases-an amendment  of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement  No. 17."  Under SFAS No. 91 nonrefundable fees and certain direct costs  associated with the origination of loans are deferred and recognized as a  yield adjustment over the contractual life of the related loans until such  time that the loan is sold. 

The Company accounts for impaired loans in accordance with SFAS No. 114, "*Accounting  by Creditors for Impairment of a Loan."*  This standard requires that  all creditors value loans at the loan's fair value if it is probable that the  creditor will be unable to collect all amounts due according to the terms of  the loan agreement. Fair value may be determined based upon the present value  of expected cash flows, market price of the loan, if available, or value of  the underlying collateral. Expected cash flows are required to be discounted  at the loan's effective interest rate.  SFAS No. 114 was amended by SFAS  No. 118 to allow a creditor to use existing methods for recognizing interest  income on an impaired loan and by requiring additional disclosures about how a  creditor recognizes interest income on an impaired loan.

Under SFAS No. 114, as amended by SFAS No. 118, when the  ultimate collectibility of an impaired loan's principal is in doubt, wholly or  partially, all cash receipts are applied to principal.  When this doubt  does not exist, cash receipts are applied under the contractual terms of the  loan agreement. Once the reported principal balance has been reduced to zero,  future cash receipts are applied to interest income, to the extent that any  interest has been foregone. Further cash receipts are recorded as recoveries  of any amounts previously charged off.

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

**Allowance for loan losses**  The allowance for loan losses is based on management's  ongoing evaluation of the loan portfolio and reflects an amount that, in  management's opinion, is adequate to absorb losses in the existing portfolio.   In evaluating the portfolio, management takes into consideration numerous  factors, including current economic conditions, prior loan loss experience,  the composition of the loan portfolio, and management's estimate of  anticipated credit losses.  Loans are charged against

  45                                                                                                                                                                            *Continued*

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

the allowance at such time as they are determined to be  losses.  Subsequent recoveries are credited to the allowance.   Management considers the year-end allowance adequate to cover losses in the  loan portfolio; however, management's judgment is based upon a number 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 that  charge-offs in future periods will not exceed the allowance for loan losses or  that additional increases in the allowance for loan losses will not be  required.

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

**Premises and equipment**  Premises and equipment are stated at cost less accumulated  depreciation and amortization. Depreciation and amortization are computed over  the estimated useful lives of the assets using primarily the straight-line  method. Additions to premises and equipment and major replacements or  improvements are capitalized at cost. Maintenance, repairs and minor  replacements are expensed when incurred.  Gains and losses on routine  dispositions are reflected in current operations.

**Advertising expense**  Advertising, promotional and other business development  costs are generally expensed as incurred.  External costs incurred in  producing media advertising are expensed the first time the advertising takes  place. External costs relating to direct mailing costs are expensed in the  period in which the direct mailings are sent. Advertising, promotional and  other business development costs of $508,000, $596,000 and $476,000, were  included in the Company's results of operations for 2007, 2006, and 2005,  respectively.

**Securities sold under agreements to repurchase**  The Bank enters into sales of securities under agreements to  repurchase.  Fixed-coupon repurchase agreements are treated as financing,  with the obligation to repurchase securities sold being reflected as a  liability and the securities underlying the agreements remaining as assets.

**Income taxes**  Income taxes are accounted for in accordance with SFAS No.  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 financial statement expense,  or income is reported for financial statement purposes prior to being reported  for tax purposes).  In addition, deferred tax assets are recognized on  all deductible temporary differences (reversing differences where financial  statements expense initially exceeds tax deductions, or income is reported for  tax purposes prior to being reported for financial statement purposes).  Valuation allowances are established to reduce deferred tax assets if it is  determined to be *"*more likely than not*"* that all or some portion  of the potential deferred tax assets will not be realized.

In 2006, the FASB issued Interpretation No. 48 (FIN 48),  "Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No.  109." FIN 48 clarifies the accounting for uncertainty in income taxes  recognized in an enterprise's financial statements in accordance with SFAS No.  109, "Accounting for Income Taxes." FIN 48 also prescribes a recognition  threshold and measurement of a tax position taken or expected to be taken in  an enterprise's tax return. FIN 48 was effective for fiscal years beginning  after December 15, 2006. Accordingly, the Company adopted FIN 48 effective  January 1, 2007. The adoption of FIN 48 did not have any impact on the  Company's consolidated financial position.

**Reclassifications**  Certain amounts in the financial statements for the years  ended December 31, 2005 and 2006 have been reclassified, with no effect on net  income, to be consistent with the classifications adopted for the year ended  December 31, 2007.

  46

                                                                                                                                                                                         *Continued   *

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

**Net income per share**  The Company computes net income per share in accordance with  SFAS No. 128, *"Earnings Per Share."*  Net income per share is  computed on the basis of the weighted average number of common shares  outstanding: 861,065 in 2007, 865,589 in 2006 and 867,346 in 2005.  The  Company does not have any dilutive instruments and therefore only basic net  income per share is presented.  Net income per share and the weighted average  common shares outstanding have been adjusted for all periods presented to  reflect the 10% stock dividend issued in 2007.

**Fair values of financial instruments**  SFAS No. 107, *"Disclosures About Fair Value of Financial  Instruments,"* as amended by SFAS No. 119 and SFAS No. 133, requires  disclosure of fair value information for financial instruments, whether or not  recognized in the balance sheet, when it is practicable to estimate the fair  value.  SFAS No. 107 defines a financial instrument as cash, evidence of  an ownership interest in an entity or contractual obligations which require  the exchange of cash or other financial instruments.  Certain items are  specifically excluded from the disclosure requirements, including the  Company's common stock.  In addition, other nonfinancial instruments such  as premises and equipment and other assets and liabilities are not subject to  the disclosure requirements.

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

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

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

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

***          Other investments -***No ready market exists for  Federal Reserve and Federal Home Loan Bank Stock and they have no quoted  market value.  However,            redemption of this stock has historically been at  par value.  Management has determined it is not practicable to estimate  the fair value and has not performed            an impairment analysis.

***          Loans*** - For variable rate loans that reprice  frequently and for loans that mature within one year, fair values are based on  carrying values.  Fair values for all            other loans are estimated using  discounted cash flow analyses, with interest rates currently being offered for  loans with similar terms to borrowers of similar            credit quality.  Fair  values for impaired loans are estimated 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 deposit approximate their fair values at the reporting date.   Fair values for long-term fixed-rate certificates          of deposit are estimated  using a discounted cash flow calculation that applies interest rates currently  being offered on certificates to a schedule of aggregated            expected monthly  maturities.

***          Short-term borrowings*** - The carrying amounts of  borrowings under repurchase agreements, federal funds purchased, U. S.  Treasury demand notes, and            Federal Home Loan Bank advances approximate their  fair values.

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

  47                                                                                                                                                                            *Continued*

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

**Recently issued accounting standards**

The following is a summary of recent authoritative  pronouncements that may affect accounting, reporting, and disclosure of  financial information by the Company:

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS  No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a  framework for measuring fair value in generally accepted accounting  principles, and expands disclosures about fair value measurements. This  standard eliminates inconsistencies found in various prior pronouncements but  does not require any new fair value measurements. SFAS 157 is effective for  the Company on January 1, 2008 and will not impact the Company's accounting  measurements but is expected to result in additional disclosures.

In September 2006, The FASB ratified the consensuses reached by the FASB's  Emerging Issues Task Force ("EITF") relating to EITF 06-4, "Accounting for the  Deferred Compensation and Postretirement Benefit Aspects of Endorsement  Split-Dollar Life Insurance Arrangements" ("EITF 06-4").  Entities  purchase life insurance for various reasons including protection against loss  of key employees and to fund postretirement benefits.  The two most common  types of life insurance arrangements are endorsement split dollar life and  collateral assignment split dollar life. EITF 06-4 covers the former and EITF  06-10 (discussed below) covers the latter.  EITF 06-4 states that entities  with endorsement split-dollar life insurance arrangements that provide a  benefit to an employee that extends to postretirement periods should recognize  a liability for future benefits in accordance with SFAS No. 106, "*Employers'  Accounting for Postretirement Benefits Other Than Pensions," (if, in  substance, a postretirement benefit plan exists)*or Accounting Principles  Board ("APB") Opinion No. 12, "*Omnibus Opinion - 1967" (if the arrangement  is, in substance, an individual deferred compensation contract). *  Entities should recognize the effects of applying this Issue through either  (a) a change in accounting principle through a cumulative-effect adjustment to  retained earnings or to other components of equity or net assets in the  statement of financial position as of the beginning of the year of adoption or  (b) a change in accounting principle through retrospective application to all  prior periods.  EITF 06-4 is effective for the Company on January 1, 2008.   The Company does not believe the adoption of EITF 06-4 will have a material  impact on its financial position, results of operations or cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF  06-5,"Accounting for Purchases of Life Insurance-Determining the Amount That  Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for Purchases of Life Insurance."  EITF 06-5 states that a  policyholder should consider any additional amounts included in the  contractual terms of the insurance policy other than the cash surrender value  in determining the amount that could be realized under the insurance contract.   EITF 06-5 also states that a policyholder should determine the amount that  could be realized under the life insurance contract assuming the surrender of  an individual-life by individual-life policy (or certificate by certificate in  a group policy). EITF 06-5 is effective for fiscal years beginning after  December 15, 2006.  The adoption of EITF 06-5 did not have a material  impact on the Company's financial position, results of operations and cash  flows.  

In March 2007, the FASB ratified the consensus reached on EITF 06-10,  "Accounting for Collateral Assignment Split-Dollar Life Insurance  Arrangements" ("EITF 06-10").  The postretirement aspect of this EITF is  substantially similar to EITF 06-4 discussed above and requires that an  employer recognize a liability for the postretirement benefit related to a  collateral assignment split-dollar life insurance arrangement in accordance  with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, if  the employer has agreed to maintain a life insurance policy during the  employee's retirement or provide the employee with a death benefit based on  the substantive agreement with the employee.  In addition, a consensus  was reached that an employer should recognize and measure an asset based on  the nature and substance of the collateral assignment split-dollar life  insurance arrangement.  EITF 06-10 is effective for the Company on January 1,  2008.  The Company does not believe the adoption of EITF 06-10 will have a  material impact on its financial position, results of operations or cash  flows.

  48                                                                                                                                                                                          *Continued*

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

**Recently issued accounting standards - continued**

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for  Financial Assets and Financial Liabilities - Including an amendment of FASB  Statement No. 115" ("SFAS 159"). This statement permits, but does not require,  entities to measure many financial instruments at fair value.  The objective  is to provide entities with an opportunity to mitigate volatility in reported  earnings caused by measuring related assets and liabilities differently  without having to apply complex hedge accounting provisions.  Entities  electing this option will apply it when the entity first recognizes an  eligible instrument and will report unrealized gains and losses on such  instruments in current earnings.  This statement 1) applies to all  entities, 2) specifies certain election dates, 3) can be applied on an  instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)  applies only to entire instruments.  One exception is demand deposit  liabilities which are explicitly excluded as qualifying for fair value.  With  respect to SFAS 115, available-for-sale and held-to-maturity securities at the  effective date are eligible for the fair value option at that date.  If the  fair value option is elected for those securities at the effective date,  cumulative unrealized gains and losses at that date shall be included in the  cumulative-effect adjustment and thereafter, such securities will be accounted  for as trading securities.  SFAS 159 is effective for the Company on January  1, 2008.  The Company is currently analyzing the fair value option that is  permitted, but not required, under SFAS 159.  

In November 2007, the Securities and Exchange Commission  ("SEC") issued Staff Accounting Bulletin No. 109, "Written Loan Commitments  Recorded at Fair Value Through Earnings" ("SAB 109").  SAB 109 expresses the  current view of the SEC staff that the expected net future cash flows related  to the associated servicing of the loan should be included in the measurement  of all written loan commitments that are accounted for at fair value through  earnings.   SEC registrants are expected to apply this guidance on a  prospective basis to derivative loan commitments issued or modified in the  first quarter of 2008 and thereafter.  The Company is currently analyzing the  impact of this guidance, which relates to the Company's mortgage loans held  for sale. 

In December 2007, the FASB issued SFAS No. 141(R), "Business  Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R)  establishes principles and requirements for how an acquirer in a business  combination recognizes and measures in its financial statements the  identifiable assets acquired, the liabilities assumed, and any controlling  interest; recognizes and measures goodwill acquired in the business  combination or a gain from a bargain purchase; and determines what information  to disclose to enable users of the financial statements to evaluate the nature  and financial effects of the business combination.  FAS 141(R) is effective  for acquisitions by the Company taking place on or after January 1, 2009.   Early adoption is prohibited. Accordingly, a calendar year-end company is  required to record and disclose business combinations following existing  accounting guidance until January 1, 2009.  The Company will assess the impact  of SFAS 141(R) if and when a future acquisition occurs.

Other accounting standards that have been issued or proposed by the FASB or  other standard-setting bodies that do not require adoption until a future date  are not expected to have a material impact on the consolidated financial  statements upon adoption.

  49                                                                                                                                                                                          *Continued****NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  AND ACTIVITIES, Continued***
**Risks and uncertainties**

              In the normal course of its business the  Company encounters two significant types of risks: economic and regulatory.  There are three main components of economic risk: interest rate risk, credit  risk and market risk.  The Company is subject to interest rate risk to  the degree that its interest-bearing liabilities mature or reprice at  different speeds, or on different basis, than its interest-earning assets.   Credit risk is the risk of default on the Company's loan portfolio that  results from borrower's inability or unwillingness to make contractually  required payments.  Market risk, as it relates to lending and real estate  held for operating locations, reflects changes in the value of collateral  underlying loans receivable 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.  The Company also undergoes periodic examinations  by the regulatory agencies, which may subject it to further changes with  respect to asset valuations, amounts of required loss allowances and operating  restrictions from the regulators' judgments based on information available to  them at the time of their examination.

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

               The Bank is required to maintain average reserve balances  either at the Bank or on deposit with the Federal Reserve Bank.  The  average amounts of these reserve balances for the years ended December 31,  2007 and 2006 were approximately $10,486,000 and $19,381,000, respectively.

  50

***NOTE 3 - INVESTMENT SECURITIES***

     The amortized cost and fair value of investment securities are based on  contractual maturity dates.  Actual maturities may differ from the  contractual maturities because borrowers may have the right to prepay  obligations with or without penalty.  The amortized cost, approximate  fair value, and expected maturities of investment securities are summarized as  follows (tabular amounts in thousands):
** **
**                                December      31, 2007                                     Amortized             Unrealized Holding         Fair              ****AVAILABLE FOR SALE**         Government sponsored enterprises            Within one year            One to five years            Six to ten years         State, county and municipal            Within one year            One to five years            Six to ten years            Over ten years         Mortgage backed            Six to ten years            Over ten years         Other Investments            CRA Qualified Investment Fund            Master Card International Stock            Total available for sale**HELD TO MATURITY**         State, county and municipal            Within one year            One to five years            Six to ten years           Over ten years            Total held to maturity
**   Cost      **      $    61,611      103,464      18,276          183,351209      6,244      1,916      10,758            19,127389          846             1,235701            11                712**$ 204,425**$        250      1,438      3,764       2,259**$     7,711**
**  Gains   **      $         2      1,408       407          1,8173      166      16         10             19511           4               15-            -                  -   **$  2,027**$     -         32      20      -   **$     52**
** Losses **      $   236      8       -              244-         -         6        49              55-           20              20-           -                 -   **$    319**$     -         -          27**$     32**
**  Value            **      $   61,377               104,864              18,683                  184,924         212               6,410               1,926              10,719                    19,267         400                   830                      1,230         701                     11                         712         **$ 206,133         **$         250               1,470               3,779                2,232         **$     7,731         **
  51                                                                                                                                                                                                *Continued*

***NOTE 3 - INVESTMENT SECURITIES, Continued***
** **
**                              December      31, 2006                                      Amortized           Unrealized Holding          Fair              ****AVAILABLE FOR SALE**   Government sponsored enterprises            Within one year            One to five years            Six to ten years         State, county and municipal            Within one year            One to five years            Six to ten years            Over ten years         Mortgage backed            Six to ten years            Over ten years         Other Investments            CRA Qualified Investment Fund            Master Card International Stock            Total available for sale**HELD TO MATURITY**         State, county and municipal            Within one year            One to five years            Over ten years            Total held to maturity
**   Cost      **      $    68,676      86,891        1,996          157,5634,531      7,931      1,511        2,711            16,684456          389                845346            10                356**$ 175,448**$     1,345      1,841       1,129**$     4,315**
**  Gains   **      $    -         14      -              ** **141      173      34      -             20812      -               12-         -               -   **$  234**$       7      37       21**$     65**
** Losses **      $     687      1,374         -             2,0613      1      -               8                12-             27                27-            -                  -   **$  2,100**$      -         -           -   **$      -   **
**  Value            **      $   67,989               85,531                1,996                  155,516         4,529               8,103               1,545                2,703                    16,880         468                   362                         830         346                     10                         356         **$ 173,582         **$     1,352               1,878                1,150         **$     4,380         **
  52

*Continued*

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

      The following table shows gross unrealized losses and  fair value, aggregated by investment category, and length of time that  individual securities have been in a continuous unrealized loss position, at  December 31, 2007 (tabular amounts in thousands): 
**Available      for Sale**
** ** ** **
**Less than                             twelve months            **
**Twelve months                                 or more             **
**               Total                 ** ** **** **
**Unrealized**
**Unrealized**
**Unrealized** ** **** **
**Fair value**
**     losses    **
****
**** |