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| **SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| **Washington****, D.C.****  20549**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| **FORM 10-K**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| [**X**]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the fiscal year ended**                                    December  31, 2006                                          **                                                                                                                                            |
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| [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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|                    For  the transition period from                                                    to                                                        |
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| Commission file number:  **000-24523**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| ***                              CNB  Corporation                              ***                                                                                                                                                                                                                                                                                                                                                                                                    |
| (Exact name of registrant as specified  in its charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| **                        South Carolina                                    **                                                                                                                                                                                                                                                                                                                                                                                                        |                                                **                       57-0792402                ** |
| (State or other jurisdiction of  incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                               (I.R.S.  Employer Identification No. ) |
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| **1400 Third Avenue, P.O. Box 320****, Conway, South Carolina****                **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        **                            29528                      ** |
| (Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                          (Zip  Code)                    |
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| (Registrant's telephone number,  including area code):  **(843) 248-5721**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
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| Securities registered pursuant to  section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| **None**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
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| Securities registered pursuant to  Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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| **Common Stock, $10.00 par value**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (Title of class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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|      Indicate  by check mark if the registrant is a well-known seasoned issuer, as defined  in Rule 405 of the Securities Act. [   ] Yes [X] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
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|      Indicate  by check mark if the registrant is not required to file reports pursuant to  Section 13 or Section 15(d) of the Act. [   ] Yes [X] No                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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|      Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 or 15(d) of the Securities  Exchange Act of 1934 during  the preceding 12 months and (2) has been subject to such filing requirements  for the past 90 days. Yes [X]  No [  ]                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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|      Indicate  by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation  S-K is not contained herein, and will not be contained, to the best of  registrant's knowledge, in definitive proxy or information statements  incorporated by reference in Part III  of this  Form 10-K or any  amendment to this Form 10-K. [   ]                                                                                                                                                                                                                                                                                                                                                                                         |
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|      Indicate  by check mark whether the registrant is a large accelerated filer, an  accelerated filer, or a non-accelerated filer.  See definition of  "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange  Act. (Check one):  Large accelerated filer [   ]  Accelerated filer [X]   Non-accelerated filer [   ]                                                                                                                                                                                                                                                                                                                                                                          |
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|      Indicate  by check mark whether the registrant is a shell company (as defined in Rule  12b-2 of the Exchange Act).  [   ] Yes [X ]  No.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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|     As  of March 1, 2007, 784,968 shares of Common Stock of CNB Corporation were  outstanding.  As of June 30, 2006, 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 $95,692,551.                                                                                                                                                                                                                                                                                                                                                                              |
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| Documents  incorporated by reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Portions of the Company's Proxy Statement to be used in connection with the  Annual Meeting of Stockholders to be held May 8, 2007 are incorporated by  reference in Part III of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| **CNB CORPORATION AND  SUBSIDIARY  2006 ANNUAL REPORT ON FORM 10-K** |
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| **TABLE OF CONTENTS**                                                |
|                                                                      |  | ** ** |
|                                                                      | **PART I** | ** ** |
|                                                                      |  | **Page ** |
| **ITEM 1 **                                                     | **Description of Business** | 1-21 |
| **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** | 34-61 |
| **ITEM 9 **                                                     | **Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure** | 62 |
| **ITEM 9A **                                                    | **Controls and Procedures** | 62 |
| **ITEM 9B**                                                          | **Other Information** | 62 |

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

 

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**FORWARD-LOOKING STATEMENTS**

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

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

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

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

CNB Corporation (the "Company") is a 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 tobanking or to acquire existing businesses already engaged in such activities,the Company has not engaged in, and has no present intent to engage in, such otherpermissible activities.

**DESCRIPTION OF THE SUBSIDIARY**

The Bank is an independent community bank engaged in the general commercialbanking business in Horry County and the "Waccamaw Neck" portion of 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 thirteenbranch 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, and a MasterCard/Visa program. The Bank offers discount brokerageservices through a correspondent relationship.  Additionally, the Bankprovides long-term mortgage loans through its secondary mortgage departmentwhich acts in an agency only capacity for various investors.  The Bank does notprovide trust services; does not sell annuities; does not sell mutual funds;and does not sell 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, 2006 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."

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**COMPETITION**

The Bank actively competes with other institutions in Horry County and the "Waccamaw Neck" region of Georgetown County in providing customers with deposit,credit and other financial services.  The principal competitors of theBank include local offices of five regional banks, five state-wide banks, thirteenlocally owned banks in Horry and Georgetown Counties and various otherfinancial and thrift institutions.  At June 30, 2006, the Bank ranked third in Horry County and ninth in Georgetown County in deposits among its competitors. The Bank alsocompetes with credit unions, money market funds, brokerage houses, insurancecompanies, mortgage companies, leasing companies, consumer finance companiesand other financial institutions. Significant competitive factors includeinterest rates on loans and deposits, prices and fees for services, officelocation, customer service, community reputation, and continuity of personnel.

**SUPERVISION AND REGULATION**

**General**

The Company and the Bank are subject to an extensive collection of state andfederal banking laws and regulations which impose specific requirements andrestrictions on, and provide for general regulatory oversight with respect to,virtually all aspects of the Company's and the Bank's operations.  TheCompany and the Bank are also affected by government monetary policy and byregulatory measures affecting the banking industry in general.  The actionsof the Federal Reserve System affect the money supply and, in general, theBank's lending abilities in increasing or decreasing the cost and availabilityof funds to the Bank.  Additionally, the Federal Reserve System regulatesthe availability of bank credit in order to combat recession and curbinflationary 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, theCompany must receive approval of, or give notice to (as applicable) the StateBoard prior to engaging in the acquisition of banking or non-bankinginstitutions or assets.

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

A number of obligations and restrictions are imposed on bank holding companiesand their depository institution subsidiaries by Federal law and regulatorypolicies that are designed to reduce potential loss exposure to the depositorsof such depository institutions and to the FDIC insurance funds in the eventthe depository institution is in danger of becoming insolvent or isinsolvent.  For example, under the policy of the Federal Reserve, a bankholding company is required to serve as a source of financial strength to itssubsidiary depository institutions and to commit resources to support suchinstitutions in circumstances where it might not do so absent suchpolicy.  In addition, the "cross-guarantee" provisions of the FederalDeposit Insurance Act, as amended ("FDIA"), require insured depositoryinstitutions under common control to reimburse the FDIC for any loss sufferedor reasonably anticipated by the FDIC as a result of the default of a commonlycontrolled insured depository institution or for any assistance provided by theFDIC to a commonly controlled insured depository institution in danger ofdefault.  The FDIC may decline to enforce the cross-guarantee provisionsif it determines that a waiver is in its best interest.  The FDIC's claimfor damages is superior to claims of stockholders of the insured depositoryinstitution or its holding company but is subordinate to claims of depositors,secured creditors and holders of subordinated debt (other than affiliates) ofthe commonly controlled insured depository 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.

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

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

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

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

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

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

**Payment of Dividends**

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

Each national banking association is required by federal law to obtain theprior approval of the OCC for the payment of dividends if the total of alldividends declared by the board of directors of such bank in any year willexceed the total of (i) such bank's net profits (as defined and interpreted byregulation) for that year plus (ii) the retained net profits (as defined andinterpreted by regulation) for the preceding two years, less any 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 thefinancial condition of the Bank, could include the payment of dividends), suchauthority may require, after notice and hearing, that such bank cease anddesist from such practice.  The OCC has indicated that paying dividendsthat deplete a national bank's capital base to an inadequate level would be anunsafe and unsound banking practice.  The Federal Reserve, the OCC and theFDIC have issued policy statements, which provide that bank holding companiesand insured banks should generally only pay dividends out of current operatingearnings.

**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.

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**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, beginning January 1, 2007, theFDIC will place each institution in one of four risk categories using atwo-step process based first on capital ratios (the capital group assignment)and then on other relevant information (the supervisory group assignment). Beginning January 1, 2007, rates will change between 5 and 43 cents per $100 inassessable deposits.

**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 loan operationsare subject to certain federal consumer credit laws and regulations promulgatedthereunder, including, but not limited to:  the federal Truth-In-LendingAct, governing disclosures of credit terms to consumer borrowers; the HomeMortgage Disclosure Act, requiring financial institutions to provide certaininformation concerning their mortgage lending; the Equal Credit Opportunity Actand the Fair Housing Act, prohibiting discrimination on the basis of certainprohibited factors in extending credit; and the Fair Debt Collection Act,governing the manner in which consumer debts may be collected by collectionagencies.  The deposit operations of the Bank are subject to the Truth inSavings Act, requiring certain disclosures about rates paid on savings accounts;the Expedited Funds Availability Act, which deals with disclosure of theavailability of funds deposited in accounts and the collection and return ofchecks by banks; the Right to Financial Privacy Act, which imposes a duty tomaintain certain confidentiality of consumer financial records and theElectronic Funds Transfer Act and regulations promulgated thereunder, whichgovern automatic deposits to and withdrawals from deposit accounts andcustomers' rights and liabilities arising from the use of automated tellermachines and other electronic banking services.  The Bank is also subjectto the requirements of the Community Reinvestment Act (the "CRA") which imposeson financial institutions an affirmative and ongoing obligation to meet thecredit needs of their local communities, including low and moderate-incomeneighborhoods, consistent with the safe and sound operation of thoseinstitutions. Each financial institution's actual performance in meetingcommunity credit needs is evaluated as part of the examination process, andalso is considered in evaluating mergers, acquisitions and applications to opena branch or facility.  As well, the Bank is subject to provisions of theGramm-Leach-Bliley Act of 1999 (See the section below of the same title).  TheBank is also subject to the Fair Credit Reporting Act, governing the use andprovision of information to credit reporting agencies; the Bank Secrecy Act,dealing with, among other things, the reporting of certain currencytransactions; and the USA Patriot Act, dealing with, among other things,requiring the establishment of anti-money laundering programs, includingstandards for verifying customer information at account opening.

**Other Safety and Soundness Regulations**

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

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

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

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**Interstate Banking**

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

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

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

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

Under provisions of the legislation and regulations adopted by the appropriateregulators, banks, securities firms and insurance companies are able tostructure new affiliations through a holding company structure or through afinancial subsidiary. The legislation creates a new type of bank holdingcompany called a "financial holding company" which has powers much moreextensive than those of standard holding companies.  These expanded powersinclude authority to engage in "financial activities," which are activitiesthat are (1) financial in nature; (2) incidental to activities that arefinancial in nature; or (3) complementary to a financial activity and that donot impose a safety and soundness risk.  Significantly, the permittedfinancial activities for financial holding companies include authority toengage in merchant banking and insurance activities, including insuranceportfolio investing.  A bank holding company can qualify as a financialholding company and expand the services it offers only if all of its subsidiarydepository institutions are well-managed, well-capitalized and have received arating of "satisfactory" on their last Community Reinvestment Act examination.

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

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

5

----

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

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

The Act and the regulations adopted pursuant to the Act create 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 financialinstitutions that are currently more capable than the Company of takingadvantage of the opportunity to provide a broader range of services. However,the Company continues to believe that its commitment to providing high quality,personalized service to customers will permit it to remain competitive in itsmarket area.

**Sarbanes-Oxley Act of 2002**

The Sarbanes-Oxley Act was signed into law on July 30, 2002, and mandatedextensive reforms and requirements for public companies.  The SEC hasadopted extensive new regulations pursuant to the requirements of the Sarbanes-OxleyAct.  The Sarbanes-Oxley Act and the SEC's implementing regulations haveincreased the Company's cost of doing business, particularly its fees forinternal and external audit services and legal services, and the law andregulations are expected to continue to do so.  However, the Company hasnot been affected by Sarbanes-Oxley and the SEC regulations in ways that arematerially different or more onerous than those of other public companies ofsimilar size and in similar business.

**Legislative Proposals**

Legislation which could significantly affect the business of banking isintroduced in Congress from time to time.  The Company cannot predict thefuture course of such legislative proposals or their impact on the Companyshould they be adopted.
| **Available  information **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| The Company electronically  files with the Securities and Exchange Commission ("SEC") its annual reports  on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on  Form 8-K, amendments to those reports filed or furnished pursuant to Section  13(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and proxy  materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on  the Internet, www.sec.gov, that contains reports, proxy and  information statements, and other information regarding issuers that file  electronically with the SEC. The Company also makes its filings available,  free of charge, through 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, 2006,2005, 2004.

6

----

|                                                                                                   |
|--------------------------------------------------------------------------------------------------------|
|  
**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:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.24%

** **

** **

** **

 
Annualized  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.

 
7

 
 
**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:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.30%

** **

** **

** **

 
Annualized  return on average stockholders' equity

** **

** **

13.41   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

41.60   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

9.70   

** **

** **

** **

 
  Average  total deposits

** **

** **

11.53   

** **

** **

** **

 
  Average  loans

** **

** **

15.59   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

92.43%

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
(1)

The  Company had no out-of-period adjustments or foreign activities.  Loan fees of  $566 are included in the above interest income.  Loans on a non-accrual  basis for the recognition of interest income 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.

 
8

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

 

 

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

** **

** **

**Interest**

**Avg. Ann.**

** **

** **

** **

**Avg.**

**Income/**

**Yield or**

** **

** **

** **

**Balance**

**Expense**

**   Rate   **

** **

** **

** **

**Assets:**

** **

** **

** **

** **

** **

** **

 
   Earning  assets:

** **

** **

** **

** **

** **

** **

 
      Loans,  net of unearned income(1)

$386,899

$  24,351     

6.29%

** **

** **

** **

 
      Securities:

** **

** **

** **

** **

** **

** **

 
        Taxable

174,016

6,656     

3.83   

** **

** **

** **

 
        Tax-exempt

23,832

1,450 (2)

6.08   

** **

** **

** **

 
      Federal  funds sold and securities purchased under 

** **

** **

** **

** **

** **

** **

 
        agreement  to resell

   25,732

         327     

1.27   

** **

** **

** **

 
          Total  earning assets

$610,479

$  32,784     

5.37   

** **

** **

** **

 
    Other  assets

    47,166

** **

** **

** **

** **

** **

 
          Total  assets

$657,645

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Liabilities  and stockholder equity**

** **

** **

** **

** **

** **

** **

 
    Interest-bearing  liabilities:

** **

** **

** **

** **

** **

** **

 
      Interest-bearing  deposits

$437,390

$    6,578     

1.50   

** **

** **

** **

 
      Federal  funds purchased and securities sold under

** **

** **

** **

** **

** **

** **

 
        agreement  to repurchase

29,251

348     

1.19   

** **

** **

** **

 
      Other  short-term borrowings

      1,097

           12     

1.09   

** **

** **

** **

 
          Total  interest-bearing liabilities

$467,738

$    6,938     

1.48   

** **

** **

** **

 
    Noninterest-bearing  deposits

 118,149

** **

** **

** **

** **

** **

 
    Other  liabilities

4,058

** **

** **

** **

** **

** **

 
    Stockholders'  equity

    67,700

** **

** **

** **

** **

** **

 
          Total  liabilities and stockholders' equity

$657,645

** **

** **

** **

** **

** **

 
    Net  interest income and yield as a percent of total

** **

** **

** **

** **

** **

** **

 
       earning  assets

$610,479

$  25,846     

4.23%

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
** **

** **

** **

** **

** **

** **

 
**Ratios:**

** **

** **

** **

** **

** **

** **

 
Annualized  return on average total assets

** **

** **

1.26%

** **

** **

** **

 
Annualized  return on average stockholders' equity

** **

** **

12.23   

** **

** **

** **

 
Cash dividends  declared as a percent of net income

** **

** **

40.47   

** **

** **

** **

 
Average  stockholders' equity as a percent of:

** **

** **

** **

** **

** **

** **

 
  Average  total assets

** **

** **

10.29   

** **

** **

** **

 
  Average  total deposits

** **

** **

12.19   

** **

** **

** **

 
  Average  loans

** **

** **

17.50   

** **

** **

** **

 
Average  earning assets as a percent of

** **

** **

** **

** **

** **

** **

 
   average  total assets

** **

** **

92.83%

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
** **

** **

 

** **

** **

** **

 
(1)

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

 
 

 
(2)

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

 
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 differencebetween the current and prior year's volume multiplied by rates earned or paid.

**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   Non-interest-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 does nothave a material effect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate. 

10

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

                                             
 

**Average**

**Average**

** **

** **

**Interest**

**Interest**

** **

**Change**

**Change**

 

**Volume**

**Volume**

**Yield/Rate**

**Yield/Rate**

**Earned/Paid**

**Earned/Paid**

** **

**Due to**

**Due to**

 

**2005**

**2004**

**2005**

**2004**

**2005**

**2004**

**Variance**

**Rate**

**Volume**

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

 $453,610

  $386,899

6.82%

6.29%

$30,953

$ 24,351

$ 6,602 

$ 2,050 

$ 4,552 

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

174,922

174,016

3.70%

3.83%

6,463

6,656

 (193)

(226)

33 

**    Tax-exempt   (2)**

21,464

23,832

6.22%

6.08%

1,335

1,450

(115)

32 

(147)

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

    23,953

   25,732

 3.27%

1.27%

      782

        327

      455 

       513 

       (58)
                                        
**Total   Earning Assets**

$673,949

$610,479

5.86%

5.37%

$39,533

$ 32,784

$ 6,749 

$  2,369 

$ 4,380 

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

$483,451

$437,390

2.02%

1.50%

$  9,779

$   6,578

$ 3,201

$  2,269 

932 

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

33,699

29,251

1.93%

1.19%

649

348

301

215 

86 

**  Other   short-term borrowings**

      1,037

      1,097

2.99%

1.09%

         31

          12

         19

        21 

         (2)
                                        
**Total   Interest-bearing Liabilities**

  518,187

  467,738

2.02%

1.48%

  10,459

     6,938

    3,521

    2,505 

   1,016 

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

155,762

142,741
                            
** **

              

              

          

          

             

              

            

              

             

**Total   Funds Supporting Earning Assets**

$673,949

$610,479

1.55%

1.14%

$10,459

$   6,938

 $ 3,521

$  2,505 

$ 1,016 
                                        
**Interest   Rate Spread**
        
3.84%

3.89%
                    
**Impact of   Non-interest-bearing Funds**
                                    
**  on   Net Yield on Earning Assets**
        
  .47%

  .34%

             

              
            
**Net Yield   on Earning Assets**
        
4.31%

4.23%

$29,074

$ 25,846
            
(1)  Includes non-accruing loans which does nothave a material effect on the Net Yield on Earning Assets.(2)  Tax-equivalent adjustment based on a 34% tax rate. 

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 2006 and 2005,investment securities represented 21% and 23% of total assets, respectively. Loan demand remained solid throughout 2006 and 2005 due to strong real estateactivity, despite rising interest rates, although interest rates remainedrelatively low.  At December 31, 2006 and 2005, the Loans/Total Assetsratios were 67.7% and 63.5%, respectively, as compared to 60.6% at December 31,2004. Investment securities have correspondingly fallen as a percentage oftotal assets.

Investment securities with a par value of $167,829,000, $122,980,000, and $99,580,000at December 31, 2006, 2005, 2004, 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, and weight-average tax-equivalent yields oninvestment securities at December 31, 2006, 2005, 2004.

**                               December  31, 2006                               **

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

**Unrealized Holding**

**Fair**

 
   
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**

**AVAILABLE  FOR SALE**
                              
 
  Federal  agencies
               
 
    Within  one year

$     6,000

$        -

$      82

$    5,918

3.37%

 
    One  to five years

       4,500

          -

      104

      4,396

    3.50%

 
     10,500

          -

      186

    10,314

    3.43%

 
 Government  Sponsored Entities     (FHLB, FHLMC, FNMA)

 

 

 

 

 

 
     Within  one year

  62,676

-

605

  62,071

3.28%

 
     One  to five years

82,391

14

1,270

81,135

3.99%

 
     Six  to ten years

      1,996

          -

          -

      1,996

    5.29%

 
  147,063

       14

  1,875

  145,202

    3.70%

 
  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 that exceeded 10% of stockholders' equity.

12

**INVESTMENT SECURITIES, continued**

**                               December  31, 2005                               **

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

**Unrealized Holding**

**Fair**

 
   
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**
                  
**AVAILABLE  FOR SALE**
               
                
 
  Federal  agencies
               
 
    Within  one year

$    2,002

$       8

$        -

$    2,010

   5.28%

 
    One  to five years

     10,500

          -

     271

    10,229

   3.43%

 
     12,502

         8

     271

    12,239

   3.73%

                
 
 Government  Sponsored Entities    (FHLB, FHLMC, FNMA)
               
 
     Within  one year

    27,045

       44

     153

    26,936

   3.99%

 
     One  to five years

  122,239

       11

  2,938

  119,312

   3.41%

 
  149,284

       55

  3,091

  146,248

   3.52%

                
 
  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.

13

**INVESTMENTSECURITIES, continued**

**                               December  31, 2004                               **

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

**Unrealized Holding**

**Fair**
      
**Value**

**Gains**

**Losses**

**Value**

**Yield(1)**
                  
**AVAILABLE  FOR SALE**
               
                
 
  Federal  agencies
               
 
    Within  one year

$  3,020

$     70

$         -

$    3,090

    5.67%

 
    One  to five years

   12,509

       70

        39

    12,540

    3.61%

 
   15,529

     140

        39

    15,630

    4.01%

                
 
 Government  Sponsored Entities    (FHLB, FHLMC, FNMA)
               
 
     Within  one year

    19,062

     284

         -

    19,346

    5.28%

 
     One  to five years

  155,351

     813

     760

  155,404

    3.56%

 
  174,413

  1,097

     760

  174,750

    3.75%

                
 
  Mortgage  Backed Securities
               
 
    Over  ten years

      1,013

          -

        40

         973

   3.62%

                
 
  State,  county and municipal
               
 
    Within  one year

         480

        1

          -

         481

    5.33%

 
    One  to five years

    11,780

     450

          -

    12,230

    5.85%

 
    Six  to ten years

      5,234

     374

          -

      5,608

    6.91%

 
    17,494

     825

          -

    18,319

    6.16%

                
 
  Other-CRA  Qualified Investment Fund

         322

          -

          -

         322

        - %

                
 
  Total  available for sale

$208,771

$2,062

$   839

$209,994

   3.96%

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

$       400

$      4

$        -

$       404

   7.49%

 
    One  to five years

      3,477

     187

          -

      3,664

   7.24%

 
    Six  to ten years

         642

       55

          -

         697

   7.25%

 
      4,519

     246

          -

      4,765

   7.27%

                 
    Total  held to maturity

$    4,519

$   246

$        -

$    4,765

  7.27%

 
(1) Tax equivalent adjustment  on tax exempt obligations based on a 34% taxrate.

As of the year ended December 31, 2004, the Bank did not hold any securities ofan issuer thatexceeded 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. As well, loans in excess of $500,000 with a loan-to-value ratio exception aresimultaneously 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 $43,429,000 and $32,484,000 or 7.7% and 6.5% of total loansat fiscal year-ends December 31, 2006 and 2005, 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 for businessexpansion (including acquisition of real estate and improvements), and loansfor purchases of equipment.  When taken, security usually consists ofliens on inventories, receivables, equipment, and furniture and fixtures. Unsecured business loans are generally short-term with emphasis on repaymentstrengths and low debt-to-worth ratios.  Commercial lending involvessignificant risk because repayment usually depends on the cash flows generatedby a borrower's business, and debt service capacity can deteriorate because ofdownturns in national and local economic conditions.  Management generallycontrols risks by conducting more in-depth and ongoing financial analysis of aborrower's cash flows and other financial information.

**Consumer Loans**

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

15

**LOAN PORTFOLIOLENDING ACTIVITIES (Continued)**

**Adjustable Rate Mortgage Loans**

TheBank offers adjustable rate mortgages (ARMs)(as defined by regulatoryauthorities) for consumer purpose real estate loans only in the form ofrevolving equity lines of credit.  ARMs are typically offered as an alternativestructuring only on commercial purpose real estate loans and other commercialpurpose loans.  Variable rate loans, the majority of which are real estatesecured, totaled $152,293,000 and $131,538,000 or 26.8% and 26.1% of totalloans at fiscal year-ends December 31, 2006 and 2005, respectively.  (The Bankdoes not offer any loan products which provide for planned graduated paymentsor loans which allow negative amortization.)

**Loan Approval and Review**

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

**CLASSIFICATION OF LOANS**

The following is asummary of loans, in thousands of dollars, at December 31, 2006, 2005, 2004,2003, 2002 by major classification:

**  2006   **

**  2005   **

**  2004   **

**  2003   **

**  2002   **

**Real Estate Loans -  mortgage**

$361,707

$324,475

$262,543

$228,556

$214,554

**                                - construction**

 74,564

 50,210

  39,525

  44,099

  28,297

**Loans to farmers**

   3,097

   1,912

1,582

   1,537

      1,674

**Commercial and  industrial loans**

83,375

84,474

66,184

  53,559

    47,631

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

  44,124

  41,400

    35,583

    32,884

    31,953

**All other loans,  including**

 

 

 

 

 

**  Overdrafts**

         458

      1,455

      1,566

      1,399

      1,513

**  Gross  Loans**

  567,325

  503,926

  406,983

  362,034

  325,622

**   Less  allowance for loan losses**

   (6,476)

   (5,918)

   (5,104)

   (4,524)

   (4,155)

**    Net  loans**

$560,849

$498,008

$401,879

$357,510

$321,467

** **

 

 

 

 

 

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

** **The Company's loanportfolio contained approximately $414,155 and $371,983 in fixed rate loans asof December 31, 2006 and 2005, respectively. At December 31, 2006, and 2005,fixed rate loans with maturities in excess of one year amounted toapproximately $289,839 and $284,363, respectively. As of December 31, 2006,fixed rate loans due after one year through five years totaled $213,107 andfixed rate loans due after five years totaled $76,732.  Variable rateloans due after one year totaled $37,945.  Variable rate loans are thoseon which the interest rate can be adjusted to changes in the Bank's primerate.  Fixed rate loans are those on which the interest rate generallycannot be changed for the term of the loan.

16

**NONACCRUAL,PAST DUE AND RESTRUCTURED LOANS**

The following schedule summarizes the amount of nonaccrual, past due, andrestructured loans, in thousands of dollars, for the periods ended December 2006,2005, 2004, 2003, and 2002:

**  2006**

**  2005**

**  2004**

**  2003**

**  2002**
               
**   Nonaccrual  loans**

$  897

$  405

$  880

$  351

$  697

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

  $   232

  $   277

  $   93

  $   130

  $  118

**   Restructured troubled debt**

  None

  None

  None

  None

  None

Information relating to interest income on nonaccrual and renegotiated loansoutstanding for the years ended December 31, 2006, 2005, 2004, 2003, and 2002is as follows:

**2006**

**2005**

**2004**

**2003**

**2002**
               
**   Interest included in income during  the year**

$ 27

$   8

$ 28

$  9

$ 19

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

  $ 65

  $ 34

  $ 69

  $ 26

  $ 63

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, 2006, 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, 2006, the Company had no foreign loansoutstanding.

**LOAN CONCENTRATIONS**

As of the year ended December 31, 2006, 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,                          **

**        2006  **

**        2005  **

**       2004  **

**       2003  **

**       2002  **

**(Thousands of Dollars)**

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

$545,451

$453,610

$386,899

$ 346,110

$309,351

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

$   5,918

$   5,104

$   4,524

$    4,155

$    3,763

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

$      188

$      324

$      281

$       431

$       412

    Real  Estate - construction and mortgage

44

52

22

59

97

    Loans  to individuals

        677

        445

        514

         392

         447
               
**      Total  charge-offs**

$      909

$      821

$      817

$       882

$       956

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

$      201

$       72

$        45

$       115

$       191

   Real  Estate - construction and mortgage

154

85

1

26

30

   Loans  to individuals

        304

        203

        196

         150

         142
               
**     Total  recoveries**

$      659

$      360

$      242

$       291

$       363

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

$      250

$      461

$      575

$       591

$       593

**Additions  charged to operations**

$      808

$   1,275

$   1,155

$       960

$       985

**Balance at  end of period**

$   6,476

$   5,918

$   5,104

$    4,524

$    4,155

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

   .05%  

   .10%  

   .15%   

   .17%   

      .19%

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

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

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, 2006, 2005, 2004, 2003, and 2002. 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)**
                     
**2006**

**2005**

**2004**

**2003**

**2002**
   
**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**Amount**

**%  Loans  in eachcategory**

**    Balanceapplicable to:   **
      
** **

** **

** **

** **

** **

** **

** **

** **

**Commercial    Industrial,    Farm Loans**

$1,269  

15.2%

$  839  

17.1%

$   727  

16.7%

$  554  

15.2%

$   597  

15.1%

** **

 

 

 

 

 

 

 

 

 

 

**Real Estate -     Construction    and Mortgage**

3,403  

76.9%

2,936  

74.4%

2,453  

74.2%

2,299  

75.3%

2,046  

74.6%

** **

 

 

 

 

 

 

 

 

 

 

**Loans to     Individuals**

606  

7.8%

597  

8.2%

269  

8.7%

423  

9.1%

425  

9.8%

** **

 

 

 

 

 

 

 

 

 

 

**Other Loans**

399  

.1%

396  

.3%

431  

.4%

265  

.4%

236  

.5%

** **

 

 

 

 

 

 

 

 

 

 

**Unallocated**

    799  

  -  

  1,150  

  -  

  1,224  

  -  

    963  

  -  

     851  

  -  

** **

 

 

 

 

 

 

 

 

 

 

** Total**

$6,476  

100%

$5,918  

100%

$5,104  

100%

$4,504  

100%

$4,155  

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,               **

**   2006   **

**   2005   **

**   2004   **
         
**Noninterest  bearing demand deposits**

$143,325

$129,833  

$118,149

**Interest bearing  demand deposits**

100,392

91,795  

72,240

**Savings deposits**

54,146

53,392  

47,998

**Time deposits**

  378,903

  338,264  

  317,152

**  Total deposits**

$676,766

$613,284

$555,539

**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,                    **

**   2006   **

**   2005   **

**   2004   **
            
**Interest bearing  demand deposits**

.38%

.33%  

.29%  

**Savings Deposits**

1.91%

1.40%  

1.16%  

**Time deposits**

3.95%

2.60%  

1.83%  

**MATURITIES OF TIME DEPOSITS**

The following table sets forth the maturity of time deposits in thousands ofdollars, at December 31, 2006:

** **

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

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

**Total  Time    Deposits**

**Maturity within 3 months or less**

$  47,342      

$  37,697     

$  85,039     

**Over 3 through 6 months**

61,329      

44,936     

106,265     

**Over 6 through 12 months**

57,386      

57,806     

115,192     

**Over 12 months**

      9,851      

      2,095     

    18,217     

**    Total**

$175,908      

$148,805     

$324,713     

**RETURN ON EQUITY AND ASSETS**

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

**             Years  Ended December 31,           **

**  2006  **

**  2005  **

**  2004  **
            
**   Return  on average total assets(1)**

1.24%

1.30%

1.26%

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

13.36%

13.41%

12.23%

**   Cash  dividend payout ratio(3)**

41.11%

41.60%

40.47%

**   Average equity to average assets  ratio**

9.25%

9.70%

10.29%

** **
         
**   (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**
         
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,                       **

**  2006  **

**  2005  **

**  2004  **

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

  $72,330

  $43,296

  $33,950

The following information relates to outstanding federal funds purchased andsecurities sold under repurchase agreements during 2006, 2005, and 2004, inthousands of dollars:

**Maximum  Amount                    Outstanding in Any                                    Month  End                         **

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

** **

**2006**

**2005**

**2004**

**2006**

**2005**

**2004**

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

  $72,330

  $43,296

  $33,950

  4.39%

  2.29%

  1.43%

**              Years  ended December 31,            **

**2006  **

**2005  **

**2004  **

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

$45,621 

$33,167 

$29,194 

 

 

 

**   Weighted average interest rate paid**

3.53%

1.92%

1.19%

21

**ITEM1A.   RISK FACTORS**

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

**Risks Related to OurBusiness**

**Our growth strategy may notbe successful.**

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

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

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

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

We are required bybanking regulators to maintain various ratios of capital to assets. As ourassets continue to grow we expect our capital ratios to decline unless we canalso continue to increase our earnings or raise sufficient new capital to keeppace with asset growth.  Our ability to raise additional capital, if needed,will depend, among other things, on conditions in the capital markets at thattime, which are outside our control, and on our financial condition and performance. If we are unable to limit a capital ratio decline by increasing our capital, wewill 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 notcontinue to grow as fast as we have in the past, we intend to expand our assetbase.  Our future profitability will depend in part on our ability to managegrowth successfully.  Our ability to manage growth successfully will depend onour ability to maintain cost controls and asset quality while attractingadditional loans and deposits, as well as on factors beyond our control, suchas economic conditions and interest rate trends.  If we grow quickly and arenot able to control costs and maintain asset quality, growth could materiallyadversely affect our financial performance.

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

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

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

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

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 adverselyaffect our business.**

Substantially all of our business is located in the Horry County and the"Waccamaw Neck" region of Georgetown County area in coastal South Carolina.  As a result, our financial condition and results of operations may beaffected by changes in the Horry County and the Waccamaw Neck economy.  Aprolonged period of economic recession, a general decline in Horry County and theWaccamaw Neck area real estate values or other adverse economic conditions in HorryCounty and the Waccamaw Neck and South Carolina may result in decreases indemand for our services, increases in nonpayment of loans and decreases in thevalue of collateral securing loans, which could have a material adverse effecton our business, future prospects, financial condition or results ofoperations.

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

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

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

We encounter strong competition from financial institutions operating in thegreater Horry/Georgetown County and Grand Strand area of South Carolina.  Inthe conduct of our business, we also compete with credit unions, insurancecompanies, money market mutual funds and other financial institutions, some ofwhich are not subject to the same degree of regulation as we are.  Many ofthese competitors have substantially greater resources and lending abilitiesthan we have and offer services, such as investment banking, insurance, trustand international banking services that we do not provide.  We believe that wehave been able to, and will continue to be able to, compete effectively withthese 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.

**Risks Related to Our Common Stock**

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

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

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

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

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

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

23

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

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

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

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

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

**Risks Related to Our Industry**

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

Weoperate in a highly regulated industry and are subject to examination,supervision and comprehensive regulation by various federal and stateagencies.  Our compliance with the requirements of these agencies is costly andmay limit our growth and restrict certain of our activities, including, paymentof dividends, mergers and acquisitions, investments, loans and interest ratescharged, and locations of offices.  We are also subject to capitalizationguidelines established by federal authorities and our failure to meet thoseguidelines could result, in an extreme case, in our bank's being placed inreceivership.  We have also recently been subjected to the extensive and expensiverequirements imposed on public companies by the Sarbanes-Oxley Act of 2002 andrelated regulations.

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

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

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

**ITEM1B.   UNRESOLVED STAFF COMMENTS**

TheCompany is an accelerated filer as defined by Rule 12(b)(2) of the ExchangeAct.  The Company has received no written comments from the SEC staff regardingits 1934 Act filings in the 180 days prior to fiscal year-end December 31, 2006.

24

**ITEM2.   PROPERTIES**

The Company's subsidiary, The Conway National Bank, has eleven permanentbanking offices in Horry County and two permanent banking offices in Georgetown County, for a total of thirteen banking offices.  In addition, the Bank hasan Operations and Administration Building, located at 1400 Third Avenue in Conway, which houses the Bank's administrative offices and data processingfacilities.  This three-story structure contains approximately 33,616square feet.  Adjacent to the Operations and Administration Building is a 24,000 square foot banking office, known as the Conway Banking Office, whichprovides retail banking functions at the Bank's principal site.  Inaddition, the Bank has a 1,450 square foot building for express bankingservices adjacent to the Conway Banking Office.  The Bank has a two-storyoffice on Main Street in Conway containing 8,424 square feet, an expressbanking services facility (675 square foot building) at the Coastal Centre inConway, banking offices located at Red Hill in Conway (3,760 square feet), WestConway in Conway (3,286 square feet), North Conway in Conway (3,600 squarefeet), Surfside in Surfside Beach (6,339 square feet), Northside, north of MyrtleBeach (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), MyrtleBeach in the City of Myrtle Beach (12,000 square feet), Murrells Inlet inMurrells Inlet, Georgetown County (3,600 square feet), North Myrtle Beach inthe City of North Myrtle Beach (3,600 square feet), and Pawleys Island (3,900square feet) in Pawleys Island, Georgetown County.  Of the thirteen bankingoffices and the Operations and Administration Building, the bank owns theOperations 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 along-term lease with renewal options. In addition to the existing facilities,the Company has purchased two future office sites.  The sites consist of 1.83acres 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 anticipatesbuilding a banking office on the other sites within the next two to six years,depending on market conditions. The physical addresses of each location are asfollows:  The Operations and Administration Building at 1400 Third Avenue,Conway; Conway Banking Office at 1411 Fourth Avenue, Conway; Coastal CentreExpress at 16th Ave., Conway; Main Street at 309 Main Street,Conway; West Conway at Highway 501 & Cultra Road, Conway; North Conway at2601 Main Street, Conway; Surfside at Highway 17 & 5th AvenueNorth, Surfside Beach; Northside at 9726 Highway 17 North, Myrtle Beach; RedHill at Highways 544 & 501, Conway; Socastee at 3591 North Gate Road,Myrtle Beach; Aynor at 2605 Highway 501, Aynor; Myrtle Beach at 1353 21stAvenue North, Myrtle Beach; Murrells Inlet at 4345 Highway 17 Bypass, MurrellsInlet;  North Myrtle Beach at 110 Highway 17 North, North Myrtle Beach; andPawleys Island at 10608 Ocean Highway, Pawleys Island.  The Bank owns all ofits offices except one express banking services facility, which is leased.

**ITEM 3.   LEGAL PROCEEDINGS**

On December 28, 2006, the Company entered into a Settlement Agreement settlingthe lawsuit initiated on September 6, 2005 by Willis J.Duncan, Harriette B. Duncan and W. Jennings Duncan against H. Buck Cutts, PaulR. Dusenbury, Robert P. Hucks, Richard M. Lovelace, Jr.,  and Howard B. Smith,III, and The Conway National Bank and the Company, as nominal defendants. The Agreement provides for dismissal of the lawsuit; resignation of Messrs.Cutts, Hucks and Smith from the Board of Directors of the Company, andresignation of Mr. Hucks from the Board of Directors of The Conway NationalBank, effective as of December 31, 2006; resignation by Mr. Hucks of hisemployment with The Conway National Bank and the Company effective as ofDecember 31, 2006; resignation by Mr. Dusenbury of his employment with TheConway National Bank and the Company, effective as of October 31, 2006; paymentby the Company and/or The Conway National Bank of an aggregate of $637,500,allocated as $95,861.17 to each of Messrs. Hucks, Dusenbury, Cutts, Lovelaceand Smith for litigation costs, and $71,187.37 and $87,006.78 to Messrs.Dusenbury and Hucks, respectively, for cancellation of their employmentagreements; and execution of mutual releases among all of the parties.  Thesettlement does not affect or alter vested rights of Messrs. Hucks, Smith orDusenbury under the Company's Phantom Stock Plan and the related Phantom StockAgreements, but no further benefits shall vest under the plan or theagreements.  The vested benefits will accrue interest and be paid in accordancewith the terms of the plan and the agreements.  The Settlement Agreement alsorequires each of Messrs. Hucks and Dusenbury to enter intoConfidentiality/Non-Disclosure and Non-Solicitation Agreements prohibiting themfrom disclosing confidential information about, or trade secrets of, the Companyor The Conway National Bank, and prohibiting them for a period of two yearsfrom soliciting, directly or indirectly, employment of any employees of TheConway National Bank for employment with any other banking institution doingbusiness in Horry or Georgetown Counties in the State of South Carolina.  Mr.Dusenbury continued to receive payments under the employment agreement enteredinto on June 14, 2005 through October 31, 2006, and Mr. Hucks received paymentsunder the employment agreement entered into on June 14, 2005 until December 31,2006.  The Settlement Agreement terminates all further obligations of theCompany and the Bank under these employment agreements and any otheragreements, other than rights existing under The Conway National Bank ProfitSharing and Savings Plan, any Executive Supplemental Income Plan, Phantom StockAgreements (as described above), and health insurance coverage through December31, 2006.

Theforegoing is merely a summary of the Settlement Agreement and Confidentiality/Non-Disclosureand Non-Solicitation Agreements, and is qualified in its entirety by referenceto such agreements, which are included as exhibits to the Company's Report onForm 8-K, filed January 4, 2007.

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

No matters were submitted to a vote of security holders in the fourth quarterof 2006.

25

**PART II**

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

As of March 1, 2007, there were approximately 809 holders of record of Companystock. There is no established market for shares of Company stock and onlylimited trading in such shares has occurred since the formation of the Companyon June 10, 1985.  During 2005 and 2006, management was aware of a fewtransactions in which the Company's common stock traded in the ranges set forthbelow. However, management has not ascertained that these transactions resultedfrom arm's length transactions between the parties involved, and because of thelimited number of shares involved, these prices may not be indicative of thevalue of the common stock.

**2006**

**2005**

  First  Quarter  Second Quarter  Third  Quarter  Fourth Quarter

**High**  $155.00  $156.50  $205.00  $162.00

**Low**  $155.00  $155.00  $156.50  $156.50

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

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

Holders of shares of Company stock are entitled to such dividends as may bedeclared from time to time by the Board of Directors of the Company. TheCompany paid an annual cash dividend of $5.25 per share in 2006 and $5.00 pershare in 2005. In addition, the Company may from time to time pay stockdividends.  There can be no assurance, however, as to the payment of dividendsby the Company in the future.  Payment of dividends is within the discretion ofthe Board of Directors, and is dependent upon the earnings and financialcondition of the Company and the Bank, and other related factors.  TheCompany's primary source of funds with which to pay dividends are dividendspaid to the Company by the Bank.  There are legal restrictions on theBank's ability to pay dividends.  See "Supervision and Regulation-Paymentof Dividends" under Item 1, Part I of this Form 10-K for a description of theselegal restrictions.

The Company does not have any equity compensation plans.  Accordingly, noinformation is required to be disclosed pursuant to Item 201(d) of RegulationS-K. 

The Company made only one sale of securities during 2006.  On December 7, 2006the Company sold 342 shares of treasury stock to The Conway National Bank ProfitSharing and Savings and Profit Sharing Plan for a price of $53,523, or $156.50per share.  This sale was exempt from registration pursuant to Section 4(2) ofthe Securities Act of 1933 because no public offering was involved.

Purchases of stock during the fourth quarter of 2006 are outlined in the belowtable.  All other purchases have been previously reported  on Forms 10-Q, filedMay 10, 2006, August 9, 2006, and November 6, 2006, and are incorporated hereinby 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  Program**

November 1 - November 30, 2006

45

$156.50

-                 

-                   

December 1 - December 31, 2006

187

$156.50

-                 

-                   

Total

232

$156.50

-                 

-                   

26

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

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

**                                               Years  Ended December 31,                                                          **

**  2006  **

**  2005  **

**  2004  **

**  2003  **

**  2002  **

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

$ 49,411

$ 39,079  

$  32,291

$   30,466

$  31,344

**Total  Interest Expense**

   18,396

   10,459  

      6,938

       7,224

      9,068

**Net  Interest Income**

   31,015

   28,620  

    25,353

     23,242

    22,276

**Provision  for Loan Losses**

         808

     1,275  

      1,155

          960

         985

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

   30,207

   27,345  

     24,198

     22,282

    21,291

**Total Other  Operating Income**

   6,958

   6,411  

   6,257

   6,117

   5,463

**Total Other  Operating Expense**

   22,339

   19,530  

     18,246

     17,237

    16,159

**Income Before  Income Taxes**

   14,826

   14,226  

     12,209

     11,162

    10,595

**Income Taxes**

     4,780

     4,748  

       3,927

       3,497

      3,413

**Net Income**

$ 10,046

$   9,478  

$     8,282

$     7,665

$    7,182
                  
***Per Share:**
               
**Net Income Per  Weighted Average**
               
**  Shares  Outstanding**

$   12.77

$   12.02  

$     10.50

$      9.71

$      9.11

**Cash Dividend Paid  Per Share**

$     5.25

$     5.00  

$       4.25

$      3.64

$      3.41

**Weighted Average  Shares Outstanding**

 786,899

 788,496  

   789,006

  789,290

  788,553
                  
***Restated for a 10% stock dividend issued during 2004.**

**Selected Balance Sheet Data:**

 

 

 

 

 

**Assets**

$837,622

$792,720

$671,569

$599,978

$569,490

**Net Loans**

 560,849

 498,008

 401,879

  357,510

  321,467

**Investment Securities**

 179,598

 181,942

 215,827

  191,575

  180,413

**Federal Funds Sold**

    26,000

    46,000

            -

      1,000

    22,000

**Deposits:**

 

 

 

 

 

**  Non-Interest-Bearing**

$129,763

$134,475

$118,580

$101,684

$100,225

**  Interest-Bearing**

  545,289

  532,001

  441,784

  401,429

  368,084

**   Total Deposits**

$675,052

$666,476

$560,364

$503,113

$468,309

**Stockholders' Equity**

$  76,663

$  70,559

$  67,585

$  64,623

$  61,125

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

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

****27

**CRITICALACCOUNTING POLICIES**

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

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

The Company believes the allowance for loan losses is a critical accountingpolicy that requires the most significant judgments and estimates used inpreparation of its consolidated financial statements. Refer to the "Provisionfor Loan Losses" below for a detailed description of the Company's estimationprocess and methodology related to the allowance for loan losses.

Distribution of Assets and Liabilities

The Company maintains a conservative approach in determining the distributionof assets and liabilities.  Loans increased 23.8% from $406,983 atDecember 31, 2004 to $503,926 at December 31, 2005; and 12.6% from December 31,2005 to $567,325 at December 31, 2006.  Loan growth is attributed tooverall business development efforts to meet business and personal loan demandin our market area. Loan demand in our market area has remained solid in 2005 and2006 in part due to a strong real estate market.  Loans increased as apercentage of total assets from 60.6% at year-end 2004 to 63.5% at year-end 2005and increased to 67.7% at year-end 2006. Correspondingly, investment securitiesand federal funds sold decreased as a percentage of total assets from 32.1% atyear-end 2004 to 28.7% at year-end 2005 and to 24.3% at year-end 2006.  Investmentsand federal funds sold provide for an adequate supply of secondaryliquidity.  Year-end other assets as a percentage of total assets rose from0.0% at year-end 2004 to 5.8% at year-end 2005, and decreased to 3.1% atyear-end 2006.  Management has sought to build the deposit base withstable, relatively non-interest-rate sensitive deposits by offering the smallto medium account holders a wide array of deposit instruments at competitiverates. Non-interest-bearing demand deposits have declined over the previousthree years from 17.7% at year-end 2004 to 17.0% at year-end 2005 and to 15.5%at year-end 2006. The Company has anticipated a decline over the long-term asmore customers utilize interest-bearing deposit accounts and repurchaseagreements.  Interest-bearing liabilities as a percentage of total assets haverisen from 71.3% at December 31, 2004 to 72.9% at December 31, 2005 and to74.0% at December 31, 2006.  Stockholders' equity as a percentage of totalassets moved closer to the Board's long-term guideline ratio of  8.50% from 10.0% at December 31, 2004 to 8.9% at December 31, 2005.  However, stockholder'sequity as a percentage of total assets increased to 9.2% at December 31, 2006. The Bank remains well-capitalized (see Note 15 to the consolidated financialstatements, contained elsewhere in this report).

The following table sets forth the percentage relationship to total assets ofsignificant components of the Company's balance sheet as of December 31, 2006,2005, and 2004:

**                                December  31,                              **

**Assets:**

**2006  **

**2005  **

**2004 **

**   Earning assets:**
         
**     Loans**

  67.7%

  63.5%

   60.6%

**     Investment securities:**

 

 

 

**     Taxable**

  18.7   

  20.2   

   28.7   

**     Tax-exempt**

    2.5   

    2.7   

     3.4   

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

    3.1   

    5.8   

        -   

**        Total  earning assets**

  92.0   

  92.2   

  92.7   

**     Other assets**

    8.0   

    7.8   

    7.3   

**        Total  assets**

100.0%

100.0%

100.0%

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

65.1%

67.1%

65.8%

**       Federal funds  purchased and securities sold**

 

 

 

**         under  agreement to resell**

8.6   

5.5   

5.1   

**       Other short-term  borrowings**

      .3   

      .3   

      .4   

**         Total  interest-bearing liabilities**

  74.0   

  72.9   

  71.3   

**     Non-interest-bearing  deposits**

  15.5   

  17.0   

  17.7   

**     Other liabilities**

1.3   

1.2   

    1.0   

**     Stockholders' equity**

    9.2   

    8.9   

  10.0   

**       Total  Liabilities and stockholders' equity**

100.0%

100.0%

100.0%

28

**Results of Operations**

CNBCorporation and subsidiary recognized earnings in 2006, 2005, and 2004 of $10,046,$9,478, and $8,282, respectively, resulting in a return on average assets of 1.24%,1.30%, and 1.26%, and a return on average stockholders' equity of 13.36%, 13.41%,and 12.23%. The earnings were primarily attributable to favorable net interestmargins in each period (see Net Income-Net Interest Income). Other factorsinclude management's ongoing effort to maintain other income at adequate levels(see Net Income ‐ Other Income) and to control other expenses (see NetIncome - Other Expenses).  These strong earnings, coupled with a moderatedividend policy, have supplied the necessary capital funds to support bankoperations. Total assets were $837,622 at December 31, 2006 as compared to $792,720at December 31, 2005 and $671,569 at December 31, 2004.  The following tablesets forth the financial highlights for fiscal years 2006, 2005, and 2004.

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

** **

**December 31,  2006  **

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

**December 31,  2005  **

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

**December 31,  2004  **

**Net interest income**

 

 

 

 

 

 
**     after provision for loan  losses**

$  30,207

10.5% 

$  27,345

13.0% 

$  24,198

 
**Income before income taxes**

14,826

4.2    

14,226

16.5    

12,209

 
**Net Income**

10,046

6.0    

9,478

14.4    

8,282

 
**Per Share (1)**

 

 

 

 

 

 
**  (weighted average of shares outstanding)**

$    12.77

6.2    

$    12.02

14.5    

$    10.50

                    
**Cash dividends declared**

4,123

4.6    

3,942

17.6    

3,352

 
** **

 

 

 

 

 

 
**  Per Share (1)**

$      5.25

5.0    

$      5.00

17.6    

$      4.25

 
** **

 

 

 

 

 

 
**Total assets**

$837,622

5.7% 

$792,720

18.0% 

$671,569

 
**Total deposits**

675,052

1.3    

666,476

  18.9% 

560,364

 
**Loans**

567,325

12.6    

503,926

23.8    

406,983

 
**Investment securities**

179,598

(1.3)  

181,942

(15.7)  

215,827

 
**Stockholders' equity**

76,663

8.7    

70,559

4.4    

67,585

 
**    Book value per share (1)**

 

 

 

 

 

 
**   (actual number of shares outstanding)**

$    97.63

9.1    

$    89.48

4.4    

$    85.70

 
** **

 

 

 

 

 

 
**Ratios (2):**

 

 

 

 

 

 
**Return on average total assets**

1.24%

(4.6)  

1.30%

3.2   

1.26%

 
**Return on average stockholders' equity**

13.36%

(.4)  

13.41%

9.6   

12.23%

                    
  (1) Adjusted for the effect of a 10% stock dividend paid in 2004.

 
 

 

 

 

 

 
(2)  For  the fiscal years ended December 31, 2006, 2005, and 2004 average total assets  amounted to $813,122,         $729,163, and $657,645,  respectively, with average stockholders' equity totaling $75,198, $70,699, and  $67,700,         for the same periods.

 
29

**NET INCOME**

**Net Interest Income**

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

The Bank maintained net interest margins in 2006, 2005, and 2004 of 4.18%, 4.31%,and 4.23%, respectively, as compared to management's long-term target of 4.35%.Net interest margins have been compressed at the Bank and industry-wide, theresult of strong competition for deposits to meet strong but competitive loandemand.  The Bank has sought to increase the volume of outstanding loans, consequentlyreducing the amount of investments held, in order to enhance interest income.  Fully-tax-equivalentnet interest income grew from $25,846 in 2004 to $29,074 in 2005 and to $31,428in 2006.  During the three-year period, total fully-tax-equivalentinterest income increased by 20.6% from $32,784 in 2004 to $39,533 in 2005 andincreased 26.0% in 2006 to $49,824.  Over the same period, total interestexpense increased 50.7% from $6,938 in 2004 to $10,459 in 2005 and increased 75.9%to $18,396 in 2006. Fully-tax-equivalent net interest income as a percentage ofaverage total earning assets was 4.23% in 2004, 4.31% in 2005, and 4.18% in2006.

Interest rates paid on deposits and borrowed funds and earned on loans andinvestments have generally followed the fluctuations in market interest ratesin 2006, 2005, and 2004. However, fluctuations in market interest rates may notnecessarily have a significant impact on net interest income, depending on theBank's rate sensitivity position.  A rate sensitive asset (RSA) is anyloan or investment that can be re-priced up or down in interest rate within acertain time interval.  A rate sensitive liability (RSL) is an interestpaying deposit or other liability that can be re-priced either up or down ininterest rate within a certain time interval. When a proper balance between RSAand RSL exists, market interest rate fluctuations should not have a significantimpact on earnings.  The larger the imbalance, the greater the interestrate risk assumed by the Bank and the greater the positive or negative impactof interest rate fluctuations on earnings.  When RSA's exceed RSL's for aspecific repricing period, a positive interest sensitive gap results.  The gapis negative when interest-sensitive liabilities exceed interest-sensitiveassets.  For a bank with a positive gap, rising interest rates would beexpected to have a positive effect on net interest income and falling rateswould be expected to have the opposite effect.  However, gap analysis, such asset forth in the table below, does not take into account actions by a bank orits customers during periods of changing rates, which could significantlychange the effects of rate changes that would otherwise be expected.  The Bankseeks to manage its assets and liabilities in a manner that will limit interestrate risk and thus stabilize long-term earning power. The following table setsforth the Bank's static gap rate sensitivity position at each of the timeintervals indicated.  The table illustrates the Bank's rate sensitivityposition on specific dates and may not be indicative of the position at otherpoints in time. Management believes that a 200 basis point rise or fall ininterest rates will have less than a 10 percent effect on before-tax netinterest income over a one-year period, which is within bank guidelines.

Interest Rate Sensitivity AnalysisDecember 31, 2006(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**

       0

  20,648 

14,738 

 38,478 

 95,474

8,203

**  Loans (net of  non-accruals $897)**

  152,293

    40,373 

    36,503 

    47,440 

  213,107

    76,732

**Total, RSA**

$178,293

$  61,021 

$  51,241 

$  85,918 

$308,581

$  84,935

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

$          0

$ 47,342 

61,336 

57,379 

9,851

0

**All Other Time Deposits**

       0

  37,697 

44,936 

57,806 

11,595

0

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

  28,359

  38,971 

5,000 

0 

0

0
                     
** **

               

                

                

                 

               

               

**Total RSL**

$  28,359

$124,010 

$ 111,272 

$115,185 

$  21,446

$           0

**RSA-RSL**

$149,934

$ (62,989)

$  (60,031)

$ (29,267)

$287,135

$  84,935

**Cumulative RSA-RSL**

$149,934

$  86,945 

$   26,914 

$   (2,353)

$284,782

$369,717

**Cumulative RSA/RSL**

   6.29

    1.57 

1.10 

    .99 

    1.71

1.92

30
**NET INCOME(continued)**
**Provision for Loan Losses**

It is the policy ofthe Bank to maintain the allowance for loan losses at a percentage of net loansor the percentage deemed appropriate by management to cover estimated losses inherentin the portfolio.  The Company complies with the provisions of SFAS No.114, "Accounting by Creditors for Impairment of a Loan", as amendedby SFAS 118, in connection with the allowance for loan losses (see NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES).  The provision for loanlosses was $808 in 2006, $1,275 in 2005, and $1,155 in 2004.  Net loancharge-offs totaled $250 in 2006, $461 in 2005, and $575 in 2004, with netcharge-offs being centered in consumer purpose loans in 2006, in consumerpurpose and commercial and industrial loans in 2005, and consumer purpose loansin 2004.  The allowance for loan losses as a percentage of net loans was 1.15%in 2006, 1.19% at December 31, 2005, and 1.27% at December 31, 2004. The lower provisionduring 2006 was due to very low net loan losses during the year andmanagement's recognition of and adherence to recommendations outlined inrecently issued pronouncements of both the accounting industry and regulatoryagencies.

**Securities Transactions**

Net unrealized gains/(losses)in the investment securities portfolio were $(1,802) at December 31, 2006, $(2,919)at December 31, 2005, and $1,469 at December 31, 2004.  The market value ofinvestment securities has increased due to increased demand for bonds and theconsequent increase in prices.  Security gains of $2 were realized in 2005on sales of $4,000 in short-term available-for-sale securities to supplementliquidity.  No security gains/(losses) were realized in 2006.

**Other Income**

Other income, net ofany securities gains/(losses), increased by 2.4% from $6,257 in 2004 to $6,409in 2005 and grew 8.5% from $6,409 in 2005 to $6,958 in 2006.  Other incomerose in 2004 primarily due to strong growth in merchant discount income as aresult of higher merchant account volumes.  During 2005, deposit service chargeincome declined as the economy strengthened and demand deposit balances grew. As well, higher earnings allowance credits were paid on commercial balances. This decline was offset by strong growth in secondary market mortgage loanincome as we expanded our secondary market mortgage loan program during thesecond half of 2005.  The increase in other income in 2006 was attributable toincreased loan fee income.  Other income was also enhanced during the sameperiod by two non-recurring items:  the receipt of life insurance proceeds, theincome portion of which was $198; and a gain from the sale of real estate inthe amount of $277.

**Other Expenses**

Other expensesincreased by 7.0% from $18,246 in 2004 to $19,530 in 2005, and increased 14.4%from $19,530 in 2005 to $22,339 in 2006.  The components of other expensesare salaries and employee benefits of $11,359, $12,459, and $13,684; occupancyand furniture and equipment expenses of $2,509, $2,727, and $3,247; and otheroperating expenses of $4,378, $4,344, and $5,408 for 2004, 2005, and 2006,respectively. 

The increase in salary and employee benefits reflects compensation increases,the increased costs of providing employee benefits, and an increase from 249 to264 full-time equivalent employees from year-end 2005 to year-end 2006.  Also,during 2006, due to the Company's unusual circumstances related to litigationamongst various directors and the Company and Bank as nominal defendants,originating in 2005 (See Item 1. Legal Proceedings), the Company paid thesalaries of the former President and CEO and former Executive Vice Presidentand CFO from May 22, 2006 to December 31, 2006, and from May 22,2006to October 31, 2006, respectively, while these individuals were retained in asuspended capacity.  At the same time, the Company paid market compensation tothe Interim President and CEO and Interim Executive Vice President and CFO.

Occupancy and furniture and equipment expenses were impacted by theconstruction of the Company's North Conway banking office, which opened July17, 2006, and renovations to the Company's Operations and Administrationbuilding.

Non-interest expense should continue to grow in 2007 due to increased growth inoperations.  However, growth in other expenses is anticipated to grow at a moremoderate pace.

**Income Taxes**

Provisions forincome taxes increased 20.9% from $3,927 in 2004 to $4,748 in 2005 andincreased .7% from $4,748 in 2005 to $4,780 in 2006.  Income tax liabilityhas increased in 2004, 2005, and 2006 as income before income taxes hasincreased 9.4%, 16.5%, and 4.2%, respectively.

LIQUIDITY

The Bank's liquidity position is primarily dependent on short-term demands forfunds caused by customer credit needs and deposit withdrawals and upon theliquidity of bank assets to meet these needs.  The Bank's liquiditysources include cash and due from banks, federal funds sold and short-terminvestments.  In addition, the Bank has established federal funds lines ofcredit from correspondent banks; has the ability, on a short-term basis, toborrow funds from the Federal Reserve System; and has a line of credit from theFederal Home Loan Bank of Atlanta (see NOTE 8 to the Consolidated FinancialStatements-LINES OF CREDIT).  The Company had cash balances on hand of $6,670,$6,623, and $7,485 at December 31, 2006, 2005, and 2004 with liabilities,consisting of cash dividends payable, totaling $4,123, $3,942, and $3,352,respectively.  Management feels that liquidity sources are more thanadequate to meet funding needs.

31

OFF BALANCE SHEET ARRANGEMENTS ANDCONTRACTUAL OBLIGATIONS

The Company, through the operations of the Bank, makescontractual commitments to extend credit in the ordinary course ofbusiness.  These commitments are legally binding agreements to lend moneyto customers of the Bank at predetermined interest rates for a specified periodof time.  In addition to commitments to extend credit, the Bank alsoissues standby letters of credit which are assurances to a third party thatthey will not suffer a loss if the Bank's customer fails to meet itscontractual obligation to a third party.  The Bank may also haveoutstanding commitments to buy/sell securities.  At December 31, 2006, theBank had issued commitments to extend credit of $59.6 million, standby lettersof credit of $7.8 million, and no commitments to buy or sell securities (seeNOTE 10 to the Consolidated Financial Statements-FINANCIAL INSTRUMENTS WITHOFF-BALANCE SHEET RISK). The majority of the commitments and standby letters ofcredit typically mature within one year and past experience indicates that manyof the commitments and standby letters of credit will expire unused. However, through its various sources of liquidity, the Bank believes that itwill have the necessary resources to meet these obligations should the needarise.

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

The following table presents, as of December 31, 2006, the Company and theBank's fixed and determinable contractual obligations by payment date.  ThePayment amounts represent those amounts contractually due to the recipient

 

**Contractual Obligations and Other  Commitments**
**December 31, 2006**
**(Dollars in Thousands)**

**Less  than**
**1  to 3**
**3  to 5**
**Total**
**One  Year**
**Years**
**Years****Contractual  Cash Obligations**  Operating leases
$         13
$           6
$         7
$       0  Time deposits
  324,713
  303,267
  16,398
  5,048     Total contractual cash  obligations
$324,726
$303,273
$16,405
$5,048
Obligations under non-cancelable operating lease agreements totaled $13 atDecember 31, 2006.  These obligations are payable over three years asshown in NOTE 11 to the Consolidated Financial Statements - COMMITMENTS ANDCONTINGENCIES.  Further information regarding the nature of time deposits isoutlined in NOTE 6 to the Consolidated Financial Statements - DEPOSITS.

**CAPITALRESOURCES**

Total stockholders' equity was $76,663, $70,559, and $67,585 at December 31, 2006,2005, and 2004, representing 9.15%, 8.89%, and 10.06% of total assets,respectively. At December 31, 2006, the Company and the Bank exceededquantitative measures established by regulation to ensure capital adequacy (seeNOTE 15 to the Consolidated Financial Statements - REGULATORY MATTERS). Capital is considered sufficient by management to meet current and prospectivecapital requirements and to support anticipated growth in bank operations.

EFFECTS OF INFLATION

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

**ACCOUNTING ISSUES**

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

****32

**RISKS AND UNCERTAINTIES**

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

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

**ITEM 7.A QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk, in regard to interest rate risk, is the risk of loss from adversechanges in market prices and rates. The Company's market risk arisesprincipally from the interest rate risk inherent in its lending, deposit andborrowing activities.  Management actively monitors and manages itsinterest rate risk exposure.  In addition to other risks which the Companymanages in the normal course of business, such as credit quality and liquidityrisk, management considers interest rate risk to be a significant market riskthat could potentially have a material effect on the Company's financialcondition and results of operations (See Item 7 - MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Net Income - NetInterest Income).  Other types of market risks, such as foreign currencyrisk and commodity price risk, do not arise in the normal course of theCompany's business activities.

33

**ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA****CNB CORPORATION AND SUBSIDIARYREPORTON CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDDECEMBER 31, 2006, 2005 and 2004**34

***CNB CORPORATION AND SUBSIDIARY  CONWAY, SOUTH CAROLINA*CONTENTS**
 
**PAGE    **  **REPORT OF INDEPENDENT      REGISTERED PUBLIC ACCOUNTING FIRM      FINANCIAL STATEMENTS         **Consolidated balance sheets         Consolidated statements of income         Consolidated statements of stockholders' equity         Consolidated statements of comprehensive income         Consolidated statements of cash flows**NOTES TO FINANCIAL STATEMENTS**
36 - 37      38      39      40      41      42      43 - 61
****35

**Elliott Davis, LLC  Advisors-CPAs-Consultants  1901 Main Street, Suite 1650  P.O. Box 2227  Columbia, SC  29202-2227****REPORT 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, 2006 and 2005, and  the related consolidated statements of income, stockholders' equity,  comprehensive income and cash flows for each of the three years in the period  ended December 31, 2006.  We also have audited management's assessment,  included in the accompanying Management's Report on Internal Control Over  Financial Reporting, that CNB Corporation maintained effective internal  control over financial reporting as of December 31, 2006, based on criteria  established in Internal Control - Integrated Framework issued by the Committee  of Sponsoring Organizations of the Treadway Commission (COSO).  The  Company's management is responsible for these financial statements, for  maintaining effective internal control over financial reporting, and for its  assessment of the effectiveness of internal control over financial reporting.   Our responsibility is to express an opinion on these consolidated financial  statements, an opinion on management's assessment, and an opinion on the  effectiveness of the Company's internal control over financial reporting 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 and whether effective internal  control over financial reporting was maintained in all material respects.   Our audit of consolidated financial statements included examining, on a test  basis, evidence supporting the amounts and disclosures in the financial  statements, assessing the accounting principles used and significant estimates  made by management, and evaluating the overall financial statement  presentation.  Our audit of internal control over financial reporting  included obtaining an understanding of internal control over financial  reporting, evaluating management's assessment, testing and evaluating the  design and operating effectiveness of internal control, and performing such  other procedures as we considered necessary in the circumstances.  We  believe that our audits provide a reasonable basis for our opinions.

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 consolidated  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 consolidated 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  consolidated financial statements.

  36

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.

In our opinion, the consolidated financial  statements referred to above present fairly, in all material respects, the  financial position of CNB Corporation as of December 31, 2006 and 2005, and  the results of their operations and their cash flows for each of the years in  the three-year period ended December 31, 2006 in conformity with accounting  principles generally accepted in the United States of America.  Also in  our opinion, management's assessment that CNB Corporation maintained effective  internal control over financial reporting as of December 31, 2006, is fairly  stated, in all material respects, based on criteria established in Internal  Control - Integrated Framework issued by the Committee of Sponsoring  Organizations of the Treadway Commission (COSO). Furthermore, in our opinion,  CNB Corporation maintained, in all material respects, effective internal  control over financial reporting as of December 31, 2006, based on criteria  established in Internal Control - Integrated Framework issued by the Committee  of Sponsoring Organizations of the Treadway Commission (COSO).

**Elliott Davis LLC**  /s/Elliott Davis LLC  Columbia, South Carolina  March 12, 2007

  37

***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 $4,380 in 2006 and $4,218 in      2005)**OTHER INVESTMENTS, AT COST****LOANS         **Less allowance for loan losses            Net loans**PREMISES AND EQUIPMENT      ACCRUED INTEREST RECEIVABLE      OTHER ASSETS                                                     *LIABILITIES AND      STOCKHOLDERS' EQUITY*      LIABILITIES         **Deposits            Noninterest-bearing            Interest-bearing               Total deposits                Securities sold under repurchase agreements         United States Treasury demand notes         Dividends payable         Other liabilities               Total liabilities**COMMITMENTS AND CONTINGENT LIABILITIES -**Notes 10 and 11**STOCKHOLDERS' EQUITY         **Common stock - $10 par value; authorized 1,500,000 shares;            issued 789,774 shares in 2006 and 2005         Capital in excess of par value of stock         Retained earnings         Accumulated other comprehensive income (loss)         Less 4,495 in 2006 and 1,240 in 2005 shares held in Treasury at cost               Total stockholders' equity
**    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**
**     2005    **$   33,461      46,000      176,363      4,120      1,459      503,926      5,918498,008      20,574      5,454        7,281**$  792,720**      $  134,475    532,001666,476      43,296      2,197      3,942        6,250          722,161      7,898      43,547      21,094      (1,81070,729                 170            70,559**$  792,720**
*******The accompanying notes are an integral part  of these consolidated financial statements.*****38

***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         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**
**     2006   **$   41,340      5,934          8026,736       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      $     12.77**
**    2005    **$   30,953      6,463          8817,344          782           39,0799,779      649      31             -            10,45928,620       1,275           27,3453,410      2,999              2             6,4119,484      2,975      1,185      1,542      513      514      1,045       2,272           19,53014,226       4,748**$     9,478      $     12.02**
**    2004    **$   24,351      6,656          9577,613          327           32,2916,578      348      12             -              6,93825,353       1,155           24,1983,504      2,753           -                6,2578,682      2,677      1,130      1,379      447      445      1,228       2,258           18,24612,209       3,927**$     8,282      $     10.50**
*******The accompanying notes are an integral part  of these consolidated financial statements.*****39

***CNB CORPORATION AND SUBSIDIARY  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  For the years ended December 31, 2006, 2005, and 2004  (amounts, except share data, in thousands)***
** **
** Common stock  Shares    Amount**
**Capital in        excess of        par value     of stock  **
**Retainedearnings **
**Accumulated      other             comprehensive      income    **
**Treasury   stock   **
**Total             stockholders'       equity     ****BALANCE, DECEMBER 31, 2003**         Net income         Cash dividend declared, $4.25 per share         10% stock dividend         Cash paid for fractional shares         Treasury stock transactions, net         Gain on sale of treasury stock         Net change in unrealized holding             loss, net of income taxes of ($1,265)**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**
      718,246      -         -         71,528      -         -            -   789,774      -         -         -         -           -   789,774      -         -         -         -           -   **789,774**
      $ 7,182      -         -         716      -         -           -    7,898      -         -         -         -          -   7,898      -         -         -         -           -   **$7,898**
      $  34,801       -         -         8,726       -         -         16            -   43,543       -         -         -         4           -     43,547       -         -         -         8         -   **$43,555**
      $   20,113       8,282       (3,352)      (9,442)      (43)      -         -           -    15,558       9,478       (3,942)      -         -            -   21,094       10,046       (4,123)      -         -           -   **$27,017**
      $  2,631       -         -         -         -         -         -   (1,897)      734       -         -         -         -     (2,544)          (1,810)      -         -         -         -        690**$(1,120)**
      $     (104)      -         -         -         -         (44)      -            -      (148)      -         -         (22)      -            -      (170)      -         -         (517)      -           -   **$(687)**
      $ 64,623       8,282       (3,352)      -         (43)      (44)      16    (1,897)      67,585       9,478       (3,942)      (22)      4    (2,544)       70,559       10,046       (4,123)      (517)      8       690 **$76,663**
*The accompanying notes are an integral part of these consolidated financial  statements.*  40

***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**
**    2006***    *$   10,046      690              -   **$   10,736**
**    2005   **       $  9,478       (2,543)                          (1)**$   6,934 **
**   2004     **      $   8,282        (1,897)             -  **$   6,385  **
  The accompanying notes are an integral part of these consolidated financial  statements.  41

***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            Loss on disposal of equipment            Discount accretion and premium amortization on investment securities            (Gain)/Loss on sale of investment securities available for sale            Gain on sale of foreclosed assets            Write-down on foreclosed assets            Changes in assets and liabilities:               (Increase) decrease in accrued interest receivable               Increase in other assets               Increase (decrease) in other liabilities                  Net cash provided by operating activities**INVESTING ACTIVITIES**   Proceeds from sales of investment securities available for sale         Proceeds from maturities and calls of investment securities held to      maturity         Proceeds from maturities and calls of investment securities available      for sale         Purchases of investment securities 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 in securities sold under repurchase agreements         Increase (decrease) in United States Treasury demand notes         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 due from banks**CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR      CASH AND CASH EQUIVALENTS, END OF YEAR      CASH PAID FOR**   Interest         Income taxes
**   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       668       -         (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      13,246       4,005       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 **
**     2004   ******      $   8,282      895       1,155       219       -         -         -         -         -         (324)      (1,188)       (219)     8,820       -         3,562       72,102       -         (103,048)      532       231       (45,835)      (30)   (1,987) (74,473)      (2,870)      57,251       9,190       1,925       (43)      (44)         16   65,425       (228)**   26,021 ****$  25,793      $   6,787 $   3,911 **
*The accompanying notes are an integral part of these consolidated financial  statements.*  42

***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, 2006, 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, 2006 was $27,672,000, $30,492,000, $22,017,000, $27,727,000, and  $21,970,000 respectively.  These amounts represented 34.83%, 38.38%,  27.71%, 34.90%, and 27.65% 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.

*(Continued)*

43

***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 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 probable credit losses.  Loans are charged against 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, 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.

*(Continued)*

44

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

**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 $596,000, $476,000 and  $426,000, were included in the Company's results of operations for 2006, 2005,  and 2004, 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.

**Reclassifications**

Certain amounts in the financial statements  for the years ended December 31, 2004 and 2005 have been reclassified, with no  effect on net income to be consistent with the classifications adopted for the  year ended December 31, 2006.

**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: 786,899 in 2006, 788,496 in 2005, and 789,006 in 2004.   The Company does not have any dilutive instruments and therefore only basic  net income per share is presented.

*(Continued)*

45

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

**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.

***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, and U. S. Treasury demand notes 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.

*(Continued)*

46

***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 July 2006, the FASB issued FASB  Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income  Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes  recognized in enterprises' financial statements in accordance with FASB  Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a  recognition threshold and measurement attributable for the financial statement  recognition and measurement of a tax position taken or expected to be taken in  a tax return. FIN 48 also provides guidance on derecognition, classification,  interest and penalties, accounting in interim periods, disclosures and  transitions. FIN 48 is effective for fiscal years beginning after December 15,  2006. The Company is currently analyzing the effects of FIN 48 on its  financial position, results of operations or cash flows.

In September 2006, the 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 does not require any new fair value measurements, but rather  eliminates inconsistencies found in various prior pronouncements. SFAS 157 is  effective for the Company on January 1, 2008 and is not expected to have a  significant impact on the Company's financial statements.

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 Company does not  believe the adoption of EITF 06-5 will have a material impact on its financial  position, results of operations and cash flows.  

In September 2006, the SEC issued Staff  Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive  guidance on how the effects of the carryover or reversal of prior year  misstatements should be considered in quantifying a potential current year  misstatement. Prior to SAB 108, Companies might evaluate the materiality of  financial statement misstatements using either the income statement or balance  sheet approach, with the income statement approach focusing on new  misstatements added in the current year, and the balance sheet approach  focusing on the cumulative amount of misstatement present in a company's  balance sheet. Misstatements that would be material under one approach could  be viewed as immaterial under another approach, and not be corrected. SAB 108  now requires that companies view financial statement misstatements as material  if they are material according to either the income statement or balance sheet  approach. The Company has analyzed SAB 108 and determined that upon adoption  it will have no impact on the reported results of operations or financial  conditions.

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.

*(Continued)*

47
***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, 2006 and 2005 were approximately $19,381,000 and $17,493,000,  respectively.

  48

***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 book  value, approximate fair value and expected maturities of investment securities  are summarized as follows (tabular amounts in thousands):

**                                  December 31,      2006                                     Amortized              Unrealized Holding                   Fair     ****AVAILABLE      FOR SALE**         Federal agencies            Within one year            One to five years         Government sponsored entities (FHLB, FHLMC, FNMA)            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      **      $    6,000      4,500          10,50062,676      82,391      1,996        147,0634,531      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 **      $      82     104           186605      1,270     -          1,8753      1      -            8             12-          27             27-        -               -   **$  2,100**$     -         -         -   **$      -   **
**  Value   **      $   5,918     4,396         10,31462,071      81,135     1,996       145,2024,529      8,103      1,545     2,703         16,880468        362              830346          10              356**$ 173,582**$   1,352      1,878     1,150**$     4,380**
*(Continued)*

49

***NOTE 3 - INVESTMENT SECURITIES, Continued***
** **
**                                 December 31,      2005                                     Amortized              Unrealized Holding                  Fair     ****AVAILABLE FOR SALE**         Federal agencies            Within one year            One to five years         Government sponsored entities (FHLB, FHLMC, FNMA)            Within one year            One to five years         State, county and municipal            Within one year            One to five years            Six to ten years         Mortgage Backed            Over ten years          CRA Qualified Investment Fund            Total available for sale**HELD TO MATURITY**         State, county and municipal            Within one year            One to five years            Total held to maturity
**     Cost      **      $      2,002      10,500            12,50227,045    122,239          149,2842,689      10,454        3,438            16,581       684           329**$  179,380**$         935        3,185              4,120**$      4,120**
**  Gains   **      $       8      -                 844      11            557      192     131           330        -          -   **$    393**$        5        93              98**$      98**
** Losses **      $        -          271             271153    2,938          3,0911      -              2                 3 45          -   **$   3,410**$      -           -                 -   **$      -   **
**  Value   **      $     2,010     10,229           12,23926,936   119,312         146,2482,695      10,646       3,567           16,908      639          329**$ 176,363**$         940        3,278              4,218**$      4,218**
*(Continued)*

50

***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, 2006 (tabular amounts in thousands):

**Available for Sale**
** **
** Less than                 twelve months           **
**Twelvemonths                     or more                  ****                   Total                      ** ** ****Fair value**
**    Unrealized              losses  **
**Fair value**
**Unrealizedlosses**
**Fair value**
**Unrealized      losses**** **** **** **** **** **** **** **Federal agencies$        -           $        -           $      10,314       $       186  $    10,314               $      186Government sponsored entities      17,864                 36            116,406             1,839      134,270                    1,875Mortgage backed        4,810                 11                         260                          1          5,070                         12State, county, and municipal          -                     -                       362                  27             362                   27              Total**$  22,674****     $         47****     $   127,342****      $   2,053**** $ 150,016****         $  2,100**** **      
             Securities classified as available-for-sale are recorded at fair  market value.  Approximately 98% of the unrealized losses, or fifty-three  individual securities, consisted of securities in a continuous loss position  for twelve months or more.  The Company has the ability and intent to  hold these securities until such time as the value recovers or the securities  mature.  The Company believes, based on industry analyst reports and  credit ratings, that the deterioration in value is attributable to changes in  market interest rates and not in the credit quality of the issuer and  therefore, these losses are not considered other-than-temporary.

             Investment securities with an aggregate par value $167,829,000 at  December 31, 2006 and $122,980,000 at December 31, 2005 were pledged to secure  public deposits and for other purposes.

**Other Investments, at Cost** - The Bank, as a  member institution, is required to own certain stock investments in the  Federal Home Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank.   The stock is generally pledged against any borrowings from these institutions  (see Note 8).  No ready market exists for the stock and it has no quoted  market value.  However, redemption of these stocks has historically been  at par value.  

The Company's investments in stock are summarized below  (tabular amounts in thousands):
 
**               December      31,       **      Federal Reserve Bank      FHLB
**   2006   **$    116   1,585**$ 1,701**
**     2005    **      $    116   1,343**$ 1,459**
******51

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

       Following is a summary of loans by major  classification (tabular amounts in thousands):
 
**             December 31,        **      Real estate - mortgage      Real estate - construction      Commercial and industrial      Loans to individuals for household, family and        other consumer expenditures      Agriculture      All other loans, including overdrafts
**     2006   **      $  361,707      74,564      83,375      44,124      3,097          458** 567,325**
**     2005   **      $  324,475      50,210      84,474      41,400      1,912       1,455**$ 503,926**
       The Bank's loan portfolio consisted  of $414,155,000 and $371,983,000 in fixed rate loans as of December 31, 2006  and 2005, respectively.  Fixed rate loans with maturities in excess of  one year amounted to $289,839,000 and $284,363,000 at December 31, 2006 and  2005, respectively.  The Bank has an available line of credit from the  FHLB.  The line is secured by a blanket lien on qualifying 1-4 family  mortgages.

       Changes in the allowance for loan losses are  summarized as follows (tabular amounts in thousands):
 
**   For the years ended December      31,    **** **
**   2006  **
**    2005  **
**  2004    **Balance, beginning of year      Recoveries of loans previously charged        against the allowance      Provided from current year's income      Loans charged against the allowance      Balance, end of year
$  5,918         659         808      (909) **$  6,476****  **
$  5,104         360         1,275       (821)**$  5,918 **
$  4,524         242         1,155       (817)**$  5,104 **
       At December 31, 2006 and 2005,  non-accrual loans totaled $897,000 and $405,000, respectively.  The total  amount of interest earned on non-accrual loans was $27,000 in 2006, $7,000 in  2005, and $28,000 in 2004.  The gross interest income which would have  been recorded under the original terms of the non-accrual loans amounted to  $65,000 in 2006, $34,000 in 2005, and $69,000 in 2004.  Foregone interest  on non- accrual loans totaled $38,000 in 2006, $26,000 in 2005, and $41,000 in  2004.  As of December 31, 2006 and 2005, the Company had no impaired loans.

  52
***NOTE 5 - PREMISES AND EQUIPMENT***       Premises and equipment at December 31 is summarized as follows (tabular  amounts in thousands): ** **
**   2006   **
**   2005   **Land and buildings      Furniture, fixtures and equipment      Less accumulated depreciation and amortization      Construction in progress
$ 25,021     7,25432,275     9,56822,707        281**$ 22,988**
$ 22,512     6,64229,154    8,81420,340        234**$ 20,574**
     Depreciation and amortization of premises and equipment  charged to operating expense totaled $1,202,000 in 2006, $983,000 in 2005 and  $895,000 in 2004.

***NOTE 6 - DEPOSITS***

     A summary of deposits, by type, as of December 31  follows (tabular amounts in thousands):
** **
**    2006    **
**    2005   **Transaction accounts      Savings deposits      Insured money market accounts      Time deposits over $100,000      Other  time deposits             Total deposits
$ 224,936      50,167      75,236      175,908**** |