UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-KSB





[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


for
the fiscal year ended December 31, 2007


OR


[    ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


for
the transition period from _______________to______________





Commission
File Number: 000-51685





CNB
FINANCIAL CORP.


(Name of
small business issuer in its charter)





MASSACHUSETTS
            20-3801620(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      employer ID)33
      Waldo Street, P.O. Box 830, Worcester, MA
            01613-0830(Address
      of principle executive offices)
            (Zip
      Code)





Issuer’s
Telephone Number: (508)
752-4800





Securities
registered under Section 12(b) of the Exchange Act:


Title of each
      class
            Name of each exchange
      on which registeredNone
            N/A


Securities registered under
Section 12(g) of the Exchange Act:


Common
Stock, par value $1.00 per share





Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act.  [   ]





Check whether the issuer: (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.YES [ X ]  NO [   ]





Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will 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-KSB or any amendment to this Form
10-KSB.     [   ]





Indicate by check mark whether the
registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.YES
[   ]  NO [ X ]





The issuer’s revenues for its fiscal
year ended December 31, 2007, were $19,376,000.





The aggregate market value of the
issuer’s voting and non voting common equity held by non-affiliates (based upon
the trading price of $6.75 per share for the issuer’s common stock on March 17,
2008, and for the purpose of this computation only, on the assumption that all
of the issuer’s directors and officers are affiliates) was approximately
$13,971,000.





At March 19, 2008, the registrant had
2,283,208 shares of common stock issued and outstanding.





Transitional Small Business Disclosure
Format (check
one):                                                                                                                     YES
[   ]   NO [X]





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders are
incorporated herein by reference in Part III of this Form 10-KSB.











CNB
Financial Corp.





Annual
Report on Form 10-KSB


For
the Fiscal Year Ended December 31, 2007





TABLE
OF CONTENTS








PART
      I
            PageItem
      1
            Description
      of Business
            1Item
      2
            Description
      of Property
            10Item
      3
            Legal
      Proceedings
            11Item
      4
            Submission
      of Matters to a Vote of Security Holders
            11PART
      IIItem
      5
            Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
              Purchases
      of Equity Securities
            12Item
      6
            Management’s
      Discussion and Analysis or Plan of Operation
            12Item
      7
            Financial
      Statements
            26Item
      8
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            26Item
      8A(T)
            Controls
      and Procedures
            26Item
      8B
            Other
      Information
            27PART
      IIIItem
      9
            Directors,
      Executive Officers, Promoters and Control Persons and Corporate
              Governance;
      Compliance with Section 16(a) of the Exchange Act
            28Item
      10
            Executive
      Compensation
            28Item
      11
            Security
      Ownership of Certain Beneficial Owners and Management and Related
              Stockholder
      Matters
            28Item
      12
            Certain
      Relationships and Related Transactions, and Director
      Independence
            29Item
      13
            Exhibits
            30Item
      14
            Principal
      Accountant Fees and Services
            30Signatures
            S-1, S-2













PART
I





ITEM1 - DESCRIPTION OF BUSINESS





This annual report contains
forward-looking statements that are based on assumptions and may describe future
plans, strategies and expectations of CNB Financial Corp.  These
forward-looking statements are generally identified by use of the words
“believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar
expressions. CNB Financial Corp.’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of CNB Financial Corp.
and its subsidiary include, but are not limited to, changes in interest rates,
national and regional economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the U.S. government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in CNB Financial Corp.’s market area,
changes in real estate market values in CNB Financial Corp.’s market area,
changes in relevant accounting principles and guidelines and inability of third
party service providers to perform. Additional factors that may affect our
results are discussed in this annual report in the section titled “Risk Factors”
below.





These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, CNB Financial Corp. does not
undertake, and specifically disclaims any obligation, to release publicly the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of the statements or to reflect
the occurrence of anticipated or unanticipated events.





General
Description of Business





Organization





CNB
Financial Corp. (the “Company”) is a bank holding company.  Its wholly
owned subsidiary Commonwealth National Bank (the “Bank”), chartered in 2001, is
a nationally chartered bank operating primarily in Worcester County,
Massachusetts.  The Bank operates out of its main office in Worcester,
Massachusetts and five branch offices.  The Bank is subject to
competition from other financial institutions, including commercial banks,
savings banks, credit unions and mortgage banking companies.  The
Company is subject to the regulations of, and periodic examinations by, the
Federal Reserve Board.  The Bank is also subject to the regulations
of, and periodic examinations by, the Office of the Comptroller of the Currency
(the “OCC”) and the Federal Deposit Insurance Corporation (the
“FDIC”).  The Deposit Insurance Fund administered by the FDIC insures
the Bank’s deposits for amounts up to $100,000 and for amounts up to $250,000 in
deposit retirement accounts.





Company
Formation





The
Company was formed on December 16, 2005 in connection with the reorganization of
the Bank into a bank holding company structure.  The Federal Reserve
Bank of Boston (“FRBB”) approved the application of the Company to acquire 100%
of the capital stock of the Bank.  In connection with the
reorganization, the holders of common stock of the Bank received one share of
common stock of the Company in exchange for each share of common stock of the
Bank.  Outstanding certificates representing shares of common stock of
the Bank now represent shares of the common stock of the Company and such
certificates may, but need not, be exchanged by the holders for new certificates
for the appropriate number of shares of the Company.  The par value of
the Company’s common stock is $1 per share, and the par value of the Bank’s
common stock was $5 per share.  The holders of Bank options
immediately prior to the reorganization are entitled to receive one option to
acquire shares of the common stock of the Company for each Bank option then held
by them on the same terms and conditions.





The
Business of CNB Financial Corp. and Commonwealth National Bank





General:  The
Company does not have operations aside from its ownership of all of the issued
and outstanding stock of the Bank.  The Bank is the Company’s sole
operating subsidiary.  The Bank provides retail and commercial banking
products and services, including checking and savings accounts, time deposits,
IRAs, and commercial, consumer, and real estate loans to customers located
primarily in the Worcester, Massachusetts market area.





The
Company relies mainly on local advertising and promotional activities and on
personal contacts by its directors, officers, employees and shareholders to
attract business and to acquaint potential customers with the Company’s
personalized service.  The Company emphasizes a high degree of
personalized service in order to be able to serve each customer’s banking
needs.  The Company operates out of its main office at 33 Waldo
Street, Worcester, Massachusetts and five branch offices: 1 West Boylston
Street, Worcester, Massachusetts; 564 Main Street, Shrewsbury, Massachusetts;
701 Church Street in the Whitinsville section of Northbridge, Massachusetts;
1393 Grafton Street, Worcester, Massachusetts and 26 West Boylston Street, West
Boylston, Massachusetts.






1





Loan Portfolio:  The
Bank originates commercial, industrial, commercial real estate, home equity,
residential and consumer loans.  Commercial and industrial loans
include operating lines of credit and term loans made to small and medium-sized
businesses.  Business assets such as accounts receivable and equipment
typically secure such loans.  Commercial real estate loans are
primarily secured by either borrower-occupied business real estate or investment
real estate.  Home equity loans and lines of credit are secured by the
borrower’s residence.  One-to-four-family owner-occupied residences
secure residential mortgage loans.  Consumer loans to individuals
include installment loans secured by automobiles and other assets and overdraft
protection lines of credit, which are generally unsecured.





Certain
risks are involved in granting loans, which primarily relate to the borrower’s
ability and willingness to repay the debt.  Before the Bank extends a
new loan to a customer, the risks are assessed through a review of the
borrower’s financial information, past and current credit history, the
collateral being used to secure the transaction and other factors.





Investment
Activities:  The Bank maintains a portion of its assets in
investment securities, which consist primarily of U.S. Government and agency
obligations, including mortgage-backed securities.





The
officers of the Bank, in accordance with investment policies established by the
Bank’s Board of Directors and with the assistance of an investment advisory
firm, manage the Bank’s investment portfolio.  The objectives of the
Bank’s investment policy are to provide liquidity and diversification of assets
and earnings.





Deposits:  The Bank
obtains its deposits from retail and commercial customers located primarily in
the Worcester market area as a result of its competitively priced deposit
products and a local advertising campaign.  The deposit portfolio is
comprised of savings accounts, NOW accounts, demand deposit accounts, money
market deposit accounts and certificates of deposit of personal, corporate and
municipal account holders.





Competition:  The
Bank faces competition, both from within and outside of its primary market area,
in all aspects of its business.  Many of these other institutions have
substantially greater financial resources than the Bank.  Competitors
for deposits include existing banks and credit unions, insurance companies,
brokerage firms, mutual funds and other financial institutions.  The
Bank competes for commercial loans with a number of banks within its service
area.  The Bank competes for consumer loans, such as home equity
loans, installment loans and automobile loans with existing banks, mortgage
companies and credit unions doing business in its market area.  Its
competitors also consist of out-of-state banks, local offices of national
financial companies and financial subsidiaries of automobile
manufacturers.





Personnel:  At
December 31, 2007, the Bank employed 56 full-time employees and 14 part-time
employees.  The Bank provides a number of benefits such as health,
disability, and life insurance for qualified employees.  None of the
Bank’s employees are subject to collective bargaining agreements.





Risk
Factors:





An
investment in shares of our common stock involves various
risks.  Before deciding to invest in our common stock, you should
carefully consider the risks described below in conjunction with the other
information in this Form 10-KSB, including the items included as
exhibits.  Our business, financial condition and results of operations
could be harmed by any of the following risks or by other risks that have not
been identified or that we may believe are immaterial or
unlikely.  The value or market price of our common stock could decline
due to any of these risks, and you may lose all or part of your
investment.  The risks discussed below also include forward-looking
statements, and our actual results may differ substantially from those discussed
in these forward-looking statements.





Our
business strategy includes the continuation of significant growth plans, and our
financial condition and results of operations could be negatively affected if we
fail to grow or fail to manage our growth effectively.





Over the
past three years our assets have increased $89.7 million, or 45%, from $199.8
million at December 31, 2004 to $289.5 million at December 31, 2007, primarily
due to increases in loans and investment securities.  We expect to
continue to experience growth in the amount of our assets, the level of our
deposits and the scale of our operations.  Achieving our growth
targets requires us to attract customers that currently bank at other financial
institutions in our market, thereby increasing our share of the
market.  Our ability to successfully grow will depend on a variety of
factors, including our ability to attract and retain experienced bankers, the
continued availability of desirable business opportunities, the competitive
responses from other financial institutions in our market areas and our ability
to manage our growth.  While we believe we have the management
resources and internal systems in place to successfully manage our future
growth, there can be no assurance growth opportunities will be available or that
we will successfully manage our growth.  If we do not manage our
growth effectively, we may not be able to achieve our business plan, and our
business and prospects could be harmed.






2





Certain
interest rate movements may hurt our earnings.





Short-term
market interest rates (which we use as a guide to price our deposits) have until
recently risen from historically low levels, while longer-term market interest
rates (which we use as a guide to price our longer-term loans) have
not.  This “flattening” of the market yield curve has had a negative
impact on our net interest margin, which has reduced our
profitability.  For the years ended December 31, 2007 and 2006,
respectively, our net interest margin was 3.03% compared to
3.27%.  Recently, however, the U.S. Federal Reserve decreased its
target for the federal funds rate from 5.25% to 2.25%.  Decreases in
interest rates can result in increased prepayments of loans and mortgage-related
securities, as borrowers refinance to reduce their borrowing
costs.  Under these circumstances, we are subject to reinvestment risk
as we may have to redeploy such loan or securities proceeds into lower-yielding
assets, which might also negatively impact our income.  Recent market
movements towards lower short-term rates have caused the yield curve to return
to a more normal upward-sloping condition and are expected to have a favorable
impact on our earnings over a one to two year period.  However, if
short-term interest rates were to rise, and if rates on our deposits and
borrowings were to reprice upwards faster than the rates on our long-term loans
and investments, we would experience further compression of our interest rate
spread and net interest margin, which would have a negative effect on our
profitability.





Our
emphasis on commercial lending may expose us to increased lending
risks.





At December 31, 2007, our loan
portfolio consisted of $128.3 million, or 59%, of commercial real estate loans
and $55.0 million, or 25%, of commercial and industrial loans.  We
intend to continue our emphasis on these types of loans.  These types
of loans generally expose a lender to greater risk of non-payment and loss than
one-to-four-family residential mortgage loans because repayment of the loans
often depends on the successful operation of the property and the income stream
of the borrowers.  Such loans typically involve larger loan balances
to single borrowers or groups of related borrowers compared to one- to
four-family residential mortgage loans.  Commercial business loans
expose us to additional risks since they typically are made on the basis of the
borrower’s ability to make repayments from the cash flow of the borrower’s
business and are secured by non-real estate collateral that may depreciate over
time.  In addition, since such loans generally entail greater risk
than one-to-four-family residential mortgage loans, we may need to increase our
allowance for loan losses in the future to account for the possible increase in
credit losses associated with the growth of such loans.  Also, many of
our commercial borrowers have more than one loan outstanding with
us.  Consequently, an adverse development with respect to one loan or
one credit relationship can expose us to a significantly greater risk of loss
compared to an adverse development with respect to a one-to-four-family
residential mortgage loan.





Our
recent results may not be indicative of our future operating
results.





Earnings per share have been volatile
due to the changes in the interest rate environment and the local economy in
recent years.  For example, net earnings per share (diluted) grew from
$0.13 for the year ended December 31, 2004 to $0.29 for the year ended December
31, 2006, then declined to $0.17 per share for the year ended December 31,
2007.  Various factors, such as economic conditions, regulatory and
legislative considerations and competition, may also cause variations in
earnings and impede or restrict our ability to increase earnings during future
periods.





Strong
competition within our market area could hurt our profits and slow
growth.





We face intense competition both in
making loans and attracting deposits.  This competition has made it
more difficult for us to make new loans and has occasionally forced us to offer
higher deposit rates.  Price competition for loans and deposits might
result in us earning less on our loans and paying more on our deposits, which
reduces net interest income.  According to the Federal Deposit
Insurance Corporation, as of June 30, 2007, we held 2.2% of the deposits in
Worcester County, Massachusetts, which was the 20th largest
market share of deposits out of the 40 financial institutions, which held
deposits in this county.  Some of the institutions with which we
compete have substantially greater resources and lending limits than we have and
may offer services that we do not provide.  We expect competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services
industry.  Our profitability depends upon our continued ability to
compete successfully in our market area.





The building of market share through
our branching strategy could cause our expenses to increase faster than
revenues.





We intend
to continue to build market share in the Worcester area through our branching
strategy.  We opened two branch offices in the past twenty-four months
and could open at least one more branch within the next twenty-four
months.  There are considerable costs involved in opening branches and
new branches generally require a period of time to generate sufficient revenues
to offset their costs, especially in areas in which we do not have an
established presence.  Accordingly, any new branch can be expected to
negatively impact our earnings for some period of time until the branch reaches
certain economies of scale.  Our expenses could be further increased
if we






3




encounter
delays in the opening of any of our new branches. Finally, we have no assurance
our new branches will be successful even after they have been
established.





The
unseasoned nature of our commercial loan portfolio may result in errors in
judging its collectibility, which may lead to additional provisions or
charge-offs, which would hurt our profits.





Our
commercial loan portfolio, which consists of commercial real estate loans and
commercial and industrial loans has increased from $120.1 million at December
31, 2004 to $183.3 million at December 31, 2007, a 53% increase.  A
large portion of our commercial loan portfolio is unseasoned and does not
provide us with a significant payment history pattern with which to judge future
collectibility.  These loans have only recently been subjected to
unfavorable economic conditions.  As a result, it is difficult to
predict the future performance of this part of our loan
portfolio.  These loans may have delinquency or charge-off levels
above our historical experience, which could adversely affect our future
performance.  Further, commercial loans generally have larger balances
and involve a greater risk than one-to-four-family residential mortgage
loans.  Accordingly, if we make any errors in judgment in the
collectibility of our commercial loans, any resulting charge-offs may be larger
on a per loan basis than those incurred with our residential mortgage loan
portfolio.





Our
continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is needed.





We are required by federal regulatory
authorities to maintain adequate levels of capital to support our
operations.  We anticipate our present capital resources will satisfy
our capital requirements for the foreseeable future.  We may at some
point, however, need to raise additional capital to support our continued
growth.  If we raise capital through the issuance of additional shares
of our common stock or other securities, it would dilute the ownership interests
of our existing stockholders and may dilute the per share book value of our
common stock.  New investors may also have rights, preferences and
privileges senior to our current shareholders which may adversely impact our
current shareholders.





Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial
performance.  Accordingly, we cannot assure you of our ability to
raise additional capital, if needed, on terms acceptable to us.  If we
cannot raise additional capital when needed, our ability to further expand our
operations through internal growth and acquisitions could be materially
impaired.





If
the value of real estate in central Massachusetts were to decline materially, a
significant portion of our loan portfolio could become under-collateralized,
which could have a material adverse effect on us.





With most of our loans concentrated in
central Massachusetts, a decline in local economic conditions could adversely
affect the value of the real estate collateral securing our loans.  A
decline in property values would diminish our ability to recover on defaulted
loans by selling the real estate collateral, making it more likely that we would
suffer losses on defaulted loans.  Additionally, a decrease in asset
quality could require additions to our allowance for loan losses through
increased provisions for loan losses, which would hurt our
profits.  Also, a decline in local economic conditions may have a
greater effect on our earnings and capital than on the earnings and capital of
larger financial institutions whose real estate loan portfolios are more
geographically diverse.  Real estate values are affected by various
factors in addition to local economic conditions, including, among other things,
changes in general or regional economic conditions, governmental rules or
policies and natural disasters.





Our
business is subject to the success of the local economy in which we
operate.





Because the majority of our borrowers
and depositors are individuals and businesses located and doing business in
central Massachusetts our success depends to a significant extent upon economic
conditions in central Massachusetts.  Adverse economic conditions in
our market area could reduce our growth rate, affect the ability of our
customers to repay their loans and generally affect our financial condition and
results of operations.  Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect our profitability. We are less able than a larger institution
to spread the risks of unfavorable local economic conditions across a large
number of diversified economies.  Any sustained period of increased
payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in the Commonwealth of Massachusetts could adversely affect
the value of our assets, revenues, results of operations and financial
condition.  Moreover, we cannot give any assurance we will benefit
from any market growth or favorable economic conditions in our primary market
areas if they do occur.





The
trading history of our common stock is characterized by low trading
volume.  The value of your common stock may be subject to sudden
decreases due to the volatility of the price of our common stock.






4





Although our common stock trades on OTC
Electronic Bulletin Board, it has not been regularly traded.  We
cannot predict the extent to which investor interest in us will lead to a more
active trading market in our common stock or how liquid that market might
become. A public trading market having the desired characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of
willing buyers and sellers of our common stock at any given time, which presence
is dependent upon the individual decisions of investors, over which we have no
control.





The market price of our common stock
may be highly volatile and subject to wide fluctuations in response to numerous
factors, including, but not limited to, the factors discussed in other risk
factors and the following:




·  actual or
anticipated fluctuations in our operating results;




·  changes
in interest rates;




·  changes
in the legal or regulatory environment in which we operate;




· press
releases, announcements or publicity relating to us or our competitors or
relating to trends in our industry;




· changes
in expectations as to our future financial performance, including financial
estimates or recommendations by securities analysts and
investors;




·  future
sales of our common stock;




· changes
in economic conditions in our marketplace, general conditions in the U.S.
economy, financial markets or the banking industry; and




·  other
developments affecting our competitors or us.




These factors may adversely affect the
trading price of our common stock, regardless of our actual operating
performance, and could prevent you from selling your common stock at or above
the price at which you purchased your shares.  In addition, the stock
markets, from time to time, experience extreme price and volume fluctuations
that may be unrelated or disproportionate to the operating performance of
companies.  These broad fluctuations may adversely affect the market
price of our common stock, regardless of our trading performance.





We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.





Commonwealth National Bank is subject
to extensive regulation, supervision and examination by the Office of the
Comptroller of the Currency, its chartering authority and by the Federal Deposit
Insurance Corporation, as insurer of its deposits.  CNB Financial
Corp. is subject to regulation and supervision by the Federal Reserve
Board.  Such regulation and supervision govern the activities in which
an institution and its holding company may engage, and are intended primarily
for the protection of the insurance fund and for the depositors and borrowers of
Commonwealth National Bank.  The regulation and supervision by the
Office of the Comptroller of the Currency, the Federal Reserve Board and the
Federal Deposit Insurance Corporation are not intended to protect the interests
of investors in CNB Financial Corp. common stock.  Regulatory
authorities have extensive discretion in their supervisory and enforcement
activities, including the imposition of restrictions on our operations, the
classification of our assets and determination of the level of our allowance for
loan losses.  Any change in such regulation and oversight, whether in
the form of regulatory policy, regulations, legislation or supervisory action,
may have a material impact on our operations.





Regulation and
Supervision





General





CNB Financial Corp., which is a bank
holding company, is required to file certain reports with the Federal Reserve
Board (“FRB”) and otherwise comply with the Bank Holding Company Act of 1956, as
amended (“BHCA”) and the rules and regulations promulgated
thereunder.





The Bank, as a national bank, is
subject to extensive regulation, examination and supervision by the OCC, as its
primary regulator, and the FDIC, as the deposit insurer.  The Bank’s
deposit accounts are insured up to applicable limits by the Deposit Insurance
Fund managed by the FDIC.  The Bank must file reports with the OCC and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with, or acquisitions of, other institutions.  The OCC
and/or the FDIC conduct periodic examinations to test the Bank’s safety and
soundness and compliance with various regulatory requirements.  Many
aspects of the Bank’s






5




operations
are regulated by federal law including allowable activities, reserves against
deposits, branching, mergers and investments.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors.  The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.  Any change in
such regulatory requirements and policies, whether by the OCC, the FDIC, or
Congress, could have a material adverse impact on CNB Financial Corp. or
Commonwealth National Bank and their operations.





Certain regulatory requirements
applicable to the Bank and CNB Financial Corp. are referred to below or
elsewhere herein.  This description of statutory provisions and
regulations applicable to national banks and their holding companies does not
purport to be a complete description of such statutes and regulations and their
effects on the Bank and CNB Financial Corp. and is qualified in its entirety by
reference to the actual statutes and regulations involved.





Holding
Company Regulation





Federal
Regulation.As a bank holding company, CNB Financial Corp. is
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB.  CNB Financial Corp. is required to obtain
the prior approval of the FRB to acquire all, or substantially all, of the
assets of any bank or bank holding company or merge with another bank holding
company.  Prior FRB approval is also required for CNB Financial Corp.
to acquire direct or indirect ownership or control of any voting securities of
any bank or bank holding company if, after giving effect to such acquisition,
CNB Financial Corp. would, directly or indirectly, own or control more than 5%
of any class of voting shares of the bank or bank holding company.  In
evaluating such transactions, the FRB considers such matters as the financial
and managerial resources of and future prospects of the companies and banks
involved, competitive factors and the convenience and needs of the communities
to be served.  Bank holding companies have authority under the BHCA to
acquire additional banks in any state, subject to certain restrictions such as
deposit concentration limits.  In addition to the approval of the FRB,
before any bank acquisition can be completed, prior approval may also be
required from other agencies having supervisory jurisdiction over the banks to
be acquired.





A bank holding company generally is
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting securities of any company conducting non-banking
activities.  One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks to be a proper incident thereto.  Some of the
activities that the FRB has determined by regulation to be closely related to
banking are:  (1) making or servicing loans; (2) performing certain
data processing services; (3) providing discount brokerage services; (4) acting
as a fiduciary, investment or financial advisor; (5) finance leasing personal or
real property; (6) making investments in corporations or projects designed
primarily to promote community welfare; and (7) acquiring a savings association,
provided that the savings association only engages in activities permitted by
bank holding companies.





The Gramm-Leach-Bliley Act authorized a
bank holding company that meets specified conditions, including being
“well-capitalized” and “well managed” to opt to become a “financial holding
company” and thereby engage in a broader array of financial activities than
previously permitted.  Such activities may include insurance
underwriting and investment banking.  The Gramm-Leach-Bliley Act also
authorized banks to engage through “financial subsidiaries” in certain of the
activities permitted for financial holding companies.  Financial
subsidiaries are generally treated as affiliates for purposes of restrictions on
a bank’s transactions with affiliates.





Bank holding companies generally are
required to give the FRB prior written notice of any purchase or redemption of
its outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of their
consolidated net worth.  The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, FRB order or directive,
or any condition imposed by, or written agreement with, the
FRB.  There is an exception to this approval requirement for
well-capitalized bank holding companies that meet certain other
conditions.





The FRB has issued a policy statement
regarding the payment of dividends by bank holding companies.  In
general, the FRB’s policies provide that dividends should be paid only out of
current earnings and only if the prospective rate of earnings retention by the
bank holding company appears consistent with the organization’s capital needs,
asset quality, and overall financial condition.  The FRB’s policies
also require that a bank holding company serve as a source of financial strength
to its subsidiary banks by standing ready to use available resources to provide
adequate capital funds to those banks during periods of financial stress or
adversity and by maintaining the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks where
necessary.  Furthermore, the FRB has authority to prohibit a bank
holding company from paying a capital distribution where a subsidiary bank is
undercapitalized. These regulatory policies could affect the ability of CNB
Financial Corp. to pay dividends or otherwise engage in capital
distributions.






6





The FRB has general authority to
enforce the BHCA as to CNB Financial Corp. and may require a bank holding
company to cease any activity or terminate control of any subsidiary engaged in
an activity that the FRB believes constitutes a serious risk to the safety,
soundness or stability of its bank subsidiaries.





CNB Financial Corp. and its
subsidiaries will be affected by the monetary and fiscal policies of various
agencies of the United States Government, including the Federal Reserve
System.  In view of changing conditions in the national economy and
money markets, it is impossible for the management of CNB Financial Corp.
accurately to predict future changes in monetary policy or the effect of such
changes on the business or financial condition of CNB Financial Corp. or the
Bank.





Massachusetts
Holding Company Regulation. In addition to the federal holding
company regulations, a bank holding company organized or doing business in
Massachusetts must comply with regulations under Massachusetts
law.  Approval of the Massachusetts regulatory authorities would be
required for the CNB Financial Corp. to acquire 25% or more of the voting stock
of another depository institution.  Similarly, prior regulatory
approval would be necessary for any person or company to acquire 25% or more of
the voting stock of CNB Financial Corp.  The term “bank holding
company,” for the purpose of Massachusetts law, is defined generally to include
any company which, directly or indirectly, owns, controls or holds with power to
vote more than 25% of the voting stock of each of two or more banking
institutions, including commercial banks and state co-operative banks, savings
banks and savings and loan association and national banks, federal savings banks
and federal savings and loan associations.  In general, a holding
company controlling, directly or indirectly, only one banking institution will
not be deemed to be a bank holding company for the purposes of Massachusetts
law.  Under Massachusetts law, the prior approval of the Board of Bank
Incorporation is required before the following: any company may become a bank
holding company; any bank holding company acquires direct or indirect ownership
or control of more than 5% of the voting stock of, or all or substantially all
of the assets of, a banking institution; or any bank holding company merges with
another bank holding company. Although CNB Financial Corp. is not a bank holding
company for purposes of Massachusetts law, any future acquisition of ownership,
control, or the power to vote 25% or more of the voting stock of another banking
institution or bank holding company would cause it to become such.





Acquisition
of CNB Financial Corp.





Federal
Regulation.  Federal law requires that a notice be submitted to
the FRB if any person (including a company), or group acting in concert, seeks
to acquire 10% or more of CNB Financial Corp.’s outstanding voting stock, unless
the FRB has found that the acquisition will not result in a change in control of
CNB Financial Corp.  The FRB has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of
the acquisition.





Under the BHCA, any company would be
required to obtain prior approval from the FRB before it may obtain “control” of
CNB Financial Corp. within the meaning of the BHCA.  “Control”
generally is defined to mean the ownership or power to vote 25% or more of any
class of voting securities of CNB Financial Corp. or the ability to control in
any manner the election of a majority of CNB Financial Corp.’s
directors.  An existing bank holding company would be required to
obtain the FRB’s prior approval under the BHCA before acquiring more than 5% of
CNB Financial Corp.’s voting stock.  See “Holding Company
Regulation.”





Federal
Banking Regulations





Capital
Requirements.  The OCC’s capital regulations require national
banks to meet two minimum capital standards:  a 4% Tier 1 capital to
total adjusted assets ratio for most banks (3% for national banks with the
highest examination rating) (the “leverage” ratio) and an 8% risk-based capital
ratio.  In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital to total assets
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the financial institution examination rating system) and, together with the
risk-based capital standard itself, a 4% Tier 1 capital to risk-based assets
standard.  “Tier 1 capital” is generally defined as common
stockholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles (other than certain
mortgage servicing rights and credit card relationships), a percentage of
certain non-financial equity investments and certain other specified
items.





The risk-based capital standard
requires the maintenance of Tier 1 and total capital (which is defined as Tier 1
capital plus Tier 2 capital) to risk-weighted assets of at least 4% and 8%,
respectively.  In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet activities, are multiplied by a
risk-weight factor of 0% to 100%, as assigned by the OCC capital regulation
based on the risks that the agency believes are inherent in the type of
asset.  The regulators have recently added a market risk adjustment to
cover a bank’s trading account, foreign exchange and commodity
positions.  Tier 2 capital may include cumulative preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values.  Overall, the amount of Tier 2
capital included as part of total capital cannot exceed 100% of Tier 1
capital.






7





The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the OCC for the Bank.  CNB Financial Corp.’s total
and Tier 1 capital exceed these requirements as of December 31,
2007.





Both the OCC and the FRB have the
discretion to establish higher capital requirements on a case-by-case basis
where deemed appropriate in the circumstances of a particular bank or bank
holding company.





Prompt Corrective
Regulatory Action.  Under the prompt corrective action
regulations, the OCC is required to take certain supervisory actions against
undercapitalized institutions under its jurisdiction, the severity of which
depends upon the institution’s degree of
undercapitalization.  Generally, an institution that has a ratio of
total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be “undercapitalized.”  An
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be “significantly undercapitalized” and an institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to be
“critically undercapitalized.”  Subject to a narrow exception, the OCC
is required to appoint a receiver or conservator within specified time frames
for an institution that is “critically undercapitalized.”  The
regulation also provides that a capital restoration plan must be filed with the
OCC within 45 days of the date an institution receives notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized.”  Compliance with the plan must be guaranteed by any
parent holding company in the amount of the lesser of 5% of the bank’s total
assets or the amount necessary to achieve compliance with applicable capital
regulations.  In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion.  The OCC could also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.





Insurance of
Deposit Accounts.  The Bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC.  The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006.  The
FDIC amended its risk-based assessment system in 2007 to implement authority
granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform
Act”).  Under the revised system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors.  An institution’s assessment rate
depends upon the category to which it is assigned.  Risk category I,
which contains the least risky depository institutions, is expected to include
more than 90% of all institutions.  Unlike the other categories, Risk
Category I contains further risk differentiation based on the FDIC’s analysis of
financial ratios, examination component ratings and other
information.  Assessment rates are determined by the FDIC and
currently range from five to seven basis points for the healthiest institutions
(Risk Category I) to 43 basis points of assessable deposits for the riskiest
(Risk Category IV).  The FDIC may adjust rates uniformly from one
quarter to the next, except that no single adjustment can exceed three basis
points.  No institution may pay a dividend if in default of the FDIC
assessment.





The Reform Act also provided for a
one-time credit for eligible institutions based on their assessment base as of
December 31, 1996.  Institutions eligible for the One-Time Assessment
Credit were those that were in existence on December 31, 1996, and paid a
deposit insurance assessment prior to that date, or are a successor to such an
institution.  The Bank was established during 2001 and therefore it
was not eligible to receive the one-time credit.  The Reform Act also
provided for the possibility that the FDIC may pay dividends to insured
institutions once the Deposit Insurance fund reserve ratio equals or exceeds
1.35% of estimated insured deposits.





In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  This payment is established quarterly and
during the calendar year ending December 31, 2007 averaged 1.18 basis points of
assessable deposits.





The Reform Act provided the FDIC with
authority to adjust the Deposit Insurance Fund ratio to insured deposits within
a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of
1.25%.  The ratio, which is viewed by the FDIC as the level that the
fund should achieve, was established by the agency at 1.25% for 2008, which is
unchanged from 2007.





The FDIC has authority to increase
insurance assessments.  A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Bank.  Management cannot predict what insurance
assessment rates will be in the future.






8





Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or OCC.  The management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.





Loans to One
Borrower.  National banks are subject to limits on the amount
that they may lend to single borrowers.  Generally, banks may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of its capital and surplus (including Tier 1 capital, Tier 2 capital and the
amount of the allowance for loan and lease losses not included in Tier 2
capital).  An additional amount may be lent, equal to 10% of capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion.  At
December 31, 2007, the Bank’s limit on loans to one borrower was $4.2 million
and the Bank’s largest aggregate outstanding balance of loans to one borrower
was $2.9 million.





Limitation on
Capital Distributions.  National banks may not pay dividends
out of their permanent capital  or in excess of undivided profits and
may not, without OCC approval, pay dividends in excess of the total of the
bank’s retained net income for the year combined with retained net income for
the prior two years less any transfers to surplus and capital
distributions.  A national bank may not pay a dividend that would
cause it to fall below any applicable regulatory capital standard.





Branching.National
banks are authorized to establish branches within the state in which they are
headquartered to the extent state law allows branching by state
banks.  Federal law also provides for interstate branching for
national banks.  Interstate branching by merger was authorized as of
June 1, 1997 unless the state in which the bank is to branch has enacted a law
opting out of interstate branching.  De novo interstate branching
is permitted to the extent that the state into which the bank is to branch has
enacted a law authorizing out-of-state banks to establish de novo
branches.





Transactions with
Related Parties.The authority of a depository institution to
engage in transactions with related parties or “affiliates” (e.g., any company that
controls or is under common control with an institution, including, in this
case, CNB Financial Corp.) is limited by Sections 23A and 23B of the Federal
Reserve Act (“FRA”).  Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the depository institution.  The aggregate amount of
covered transactions with all affiliates is limited to 20% of the depository
institution’s capital and surplus.  Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from affiliates
is generally prohibited.  Section 23B generally provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.





The authority of the Bank to extend
credit to executive officers, directors and 10% or greater shareholders
(“insiders”), as well as entities such persons control, is governed by Sections
22(g) and 22(h) of the FRA and Regulation O thereunder.  Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and are not to involve more than the
normal risk of repayment.  There is an exception to this requirement
for loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees.  Regulation O also places individual
and aggregate limits on the amount of loans that institutions may make to
insiders based, in part, on the institution’s capital position and requires that
certain board approval procedures be followed.  Extensions of credit
to executive offices are subject to additional restrictions.





Enforcement.The
OCC has primary enforcement responsibility over national banks and has the
authority to bring actions against such banks and all institution-affiliated
parties, including directors, officers, stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured
institution.  Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership or conservatorship.  Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1.0 million per day in especially egregious cases.  The FDIC has
the authority to recommend to the OCC that it take enforcement action with
respect to a national bank.  If action is not taken by the agency, the
FDIC has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for
certain violations.  The FRB has generally similar enforcement
authority with respect to CNB Financial Corp.  Neither CNB Financial
Corp. nor the Bank are under any enforcement action.





Standards for
Safety and Soundness.The federal banking agencies have
adopted Interagency Assessments Guidelines Prescribing Standards for Safety and
Soundness (“Guidelines”) and a final rule to implement safety and soundness
standards required under federal law.  The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired.  The standards address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth and quality; earnings; and
compensation, fees and benefits.  If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed by
the Guidelines, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard.  The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans when such plans are required.






9





Community
Reinvestment Act.The Community Reinvestment Act, (“CRA”), as
implemented by OCC regulations, provides that a national bank has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods.  The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
CRA.  The CRA requires the OCC, in connection with its examination of
a bank, to assess the institution’s record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
corporate applications by such institution, such as mergers and
branching.  The Bank’s most recent rating was
“Satisfactory.”





Federal
Reserve System





The FRB regulations require savings
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts).  The
regulations generally provide that reserves be maintained against aggregate
transaction accounts as follows:  for accounts aggregating $43.9
million or less (subject to adjustment by the FRB) the reserve requirement is
3%; and for accounts aggregating greater than $43.9 million, a reserve
requirement of 10% (subject to adjustment by the FRB between 8% and 14%) is
applied against that portion of total transaction accounts in excess of $43.9
million.  The first $9.3 million of otherwise reservable balances
(subject to adjustments by the FRB) are exempted from the reserve
requirements.





Federal
Home Loan Bank System





The Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks
(“FHLBs”).  The FHLB provides a central credit facility primarily for
member institutions.  The Bank, as a member of the FHLB of Boston, is
required to acquire and hold shares of capital stock in the FHLB of Boston. The
Bank was in compliance with this requirement with an investment in FHLB stock at
December 31, 2007 of $3.1 million.





The FHLBs are required to provide funds
for the resolution of insolvent thrifts and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the FHLBs pay to their members and could also result in the FHLBs imposing a
higher rate of interest on advances to their members.  If dividends
were reduced, or interest on future FHLB advances increased, the Bank’s net
interest income would likely also be reduced.  Recent legislation has
changed the structure of the FHLBs’ funding obligations for insolvent thrifts,
revised the capital structure of the FHLBs and implemented entirely voluntary
membership for FHLBs.  Management cannot predict the effect that these
changes may have with respect to its FHLB membership.





ITEM2 - DESCRIPTION OF PROPERTY





Company
and Bank Premises





The Bank
leases administrative and banking offices located at 33 Waldo Street, Worcester,
Massachusetts.  The Waldo Street facility lease is for an initial term
of fifteen years, which term ends in 2016, and provides two five-year renewal
options.  Rentals increase at the rate of 7% every third
year.  The lease is currently in the third three-year period of the
initial term and the Bank’s effective costs are now $19.16 per square foot plus
escalations.





On March
6, 2003, a lease for 2,820 square feet in the multi-tenant building at 1 West
Boylston Street, Worcester, Massachusetts was executed with a term commencement
date of December 1, 2002.  The lease includes an initial term of
twenty years and provides two five-year renewal options.  Lease
payments are currently to $32.78 per square foot ($92,440 per
annum).  Commencing with the seventh year of the lease, and at the
beginning of each lease year thereafter, lease payments increase by a percentage
equal to the most recent annual percentage increase in the Consumer Price Index
(CPI).





On June
6, 2002, the Bank executed a ground lease for 28,253 square feet of land at 572
Main Street, Shrewsbury, Massachusetts.  The lease includes an initial
term of twenty years and provides eleven five-year renewal
options.  Lease payments during the first five years were $36,000 per
year.  During subsequent years the rent payments increase in
accordance with the annual increase in the CPI less an amount of
$3,000.  As of December 31, 2007 the lease payment is $37,338 per
year.






10





During
2004, the Bank purchased a parcel of land at 701 Church Street, Northbridge,
Massachusetts and constructed an office building at a cost of approximately
$580,000.  Upon completion of the building, the Bank sold the premises
and entered into a leaseback agreement for an initial term of twenty years,
which term ends in 2024 and provides for two five-year extension
options.  On November 15, 2004, the Bank opened a bank branch facility
at the building.  Gross rentals will increase by 3% annually during
the initial twenty year term.  The gross rent for the current
twelve-month period (11/1/07 to 10/31/08) is equal to $71,027.





On
January 27, 2006, the Bank executed a lease for approximately 2,000 square feet
in a multi-tenant building at 1393 Grafton Street, Worcester, Massachusetts for
a branch facility.  The lease includes an initial term of ten years
and provides three five-year renewal options.  Gross rentals during
the five years are $19.75 per square foot ($39,500 per annum) including parking
for employees and customers, heating and air conditioning.  Lease
payments increase by 2% per year at the commencement of the sixth year of the
lease term.





On July
25, 2006, the Bank entered into a lease for 7,704 square feet of office space in
a multi-tenant building located at 67 Millbrook Street, Worcester,
Massachusetts.  The premises house a portion of the Bank’s staff
functions.  The term of the lease is five years, commencing on October
1, 2006.  Under the terms of the lease, the Bank pays monthly rent of
$7,381, including utilities.  The lease provides for the Bank’s right to
extend the lease for one additional five-year period with the monthly rents
equal to $9,250 during the first extended year and increasing approximately 5%
each year.





On August
14, 2006, the Bank entered into a lease for a building located at 26 West
Boylston Street, West Boylston, Massachusetts for a bank branch.  The
term of the lease is ten years, commencing on July 1, 2006.  Under the
terms of the lease, base rent is $2,400 per month during the first year with a
3% increase each year.  As of December 31, 2007 the base rent equaled
$29,664 per year.  The lease provides for the Bank’s right to extend
the lease for three additional five-year terms, each with a 3% annual increase
in rent.





All of
the properties are considered to be in good condition and adequate for the
purpose for which they are used.  In the opinion of management, the
foregoing properties are adequately covered by insurance.





ITEM3 - LEGAL PROCEEDINGS





Neither
the Company nor the Bank currently is party to any pending legal proceedings,
other than routine matters incidental to the business of banking.  The
Company is not aware of any proceedings contemplated by any governmental
entity.





ITEM4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





No matter
was submitted during the fourth quarter of the fiscal year covered by this Form
10-KSB to a vote of the Company’s security holders.






11




PART
II





ITEM5 -MARKET FOR COMMON EQUITY RELATED
STOCKHOLDER MATTERS





The
Company’s common stock is listed on the Over-The-Counter Bulletin Board under
the symbol CFNA.  As of February 29, 2008, there were approximately
687 holders of record of the Company’s Common Stock.  The Company has
not declared a dividend on its common stock.





The
following table gives the high and low bid information for the Company’s common
stock on the OTC Bulletin Board for the last two fiscal years.  High
and low bid prices reported on the OTC Bulletin Board reflect inter-dealer
quotations without retail markup, markdown or commissions, and may not
necessarily represent actual transactions.





CNB
      Financial Corp.
              Common
      Stock
            Sales PriceHigh
            
            Low1st
      Quarter 2006
            
            $
      24.00
            
            $
      12.152nd
      Quarter 2006
            
            $
      14.50
            
            $
      12.553rd
      Quarter 2006
            
            $
      14.50
            
            $
      12.754th
      Quarter 2006
            
            $
      13.80
            
            $
      11.251st
      Quarter 2007
            
            $
      12.70
            
            $
      10.752nd
      Quarter 2007
            
            $
      11.60
            
            $   9.503rd
      Quarter 2007
            
            $
      10.25
            
            $   8.204th
      Quarter 2007
            
            $   9.00
            
            $   7.10




The
Company is subject to Massachusetts law, which prohibits distributions to
stockholders if, after giving effect to the distribution, the Company would not
be able to pay its debts as they become due in the usual course of business or
the Company total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the Company were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.





Dividends
from the Company may depend, in part, upon receipt of dividends from the
Bank.  National banks are subject to significant regulatory
restrictions on the payments of cash dividends.  In light of these
restrictions on the Bank and the need for the Company to retain and build
capital, the Boards of Directors of the Company and the Bank plan to reinvest
earnings for the period of time necessary to further support successful
operations.  As a result, the Company has not declared any dividends
and does not plan to pay dividends in the near future so it may further support
growth.  The Company’s future dividend policy therefore will depend on
earnings, capital requirements and financial condition and on other factors that
the Company’s Board of Directors considers relevant.





The prior
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the bank’s net profits, as defined
for that year combined with its retained new profits for the preceding two
calendar years, less any required transfers to surplus or a fund for the
retirement of any preferred stocks.  The payment of dividends by the
Company may also be affected by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.





ITEM6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION





The
Company is the parent of the Bank, a national bank with six full-service
branches located in the greater Worcester, Massachusetts area.  The
Company reports its financial results on a consolidated basis with the
Bank.  The Company’s financial statements and related notes, which are
included in this filing, provide additional information relating to the
following discussion of its financial condition.  See Item 7 of this
Form 10-KSB.





General





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






12






This
discussion and analysis covers material changes in financial condition and
liquidity that have occurred since December 31, 2006 as well as the results of
operations for the years ended December 31, 2007 and 2006.





Executive
Summary





During
2007, the Company experienced net interest margin contraction, largely the
result of the flat to inverted yield curve, competitive deposit pricing
conditions and the migration of certain deposit balances into higher cost
categories.  In response to these conditions, the Company took various
actions to reduce low net interest margin matches of assets and liabilities and
partially funded loan growth with liquidity derived from the maturities of
lower-yielding securities within the investment
portfolio.  Accordingly, loans grew by $16.7 million or 8.3% from
year-end to year-end, outpacing the 2.9% asset growth during the same
period.





Critical
Accounting Policies





The
Company has established various accounting policies that govern the application
of accounting principles generally accepted in the United States in the
preparation of the Company’s financial statements.  The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements.  Certain accounting policies
involve significant judgments and assumptions by management that have a material
impact on the carrying value of certain assets and
liabilities.  Management considers such accounting policies to be
critical accounting policies.  The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances.  Because of the
nature of the judgments and assumptions made by management, actual results could
differ from management’s judgments and estimates which, in turn, could have a
material impact on the carrying values of assets and liabilities and the results
of operations of the Company.




The
Company believes accounting policies covering the allowance for loan losses,
income taxes, and other-than-temporary losses require the most significant
judgments and estimates used in preparation of its consolidated financial
statements.  Refer to the “Credit Quality and Allowance for Loan
Losses” section entitled “Allowance for Loan Losses” and Note 2 of the
consolidated financial statements-Summary of Significant Accounting Policies-for
a detailed description of the Company’s estimation process and methodology
related to the allowance for loan losses, income taxes, and other-than-temporary
losses.





RESULTS
OF OPERATIONS





Summary





The
Company recorded consolidated net income of $397,000 for 2007 compared to
$636,000 for 2006.  The primary reason for the decline in net income
was a shrinking of the Company’s net interest margin which was caused by the
interest rate environment (a flat to inverted yield curve) which existed during
most of 2007, as well as increased operating expenses for 2007 caused primarily
by the opening of two branches during the latter part of 2006.  Net
interest income during 2007 was approximately equal to that of 2006 and was
driven by the 8% year over year growth in average earning assets, offset by a 24
basis points reduction in the net interest margin.  This margin
contraction was caused by the previously mentioned flat to inverted yield curve
and competitive deposit pricing conditions which caused a higher (by 52 basis
points) average cost of funds.  The yield on average earning assets
increased by 22 basis points.





Net
Interest Income





During
2007, the Company generated $18,913,000 in interest income, which was offset by
interest expense of $10,542,000 resulting in net interest income of $8,371,000,
a slight ($27,000 or 0.3%) decrease compared to 2006, during which the Company
generated $16,970,000 in interest income, which was offset by interest expense
of $8,572,000, resulting in net interest income of $8,398,000.  Net
interest income was impacted by the 8% increase in the average balance of
interest-earning assets and a 22 basis point increase in the average yield of
interest-earning assets primarily due to the $21.4 million growth of the loan
portfolio and a 49 basis point increase in the yield on investments, federal
funds and other interest earning assets, offset by a 7% increase in the average
balance of deposits and borrowed funds and a 52 basis point increase in the cost
of funds.  The net interest margin equaled 3.03% for the year,
compared to 3.27% for 2006 a decrease of 24 basis points.  This
contraction was caused by the previously mentioned flat to inverted yield curve
environment and competitive pricing conditions.






13





The
following table presents condensed annual average balance sheet categories and
the average yields and costs for each category during the years ended December
31, 2007, 2006 and 2005.  The interest income, net interest income,
asset yields, interest rate spread and net interest margin are portrayed on a
taxable equivalent basis.




Distribution
      of Assets, Liabilities and Stockholders’ Equity:
              Interest
      Rates and Interest DifferentialYear
      Ended
              December 31, 2007
            
            
            Year
      Ended
              December 31, 2006
            
            
            Year
      Ended
              December 31, 2005(Dollars
      in thousands)
            
            Average
              Balance
            
            
            Interest
              Income
      and
              Expense
              (Taxable
              Equivalent)(1)
            
            
            Average
              Yield/Rate
            
            
            Average
              Balance
            
            
            Interest
              Income
      and
              Expense
              (Taxable
              Equivalent)(1)
            
            
            Average
              Yield/Rate
            
            
            Average
              Balance
            
            
            Interest
              Income
      and
              Expense
              (Taxable
              Equivalent)(1)
            
            
            Average
              Yield/RateINTEREST
      EARNING ASSETS:Total
      Loans(2)
            
            $
            211,646
            
            
            $
            15,535
            
            
            
            7.34
            %
            
            $
            190,282
            
            
            $
            13,863
            
            
            
            7.29
            %
            
            $
            163,577
            
            
            $
            10,638
            
            
            
            6.50
            %Investments,
      Fed Funds and Other
              Interest
      Earning Assets
            
            
            67,299
            
            
            
            3,459
            
            
            
            5.14
            %
            
            
            67,749
            
            
            
            3,149
            
            
            
            4.65
            %
            
            
            50,566
            
            
            
            1,944
            
            
            
            3.84
            %Total
      Interest Earnings Assets
            
            
            278,945
            
            
            
            18,994
            
            
            
            6.81
            %
            
            
            258,031
            
            
            
            17,012
            
            
            
            6.59
            %
            
            
            214,143
            
            
            
            12,582
            
            
            
            5.88
            %Allowance for Loan
      Losses
            
            
            (2,803
            )
            
            
            
            
            
            
            
            
            
            
            (2,724
            )
            
            
            
            
            
            
            
            
            
            
            (2,296
            )Cash and Due from
      Banks
            
            
            5,405
            
            
            
            
            
            
            
            
            
            
            
            5,242
            
            
            
            
            
            
            
            
            
            
            
            4,858Premises and
      Equipment
            
            
            2,486
            
            
            
            
            
            
            
            
            
            
            
            2,101
            
            
            
            
            
            
            
            
            
            
            
            1,914Other Assets
            
            
            3,164
            
            
            
            
            
            
            
            
            
            
            
            4,888
            
            
            
            
            
            
            
            
            
            
            
            1,756Total
      Assets
            
            $
            287,197
            
            
            
            
            
            
            
            
            
            
            $
            267,538
            
            
            
            
            
            
            
            
            
            
            $
            220,375INTEREST
      BEARING LIABILITIESSavings,
      NOW and Money Market Deposits
            
            
            52,737
            
            
            
            1,325
            
            
            
            2.51
            %
            
            
            46,645
            
            
            
            811
            
            
            
            1.74
            %
            
            
            56,321
            
            
            
            965
            
            
            
            1.71
            %Time
      Deposits
            
            
            117,448
            
            
            
            5,930
            
            
            
            5.05
            %
            
            
            121,081
            
            
            
            5,235
            
            
            
            4.32
            %
            
            
            93,961
            
            
            
            2,888
            
            
            
            3.07
            %Borrowed
      Funds
            
            
            59,807
            
            
            
            2,734
            
            
            
            4.57
            %
            
            
            45,515
            
            
            
            2,001
            
            
            
            4.40
            %
            
            
            30,180
            
            
            
            1,003
            
            
            
            3.33
            %Trust
      Preferred
            
            
            7,500
            
            
            
            553
            
            
            
            7.37
            %
            
            
            7,500
            
            
            
            525
            
            
            
            6.90
            %
            
            
            329
            
            
            
            21
            
            
            
            6.26
            %Total Interest Bearing
      Liabilities
            
            
            237,492
            
            
            
            10,542
            
            
            
            4.44
            %
            
            
            220,741
            
            
            
            8,572
            
            
            
            3.88
            %
            
            
            180,791
            
            
            
            4,877
            
            
            
            2.70
            %Demand
      Deposits
            
            
            26,465
            
            
            
            
            
            
            
            
            
            
            
            26,415
            
            
            
            
            
            
            
            
            
            
            
            22,968Total Deposits and Borrowed
      Funds
            
            
            263,957
            
            
            
            10,542
            
            
            
            3.99
            %
            
            
            247,156
            
            
            
            8,572
            
            
            
            3.47
            %
            
            
            203,759
            
            
            
            4,877
            
            
            
            2.39
            %Other
      Liabilities
            
            
            2,785
            
            
            
            
            
            
            
            
            
            
            
            2,104
            
            
            
            
            
            
            
            
            
            
            
            557Stockholders’
      Equity
            
            
            20,455
            
            
            
            
            
            
            
            
            
            
            
            18,278
            
            
            
            
            
            
            
            
            
            
            
            16,059Total
      Liabilities and Stockholders’ Equity
            
            $
            287,197
            
            
            
            
            
            
            
            
            
            
            $
            267,538
            
            
            
            
            
            
            
            
            
            
            $
            220,375Net
      Interest Income (tax equivalent basis)
            
            
            
            
            
            
            8,452
            
            
            
            
            
            
            
            
            
            
            
            8,440
            
            
            
            
            
            
            
            
            
            
            
            7,705Interest
      Rate Spread
            
            
            
            
            
            
            
            
            
            
            2.82
            %
            
            
            
            
            
            
            
            
            
            
            3.12
            %
            
            
            
            
            
            
            
            
            
            
            3.48
            %Less:
      adjustment of tax exempt income
            
            
            
            
            
            
            (81
            )
            
            
            
            
            
            
            
            
            
            
            (42
            )
            
            
            
            
            
            
            
            
            
            
            -Net
      interest income
            
            
            
            
            
            $
            8,371
            
            
            
            
            
            
            
            
            
            
            $
            8,398
            
            
            
            
            
            
            
            
            
            
            $
            7,705Net
      Yield on Interest Earning Assets
              (Net
      Interest Margin)
            
            
            
            
            
            
            
            
            
            
            3.03
            %
            
            
            
            
            
            
            
            
            
            
            3.27
            %
            
            
            
            
            
            
            
            
            
            
            3.60
            %




(1)
Tax-equivalent amounts are determined assuming a 34% federal tax
rate


(2)
Non-accrual loans are included in average amounts outstanding.






14




The
following table depicts the composition of average earning assets and interest
bearing liabilities as a percentage of average earning assets.  The
earning asset ratio reflects the percentage of total assets that earn
interest.





Composition
      of Average Earning Assets and Interest Bearing Liabilities
            2007
            2006As
      a percentage of average earning assetsLoans
            75.9%
            73.7%Other
      earning assets
            24.1%
            26.3%Average
      earning assets
            100.0%
            100.0%Savings
      and NOWs and MMDAs
            18.9%
            18.1%Certificates
      of deposit
            42.1%
            46.9%Borrowed
      funds
            24.1%
            20.6%Average
      interest bearing liabilities
            85.1%
            85.6%Earning
      asset ratio
            97.1%
            96.5%





Rate/Volume
Analysis.  The following
tables set forth the effects of changing rates and volumes on our net interest
income for 2007 compared to 2006 and for 2006 compared to 2005.  The
rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume).  The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior
rate).  Changes due to both volume and rate have been allocated
proportionally to the volume and rate changes. The net column represents the sum
of the prior columns.





2007
      Compared to 2006(In
      thousands)
            
            Volume
            
            
            Rate
            
            
            NetInterest
      income:Total
      Loans
            
            $
            1,576
            
            
            $
            96
            
            
            $
            1,672Investments,
      fed funds and other interest-earning assets
            
            
            (21
            )
            
            
            331
            
            
            
            310Total
            
            
            1,555
            
            
            
            427
            
            
            
            1,982Interest
      expense:Deposits
            
            
            (33
            )
            
            
            1,242
            
            
            
            1,209FHLB
      advances and other borrowed funds
            
            
            652
            
            
            
            81
            
            
            
            733Subordinated
      Debentures
            
            
            -
            
            
            
            28
            
            
            
            28Total
            
            
            619
            
            
            
            1,351
            
            
            
            1,970Increase
      in net interest income (tax equivalent basis)
            
            $
            936
            
            
            $
            (
      924
            )
            
            $
            12




2006
      Compared to 2005(In
      thousands)
            
            Volume
            
            
            Rate
            
            
            NetInterest
      income:Total
      Loans
            
            $
            1,849
            
            
            $
            1,376
            
            
            $
            3,225Investments,
      fed funds and other interest-earning assets
            
            
            743
            
            
            
            462
            
            
            
            1,205Total
            
            
            2,592
            
            
            
            1,838
            
            
            
            4,430Interest
      expense:Deposits
            
            
            802
            
            
            
            1,391
            
            
            
            2,193FHLB
      advances and other borrowed funds
            
            
            611
            
            
            
            387
            
            
            
            998Subordinated
      Debentures
            
            
            502
            
            
            
            2
            
            
            
            504Total
            
            
            1,915
            
            
            
            1,780
            
            
            
            3,695Increase
      in net interest income (tax equivalent basis)
            
            $
            677
            
            
            $
            58
            
            
            $
            735






15




Provision
for Loan Losses





The
Company provided for an $80,000 addition to the allowance for loan losses
through charges to operations during 2007, compared to a provision of $216,000
during 2006.  The allowance for loan losses equaled $2,844,000 or
1.31% of total loans at December 31, 2007, compared to 1.40% at December 31,
2006.  Management, based upon known circumstances and conditions,
determines the level of allowance for loan losses.  In addition to
assessing risk on individual loans, the Company considers industry trends,
regional and national economic conditions, and past estimates of losses as
compared to actual losses.  During 2007, loans in the net amount of
$82,000 were charged off and $39,000 of recoveries were recorded.  At
December 31, 2007, loans in the amount of $1,482,000 were in non-accrual
status.  Loans accruing interest in the amount of $653,000 were past
due 30 days or more; no loans accruing interest were past due 90 days or
more.  The Company will discontinue the accrual of interest on loans
once they become 90 days past due or earlier when it becomes doubtful that the
full principal and interest will be collected.  Once a loan is placed
on non-accrual status, any interest that is collected will be recorded on a cash
basis unless the ultimate collectibility of principal and interest is
assured.





Total
Other Income





Total
other income amounted to $463,000 for 2007 compared to $548,000 for 2006, a 16%
decrease.  The source of this income is primarily fees and service
charges on deposit accounts, loan document preparation fees and mortgage loan
referral fees.  The decrease was caused by a greater proportion of
fees on commercial deposit accounts being paid by compensating balances and the
downturn in the mortgage market, which caused a decline in mortgage loan
referrals to a third party lender upon which fee income is earned.





Operating
Expenses





Total
operating expenses amounted to $8,178,000 for 2007 compared to $7,622,000 during
2006, a 7% increase.  This increase was caused by the growth of the
Company, which included growth in asset and deposit size, growth in the number
of deposit and loan accounts, the full year of costs for the two branches opened
in the latter part of 2006 (one in July and one in November), costs associated
with the operations center facility newly leased in late 2006, information
processing costs related to the increased size of the Company, as well as
increased audit, legal and compliance costs.  The increase was
comprised of several categories.  Compensation and employee benefit
costs increased by $231,000 or 6% over 2006.  The increase was caused
by staff merit increases and a full year of staffing the two new branches,
partially offset by lower incentive payments.  Occupancy and equipment
cost increases of $200,000 or 17% over the prior year were the result of the
expenses relating to the new branches, increases in lease costs (particularly
for the new operations center), real estate taxes, increased utility costs and
service contracts.  Marketing and public relations expense decreased
by $181,000 or 38% compared to the prior year as the Company significantly
reduced marketing in local newspapers, as well as on outdoor billboards and
radio advertisements.  Data processing costs increased by $76,000 or
20%, compared to the prior year as a result of increased numbers of loan and
deposit accounts maintained on the data processing systems, additional software
purchases to run banking system applications and increased software maintenance
expenses.  Professional services (primarily audit, director fees,
consulting and appraisal expenses) increased by $77,000 or 12% on a year to year
basis as a result of the increased cost of complying with Sarbanes-Oxley Section
404 and increased expenditures for director fees and appraisal
services.  Other general and administrative costs increased by
$153,000, or 19%, versus the prior year primarily due to the increased cost of
FDIC deposit insurance premiums.  The premiums for FDIC insurance
increased for all insured banks in 2007 however most banks received an
offsetting assessment credit from the FDIC for premiums paid in prior
years.  Because the Company’s subsidiary bank is relatively new
(opened in 2001) it did not receive any deposit insurance assessment credits
from the FDIC.  Also impacting other general and administrative costs
were increased costs for postage, delivery, OCC assessments and office
supplies.





Provision
for Income Taxes





Income
tax expense of $179,000 was recorded during 2007 compared to $472,000 recorded
in 2006.  This decline was caused by the lower level of earnings in
2007 and the growth of the Company’s portfolio of municipal bonds, which are
tax-free for federal purposes.  At December 31, 2007, the Company had
approximately $432,000 in net operating loss carry forwards available to offset
future taxable earnings, if any, under current Federal tax laws.  Net
operating loss carry forwards are available for a period of up to 20 years to
offset taxable income in those years.  As the Company continues to
generate taxable income in the future, this utilization of carry-forwards will
continue to reduce income taxes paid until the $432,000 is
exhausted.






16




FINANCIAL
CONDITION





Overview





Total
assets at December 31, 2007, amounted to $289.5 million compared to $281.4 at
December 31, 2006, an $8.1 million or 3% increase.  Approximately 97%
of the total assets at year-end 2007 were held in earning assets, with total
loans equaling $217.3 million (an 8% increase), investment securities equaling
$61.1 million (a 16% decrease) and interest bearing cash equivalents totaling
$8.8 million.  At December 31, 2006, earning assets equaled
approximately 97% of total assets, with total loans equaling $200.7 million,
investment securities totaling $70.9 million and interest bearing cash
equivalents totaling $6.7 million.  The aggregate of deposits and
borrowed funds equaled $265.9 million at December 31, 2007, a 3% increase over
the $258.2 million level at December 31, 2006.





Loans





The 8%
increase in loan balances from year to year was the result of the application of
the Company’s strategy of continued focus on growing the loan portfolio from
within the Company’s market area, which primarily covers a substantial portion
of Worcester County.  Continued growth of the loan portfolio is
dependent upon management’s assessment of risks and opportunities in its future
lending activities in addition to a variety of competitive and economic
factors.





December
      31,2007
            2006
            2005
            2004
            2003(Dollars
      in thousands)
            Amount
            Percent
            Amount
            Percent
            Amount
            Percent
            Amount
            Percent
            Amount
            PercentReal
      estate loans:
            $
            %
            $
            %
            $
            %
            $
            %
            $
            %Residential
            21,610
            9.96
            15,048
            7.51
            15,278
            8.46
            17,392
            11.65
            21,273
            20.03Commercial
            128,283
            59.12
            110,693
            55.25
            91,497
            50.69
            78,571
            52.61
            47,986
            45.18Total
      real estate loans
            149,893
            69.08
            125,741
            62.75
            106,775
            59.16
            95,963
            64.26
            69,259
            65.21Commercial
      loans
            54,667
            25.19
            61,931
            30.91
            58,681
            32.51
            41,180
            27.57
            31,758
            29.90Consumer
      loans
            12,441
            5.73
            12,710
            6.34
            15,030
            8.33
            12,197
            8.17
            5,199
            4.89Total
      loans
            217,001
            100.00
            200,382
            100.00
            180,486
            100.00
            149,340
            100.00
            106,216
            100.00Net
      deferred loan fees
            320
            
            286
            
            362
            
            353
            
            420Allowance
      for losses
            (2,844)
            
            (2,807)
            
            (2,615)
            
            (2,025)
            
            (1,413)Loans,
      net
            214,477
            
            197,861
            
            178,233
            
            147,668
            
            105,223





The following table sets forth certain
information at December 31, 2007 regarding the dollar amount of loan principal
repayments becoming due during the periods indicated.  The table does
not include any estimate of prepayments which significantly shorten the average
life of all loans and may cause our actual repayment experience to differ from
that shown below.  Demand loans, having no stated schedule of
repayments and no stated maturity, are reported as due in one year or less.The
amounts shown below exclude applicable loans in process, unearned interest in
consumer loans and net deferred loan costs.Our adjustable-rate
mortgage loans generally do not provide for downward adjustments below the
initial discounted contract rate.  When market interest rates rise,
the interest rates on these loans may increase based on the contract rate (the
index plus the margin) exceeding the initial interest rate
floor.


December
      31, 2007 (In thousands)
            
            Real
      Estate
              Loans
            
            
            Commercial
              Loans
            
            
            Consumer
              Loans
            
            
            Total
              LoansAmounts
      due in:One
      year or
      less
            
            $
            24,657
            
            
            $
            5,358
            
            
            $
            421
            
            
            $
            30,436More
      than one to five
      years
            
            
            26,613
            
            
            
            12,276
            
            
            
            371
            
            
            
            39,261More
      than five
      years
            
            
            98,623
            
            
            
            37,033
            
            
            
            11,649
            
            
            
            147,304Total
            
            $
            149,893
            
            
            $
            54,667
            
            
            $
            12,441
            
            
            $
            217,001Interest
      rate terms on amounts due after one year:Fixed-rate
      loans
            
            $
            33,961
            
            
            $
            14,657
            
            
            $
            4,074
            
            
            $
            52,693Adjustable-rate
      loans
            
            
            91,275
            
            
            
            34,652
            
            
            
            7,946
            
            
            
            133,872Total
            
            $
            125,236
            
            
            $
            49,309
            
            
            $
            12,020
            
            
            $
            186,565





Investment
Securities





The
Company views the investment portfolio both as a means of generating earnings
and as a source of liquidity.  The portfolio at year-end was comprised
primarily of government agency securities and mortgage backed
securities.  At December 31, 2007, approximately $7.0 million of the
portfolio was scheduled to mature within one year and $50.3 million after one
year.  Approximately $20.4 million of the portfolio securities are
subject to calls prior to final maturity.  During 2007, the company
purchased $1.0 million of Mortgage-backed securities, $2.0 million in U.S.
Government agencies and $2.0 million of municipal securities.  The
average years-to-maturity of the mortgage-backed securities portfolio at
December 31, 2007 was 15.9 years.






17





December
      31,2007
            2006
            2005(In
      thousands)
            Amortized
              Cost
            Fair
              Value
            Amortized
              Cost
            Fair
              Value
            Amortized
              Cost
            Fair
              ValueSecurities
      available-for-sale:Gov’t
      Sponsored Enterprises
            $13,980
            $14,168
            $19,956
            $19,807
            $21,159
            $20,766Mortgage-backed
      securities
            31,116
            31,429
            34,852
            34,775
            19,135
            18,827Total
      available-for-sale
            45,096
            45,597
            54,808
            54,582
            40,294
            39,593Securities
      held-to-maturity:Gov’t
      Sponsored Enterprises
            2,000
            1,997
            3,997
            3,970
            4,982
            4,944Mortgage-backed
      securities
            4,214
            4,215
            5,114
            5,046
            4,103
            4,036Municipals
            5,373
            5,408
            3,352
            3,384
            -
            -Other
      bonds
            100
            100
            50
            50
            25
            25Total
      held-to-maturity
            11,687
            11,720
            12,513
            12,450
            9,110
            9,005Total
            $56,783
            $57,317
            $67,321
            $67,032
            $49,404
            $48,598





The following table sets forth the
stated maturities and weighted average yields of our investment securities at
December 31, 2007.  Certain mortgage-backed securities have adjustable
interest rates and will reprice annually within the various maturity
ranges.  These repricing schedules are not reflected in the table
below.





One
      Year or Less
            More
      than One
              Year
      to Five Years
            More
      than Five
              Years
      to Ten Years
            More
      than Ten Years
            TotalDecember
      31, 2007
              (Dollars
      in thousands)
            Carrying
              Value
            Weighted
              Average
              Yield
            Carrying
              Value
            Weighted
              Average
              Yield
            Carrying
              Value
            Weighted
              Average
              Yield
            Carrying
              Value
            Weighted
              Average
              Yield
            Carrying
              Value
            Weighted
              Average
              YieldSecurities
      available-for-sale:
            $
            %
            $
            %
            $
            %
            $
            %
            $
            %Gov’t
      Sponsored Enterprises
            4,990
            4.21
            4,175
            4.40
            996
            4.44
            4,007
            5.76
            14,168
            4.72Mortgage-backed
      securities
            1,738
            4.71
            -
            -
            2,866
            4.71
            26,825
            5.32
            31,429
            5.23Total
      available-for-sale
            6,728
            4.34
            4,175
            4.40
            3,862
            4.64
            30,832
            5.38
            45,597
            5.07Securities
      held-to-maturity:Gov’t
      Sponsored Enterprises
            2,000
            4.58
            -
            -
            -
            -
            -
            -
            2,000
            4.58Mortgage-backed
      securities
            -
            -
            -
            -
            3,017
            4.87
            1,197
            4.89
            4,214
            4.88Municipals
            -
            -
            -
            -
            330
            3.97
            5,043
            4.28
            5,373
            4.26Other
      bonds
            -
            -
            75
            4.61
            25
            5.65
            -
            -
            100
            4.87Total
      held-to-maturity
            2,000
            4.58
            75
            4.61
            3,372
            4.79
            6,240
            4.39
            11,687
            4.54Total
            8,728
            4.39
            4,250
            4.40
            7,234
            4.71
            37,072
            5.21
            57,284
            4.96





Cash
and Cash Equivalents





Cash and
cash equivalents amounted to $8.8 million at December 31, 2007 compared to $6.7
million at December 31, 2006.  The increase of $2.1 million was
primarily due to a higher level of federal funds sold at December 31,
2007.





Liabilities





Deposits





At
December 31, 2007, total deposits amounted to $202.2 million compared to $191.8
million at December 31, 2006, a $10.4 million or 5% increase.  During
2007, management continued its strategy to lessen the Company’s reliance on high
cost deposit products.  The maturity structure of the certificate of
deposit portfolio, which is reflected in the following table, was shortened
whenever possible by altering product pricing and
offerings.  Certificates of deposit decreased $16.7 million or 13% and
equaled $107.4 million at December 31, 2007. A significant portion of this
volume decrease stayed within the Company, but moved to a high yielding savings
product introduced in the spring of 2007.  Personal and commercial
savings, money market and NOW accounts grew by $22.4 million to $65.6 million,
and demand deposit accounts increased by $4.7 million and equaled $29.2 million
or 14% of total deposits.  Of the total certificates of deposit, 95%,
or approximately $102.3 million, are scheduled to mature in
2008.  Demand deposits, savings, money market and NOW accounts are
considered core deposits.  To attract new core depositors, the Company
conducts deposit promotion campaigns comprised of newspaper, radio and outdoor
advertisements, competitive pricing and in-branch promotions.  The
Company also keeps up-to-date with technological advances and offers new
products and services desirable to our customers, such as remote deposit
capture.  Management believes that the new relationships that result
from these efforts provide valuable opportunities to cross-sell other deposit
and loan products and services, as well as build a solid base of core
deposits.






18





December
      31, 2007 (In thousands)
            
            Certificates
              of
      DepositMaturity
      PeriodThree
      months or less
            
            $
            37,812Over
      three through six months
            
            
            53,568Over
      six through twelve months
            
            
            10,982Over
      twelve months
            
            
            5,048Total
            
            $
            107,410





Borrowings





The
Company has outstanding subordinated debt in the form of trust preferred
securities issued through a private placement offering in the amount of
$7,732,000.  The issue has a maturity date of March 15, 2036 and bears
a floating rate of interest that reprices quarterly (March, June, September and
December) at the 3-month LIBOR rate plus 1.85%.  The interest rate at
December 31, 2007 was 6.84%.  A special redemption provision allows
the issue to be callable at 103.525% of par for the first year and thereafter on
a sliding scale down to 100% of par upon the fifth year and
thereafter.  The Company also borrows in the form of advances from the
FHLBB, issues overnight repurchase agreements and, on occasion, borrows funds in
the federal funds market.  The overnight repurchase agreements result
from a customer cash management product which experienced growth during
2007.  The outstanding level of FHLBB advances at December 31, 2007
was lower than at the end of 2006 as a result of the growth in deposit and
repurchase agreement balances.  The following table details the
borrowing activity for the past three years.





Year
      Ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Maximum
      amount outstanding at any month-end during the period:FHLB
      advances
            
            $
            61,250
            
            
            $
            59,500
            
            
            $
            34,500Overnight
      Repurchase Agreements
            
            
            13,587
            
            
            
            7,169
            
            
            
            -Federal
      Funds Purchased
            
            
            1,325
            
            
            
            500
            
            
            
            -Subordinated
      Debt
            
            
            7,732
            
            
            
            7,732
            
            
            
            7,732Average
      amount outstanding during the period (1):FHLB
      advances
            
            $
            51,000
            
            
            $
            43,687
            
            
            $
            30,107Overnight
      Repurchase Agreements
            
            
            8,466
            
            
            
            1,618
            
            
            
            -Federal
      Funds Purchased
            
            
            342
            
            
            
            211
            
            
            
            73Subordinated
      Debt
            
            
            7,732
            
            
            
            7,732
            
            
            
            339Weighted
      average interest rate during the period (1):FHLB
      advances
            
            
            4.61
            %
            
            
            4.37
            %
            
            
            3.32
            %Overnight
      Repurchase Agreements
            
            
            4.33
            %
            
            
            4.89
            %
            
            
            -Federal
      Funds Purchased
            
            
            5.49
            %
            
            
            5.49
            %
            
            
            3.67
            %Subordinated
      Debt
            
            
            7.38
            %
            
            
            7.00
            %
            
            
            6.26
            %Balance
      outstanding at end of period:FHLB
      advances
            
            $
            48,750
            
            
            $
            52,250
            
            
            $
            33,500Overnight
      Repurchase Agreements
            
            
            7,214
            
            
            
            5,946
            
            
            
            -Federal
      Funds Purchased
            
            
            -
            
            
            
            500
            
            
            
            -Subordinated
      Debt
            
            
            7,732
            
            
            
            7,732
            
            
            
            7,732Weighted
      average interest rate at end of period:FHLB
      advances
            
            
            4.37
            %
            
            
            4.62
            %
            
            
            3.61
            %Overnight
      Repurchase Agreements
            
            
            3.37
            %
            
            
            4.88
            %
            
            
            -Federal
      Funds Purchased
            
            
            -
            
            
            
            5.50
            %
            
            
            -Subordinated
      Debt
            
            
            6.84
            %
            
            
            7.21
            %
            
            
            6.26
            %


(1)
            Averages
      are based on daily balances.





Capital
Resources





The FRB,
the FDIC and other regulatory agencies have established capital guidelines for
banks and bank holding companies.  Risk-based capital guidelines
issued by the federal regulatory agencies require banks to meet a minimum
Tier 1 risk-based capital ratio of 4.0% and a total risk-based capital
ratio of 8.0%.  At December 31, 2007, the Company and the Bank
exceeded the minimum requirements for Tier 1 risk-based and total
risk-based capital.  A minimum requirement of 4.0% of Tier 1
leverage capital is also mandated.  On December 31, 2007, the
Tier 1 leverage capital ratio for the Company and the Bank was 9.40% and
8.68%, respectively.  At December 31, 2007, the Bank was categorized
as “well capitalized” as defined by federal regulators.






19




The
Company has been successful in achieving the primary targets contained within
its business plan, as evidenced by the growth in the loan and deposit portfolios
and thus, growth in total assets.  The business plan for 2008 reflects
continued levels of growth in quality loans, deposits and total assets, and
continued profitability on a quarter-to-quarter basis.  The Company
anticipates in its 2008 Business Plan that current levels of Stockholders’
Equity, coupled with a continuation of profitable operations, will be sufficient
to support such growth in total assets by meeting the FDIC, OCC and FRB
requirements for capital adequacy.





CREDIT
QUALITY AND ALLOWANCE FOR LOAN LOSSES





Policies
Related to the Accrual of Interest Income





The
Company and the Bank normally recognize income on earning assets on the accrual
basis, which calls for the recognition of income when earned, rather than when
it is collected.  The Bank’s policy is to classify a loan 90 days or
more past due with respect to principal or interest as a non-accruing loan,
unless the ultimate collectibility of principal and interest is
assured.  Income accruals are suspended on all non-accruing loans, and
all the previously accrued and uncollected interest is typically charged against
current income.  A loan remains on non-accrual status until the
factors which suggest doubtful collectibility no longer exist, the loan is
liquidated, or when the loan is determined to be uncollected and is charged off
against the allowance for loan losses.  In those cases where a
non-accruing loan is secured by real estate, the Bank can, and usually will,
initiate foreclosure proceedings.  The result of such action will
either be to cause repayment of the loan with the proceeds of a foreclosure sale
or to give the Bank possession of the collateral in order to manage a future
resale of the real estate.  Foreclosed property is recorded at its
estimated fair value, less any estimated costs to sell.  Any cost in
excess of the estimated fair value on the transfer date is charged to the
allowance for loan losses, while further declines in market values are recorded
as expenses in other non-interest expense in the statement of
operations.  The following table details non-performing assets for
each of the past five year-end dates.





December
      31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Nonaccrual
      loans:
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $
            
            
            
            $Residential
      real estate
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            490
            
            
            
            -
            
            
            
            151
            
            
            
            -
            
            
            
            -Construction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
            
            
            992
            
            
            
            67
            
            
            
            1,136
            
            
            
            -
            
            
            
            47Consumer
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            1,482
            
            
            
            67
            
            
            
            1,287
            
            
            
            -
            
            
            
            47Accruing
      loans past due 90 days or more:
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      of nonaccrual and 90 days or more past due loans
            
            
            1,482
            
            
            
            67
            
            
            
            1,287
            
            
            
            -
            
            
            
            47Other
      nonperforming assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      nonperforming assets
            
            
            1,482
            
            
            
            67
            
            
            
            1,287
            
            
            
            -
            
            
            
            47Troubled
      debt restructurings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Troubled
      debt restructurings and total nonperforming assets
            
            $
            1,482
            
            
            $
            67
            
            
            $
            1,287
            
            
            $
            -
            
            
            $
            47Total
      nonperforming loans to total loans
            
            
            0.68
            %
            
            
            0.03
            %
            
            
            0.71
            %
            
            
            -
            
            
            
            0.04
            %Total
      nonperforming loans to total assets
            
            
            0.51
            %
            
            
            0.02
            %
            
            
            0.52
            %
            
            
            -
            
            
            
            0.03
            %Total
      nonperforming assets and troubled debt
              restructurings
      to total assets
            
            
            0.51
            %
            
            
            0.02
            %
            
            
            0.52
            %
            
            
            -
            
            
            
            0.03
            %





Total nonperforming loans increased
from December 31, 2006 to December 31, 2007 as a result of the addition of four
loans to nonaccrual status.  Interest income that would have been
recorded for the year ended December 31, 2007, had nonaccruing loans been
current according to their original terms amounted to $53,000.  No
interest related to nonaccrual loans was included in interest income for the
year ended December 31, 2007.  Interest income related to currently
non-accrual loans in the amount of $94,000 was recorded and received during 2007
prior to the placement of these loans on non-accrual status.





Loan
Portfolio Monitoring





The
Bank’s Board of Directors grants each loan officer the authority to originate
loans on behalf of the Bank, subject to certain limitations.  The
Board of Directors also establishes restrictions regarding the types of loans
that may be granted and the distribution of loan types within the Bank’s
portfolio, and sets loan authority limits for each lender.  These
authorized lending limits are reviewed at least annually and are based upon the
lender’s knowledge and experience.  Loan requests that exceed that
lender’s authority require the approval of either the President or the Officers’
Loan Committee.  All extensions of credit over a $1,250,000 dollar
threshold to any one borrower, or related party interest, are reviewed and
approved by the Executive Committee of the Bank’s Board of
Directors.






20





Using a
variety of management reports, the Bank’s loan portfolio is regularly monitored
by credit administration, senior management and the Board of
Directors.  The loan portfolios as a whole, as well as individual
loans, are reviewed for payment performance, creditworthiness and strength of
documentation.  The Bank uses an external loan review firm to assist
in monitoring the commercial loan portfolio.  Credit risk ratings are
assigned to commercial loans and are regularly reviewed.





All loan
officers are required to service their loan portfolios and account
relationships.  Remedial actions would be taken, as necessary, to
assure full and timely payments of loan balances.





Allowance
for Loan Losses





The
Allowance for Loan Losses (the “ALL”) is based on management’s estimate of the
amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known at each reporting date.  The Bank
reviews the adequacy of the ALL at least quarterly.  The methodology
is a comprehensive analytical process of assessing the credit risk inherent in
the loan portfolio.  This assessment incorporates a broad range of
factors including previous loss experience, if any, asset quality trends,
current economic conditions and their effect on borrowers, the performance of
individual loans in relation to contract terms and the estimated fair value of
collateral.  Losses are charged against the ALL when management
believes that the collectibility of principal is doubtful.  To the
extent management determines the level of anticipated losses in the portfolio
has significantly increased or diminished, the ALL is adjusted through a
provision or credit to earnings.  As part of the Bank’s analysis of
specific credit risk, extensive reviews are done on problematic credits when
identified on the watch and non-performing assets lists.  At December
31, 2007, $653,000 of loans accruing interest were past due more than 30 days
and no loans accruing interest were past due 90 days or more.  At
December 31, 2007, eight loans in the amount of $1,482,000 were in nonaccrual
status.





The ALL
consists of two components:





Allocated Allowances –
represents management’s assessment of potential losses associated with problem
loan relationships over a certain size identified on the watch list and
non-performing asset list.  Loans are evaluated for impairment by
looking at the fair value of the collateral, if the loan is collateral
dependent, or measuring the net present value of the expected future cash flows
using the loan’s original effective interest rate.  When the fair
value of the collateral (if the loan is collateral dependent) or the net present
value of a loan is lower than the recorded investment of the loan, the
difference is reflected with a resulting specific reserve.





General Allowances –
represents a reflection of risk associated with adversely graded/watch list
commercial loans for which an allocated reserve has not been
provided.  It is based on the premise that, while loss exposure
associated with any one particular credit may be greater than the percentages
assigned, the losses that will be incurred by the pool of loans in an adverse
grade will be consistent with these percentages.





The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.






2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands)
            
            Amount
            
            
            %
      of
              Loans
      in
              Category
              To
      Total
              Loans
            
            
            Amount
            
            
            %
      of
              Loans
      in
              Category
              To
      Total
              Loans
            
            
            Amount
            
            
            %
      of
              Loans
      in
              Category
              To
      Total
              Loans
            
            
            Amount
            
            
            %
      of
              Loans
      in
              Category
              To
      Total
              Loans
            
            
            Amount
            
            
            %
      of
              Loans
      in
              Category
              To
      Total
              LoansResidential
      real estate
            
            $
            76
            
            
            
            10.0
            %
            
            $
            27
            
            
            
            7.5
            %
            
            $
            34
            
            
            
            8.4
            %
            
            $
            52
            
            
            
            11.6
            %
            
            $
            57
            
            
            
            19.9
            %Commercial
      real estate
            
            
            1,840
            
            
            
            59.1
            
            
            
            1,624
            
            
            
            55.2
            
            
            
            1,352
            
            
            
            50.7
            
            
            
            1,073
            
            
            
            52.6
            
            
            
            792
            
            
            
            45.0Commercial
            
            
            856
            
            
            
            25.2
            
            
            
            1,107
            
            
            
            31.0
            
            
            
            1,174
            
            
            
            32.6
            
            
            
            826
            
            
            
            27.7
            
            
            
            538
            
            
            
            30.2Consumer
            
            
            72
            
            
            
            5.7
            
            
            
            49
            
            
            
            6.3
            
            
            
            55
            
            
            
            8.3
            
            
            
            74
            
            
            
            8.1
            
            
            
            26
            
            
            
            4.9Total
      allowance for loan losses
            
            $
            2,844
            
            
            
            100.0
            %
            
            $
            2,807
            
            
            
            100.0
            %
            
            $
            2,615
            
            
            
            100.0
            %
            
            $
            2,025
            
            
            
            100.0
            %
            
            $
            1,413
            
            
            
            100.0
            %





Although
the Company believes that it uses the best information available to establish
the allowance for loan losses, future adjustments to the allowance for loan
losses may be necessary and its results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.  Furthermore, while the Company believes it
has established its allowance for loan losses in conformity with generally
accepted accounting principles, there can be no assurance that regulators, in
reviewing its loan portfolio, will not






21




require
the Company to increase its allowance for loan losses.  In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above.  Any
material increase in the allowance for loan losses may adversely affect its
financial condition and results of operations.  The following table
details activity within the allowance for loan losses during the past five
years.


(Dollars
      in thousands
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Allowance
      at beginning of period
            
            $
            2,807
            
            
            $
            2,615
            
            
            $
            2,025
            
            
            $
            1,413
            
            
            $
            756Provision
      for loan losses
            
            
            80
            
            
            
            216
            
            
            
            590
            
            
            
            612
            
            
            
            659Charge
      offs:Residential
      real estate loans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate loans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      loans
            
            
            (82
            )
            
            
            (13
            )
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      loans
            
            
            -
            
            
            
            (12
            )
            
            
            -
            
            
            
            -
            
            
            
            (2
            )Total
      charge-offs
            
            
            (82
            )
            
            
            (25
            )
            
            
            -
            
            
            
            -
            
            
            
            (2
            )RecoveriesCommercial
      loans
            
            
            33Consumer
      loans
            
            
            6
            
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Recoveries
            
            
            39Net
      charge-offs
            
            
            (43
            )
            
            
            (24
            )
            
            
            -
            
            
            
            -
            
            
            
            (2
            )Allowance
      at end of period
            
            $
            2,844
            
            
            $
            2,807
            
            
            $
            2,615
            
            
            $
            2,025
            
            
            $
            1,413Allowance
      to nonperforming loans
            
            
            1.9
            X
            
            
            41.9
            X
            
            
            2.0
            X
            
            
            (
            *)
            
            
            30.1
            XAllowance
      to total loans outstanding at the end of the period
            
            
            1.31
            %
            
            
            1.40
            %
            
            
            1.45
            %
            
            
            1.35
            %
            
            
            1.33
            %Net
      charge-offs to average loans outstanding during the period
            
            
            0.02
            %
            
            
            0.01
            %
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %


(*) The
Company had no nonaccrual loans at the end of 2004





Liquidity
and Interest Rate Sensitivity





The
Company’s net interest income, its primary source of earnings, will fluctuate
with interest rate movements.  To lessen the impact of changes in the
interest rates, the Company endeavors to structure the balance sheet so there
will be regular opportunities to change the interest rates on (or “reprice”)
many of the interest-bearing assets in order to match the variability of
interest rates paid on the Company’s interest bearing
liabilities.  Imbalance among interest bearing assets and liabilities
at any point in time constitutes interest rate risk.





Interest
rate risk includes interest rate sensitivity.  Sensitivity refers to
the responsiveness of interest-bearing assets and liabilities to changes in
market interest rates.  The Asset/Liability Committee, which meets on
a quarterly basis, develops and implements the Company’s strategy for managing
the potential impact of changing interest rates.  The general
objective of the Asset/Liability Committee is to actively manage rate sensitive
assets and liabilities in order to reduce the impact of interest rate
fluctuations on the net interest margin of the
Company.    As growth in assets continues, the Company will
continuously structure its rate sensitivity position in an effort to protect
against rapidly rising or falling interest rates.  The Company has
established guidelines to maintain an acceptable balance between rate sensitive
assets and liabilities.





The
Company regularly evaluates the asset mix of the balance sheet in terms of
several variables: yield, credit quality, maturity, and appropriate funding
sources and liquidity.  To manage the balance sheet’s liability mix
effectively, the Company focuses primarily on expanding the deposit base by
providing a high level of customer service.





Liquidity
represents the ability to provide sources of funds for loan commitments and
investment activities, as well as to maintain sufficient funds to cover deposit
withdrawals, to pay off debt and meet operating obligations.  The
Company’s ability to maintain and increase deposits will serve as its primary
source of liquidity.  In addition, the Company’s liquidity may be
supplemented through the use of borrowings or by converting portions of the
investment security portfolio to cash.





The
Company knows of no trends, demands, commitments, events or uncertainties that
should result in, or are reasonably likely to result in, its liquidity
increasing or decreasing in any material way in the foreseeable future, other
than through its normal banking operations.






22




RISK
MANAGEMENT





Management
and the Boards of Directors of the Company and the Bank are committed to sound
risk management practices throughout the organization.  A third party
internal audit firm performs periodic audits of the Company’s policies and
procedures.  Risks associated with the Company’s business activities
and products are identified and measured as to probability of occurrence and
impact on the Company (low, moderate, or high), and the control of other
activities in place to manage those risks are identified and
assessed.  The firm reports its findings to the Audit Committee of the
Company’s Board of Directors.  Department-level and senior managers of
the Company and the Bank are responsible for implementing changes recommended by
the internal audit firm and approved by the Audit Committee.  This
documented program provides management and the Board of Directors with a
comprehensive framework for monitoring the Company’s risk profile from a macro
perspective, while also serving as a tool for assessing internal controls over
financial reporting.





Interest
Rate Risk





Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market rates/prices such as interest rates, foreign currency exchange rates,
commodity prices, and equity prices.  The Company’s primary market
risk exposure is interest rate risk.  Interest rate risk is the
exposure to movement in interest rates, which could affect the Company’s net
interest income.  It is the responsibility of the Bank’s
Asset/Liability Committee (“ALCO”) to manage the interest rate risk, which
arises naturally from imbalances in repricing, maturity and/or cash flow
characteristics of both the Company’s and the Bank’s assets and
liabilities.  Asset/liability management is governed by policies
reviewed and approved annually by the Board of Directors.  The ALCO,
composed of members of the Board of Directors and senior management, meets at
least quarterly to review and develop asset/liability management strategies and
tactics.  The ALCO is responsible for ensuring that the Board of
Directors receives timely, accurate information regarding the Company’s interest
rate risk position.  Techniques used by the ALCO take into
consideration the cash flow and repricing attributes of balance sheet and
off-balance sheet items and their relation to possible changes in interest
rates.  The ALCO manages its interest rate exposure primarily by using
on-balance sheet strategies, generally accomplished through the management of
the duration, rate sensitivity and average lives of the Company’s various
investments, and by extending or shortening maturities of borrowed funds, as
well as carefully managing and monitoring the pricing of deposits.





Through
the use of a computerized modeling system maintained by outside consultants, the
potential effect on the Company’s net interest income (“NII”) of possible
changes in interest rates, in rising and declining scenarios is determined and
evaluated by ALCO.  This evaluation is performed each quarter based
upon the Company’s financial data as of February, May, August and
November.  ALCO has established a maximum limit for the change in net
interest income over a twelve-month period.  This limit requires that
NII for the projected next twelve-month period will not be reduced by more than
5% for every 100 basis point (given a gradual ramp) change in interest
rates.  In addition, the limits require that the projected Return on
Assets (“ROA”) for the next twelve months will not be reduced by more than 10
basis points for every 100 basis point (given a gradual ramp) change in interest
rates.  Exceptions to the tolerance limits will be considered
“significant” when measurements for both NII and ROA are beyond the tolerance
limits.  The Company’s most recent model simulation reflects a 1.20%
improvement in NII and a 3 basis point increase in ROA if market rates decline
by 100 basis points, a 6.22% improvement in NII and a 10 basis point increase in
ROA if market rates decline by 200 basis points and a 13.22% reduction in NII
and a 30 basis point reduction in ROA if market rates increase by 200 basis
points over a one year period.  These changes in a declining rate
scenario fall within the ALCO established limits for NII and ROA for the
projected next twelve months. These changes in a rising rate scenario are
outside the established limits for NII and ROA for the projected next twelve
months.  Although the likelihood of an increase in the interest rate
environment appears remote, management and ALCO develops strategies that would
be implemented to limit the reduction in NII and ROA if such an interest rate
scenario were to occur.  The following table depicts the potential
effect on the Company’s net interest income of various possible changes in
interest rates, in rising and declining scenarios, over a two-year period
forecast as of November 30, 2007.






23




Changes
      in Net Interest Income and Return on Assets(over
      a two-year period)
              (Dollars
      in thousands)
            
            as
      of November 30, 2007Change
      in Interest Rates During Year One
            
            Net
      Interest Income
            
            
            Percent
      Change
            
            
            Change
      in Return on Assets200
      basis point rise
            
            $
            9,551
            
            
            
            (13.22
            %)
            
            
            (0.30
            %)Flat-rate
      scenario
            
            
            11,006100
      basis point decline
            
            
            11,138
            
            
            
            1.20
            %
            
            
            0.03
            %200
      basis point decline
            
            
            11,691
            
            
            
            6.22
            %
            
            
            0.10
            %Change
      in Interest Rates During Year Two
            
            Net
      Interest Income
            
            
            Percent
      Change
            
            
            Change
      in Return on Assets200
      basis point rise
            
            $
            11,031
            
            
            
            (9.99
            %)
            
            
            (0.26
            %)Flat-rate
      scenario
            
            
            12,256100
      basis point decline
            
            
            12,395
            
            
            
            1.13
            %
            
            
            0.02
            %200
      basis point decline
            
            
            12,987
            
            
            
            5.96
            %
            
            
            0.05
            %





Based
upon the interest rate environment that existed as of January 30,
2008





As market
conditions vary from those assumed in the interest rate sensitivity analysis,
actual results will likely differ due to: the varying impact of changes in the
balances and mix of loans and deposits differing from those assumed; the impact
of possible off balance sheet hedging strategies; and other internal/external
variables.  Furthermore, the sensitivity analysis may not reflect all
actions that ALCO might take in responding to or anticipating changes in
interest rates.





During
the past year, the magnitude of the Company’s expectations for potential changes
in the interest rate environment have changed and the Company’s balance sheet
structure has also changed in reaction to market conditions, as well as the
implementation of management’s balance sheet growth strategies.  A
year ago, the simulation of the Company’s net interest income was based upon
similar interest rate change assumptions (yet with different spreads between the
yield on long versus short term assets) and a different balance sheet structure
(maturities of liabilities were longer term).  The current balance
sheet is similarly positioned to benefit from a decline in market interest rates
as it was one year ago, and the results of declining rate simulations were
within the risk tolerance limits established by the Board of
Directors.





The model
that is used to perform the simulation (the results of which are depicted above)
assumes a gradual parallel shift of the yield curve over twenty-four months and
reprices every interest bearing asset and liability on the Company’s balance
sheet.  The model uses contractual repricing dates for variable
products; contractual maturities for fixed-rate products, and product-specific
assumptions for deposits such as NOW Accounts and Money Market Accounts that are
subject to repricing based on current market conditions.  Investment
securities with call provisions will be examined on an individual basis in each
rate environment to estimate the likelihood of a call.





The
Company could enter into interest rate swap, cap or floor contracts, from time
to time, to mitigate the effects on net interest income in the event interest
rates on variable deposits rise or rates on variable rate loans
decline.  No interest rate swap, cap or floor contracts were entered
into during the years ended December 31, 2007 or 2006.





Credit
Risk





The
Bank’s lending staff manages credit risk with review by credit administration
and senior management and oversight by the Board of Directors.  The
Board of Directors grants each loan officer the authority to originate loans on
behalf of the Company and establishes policies regarding loan portfolio
diversification and loan officer lending limits.  The Company’s loan
portfolio is monitored through the use of a variety of management reports and
with the assistance of an external loan review firm, for performance,
creditworthiness and quality documentation.  The portfolio is also
examined by the OCC.  Risk ratings are assigned to commercial loans at
inception and are routinely reviewed.  When necessary, loan officers
take remedial actions to assure full and timely repayment of loan
balances.  The Company’s policy is to discontinue the accrual of
interest on loans when scheduled payments become contractually past due 90 days
or more or when the ultimate collectibility of principal or interest becomes
doubtful.  Consumer installment loans will be charged off when they
reach 120 days past due.






24





LIQUIDITY
AND CAPITAL RESOURCES MANAGEMENT





Liquidity,
as it pertains to banking, can be defined as the ability to generate cash in the
most economical way to satisfy loan demand and/or deposit withdrawal demand, and
to meet other business opportunities that require cash.  Sources of
liquidity for banks include short-term liquid assets, cash generated from loan
repayments and amortization, borrowings, deposit generation and
earnings.  Additionally, the Company’s investment portfolio is
actively managed by the ALCO and is a strong source of cash flow for the
Company.  The portfolio is fairly liquid, with a weighted average life
of 5.2 years, and is available to be used as a source of funds, if
needed.  Eighty percent of the portfolio is held as
available-for-sale.  Including the effect of potential calls on
specific investments, the weighted average life of the portfolio is 3.8
years.





Approximately
$13.9 million in capital was generated during the Bank’s initial stock
offering.  The Bank conducted a subscription rights and community
offering in 2003 to raise additional capital to support further growth as was
planned in the original business plan.  This offering resulted in the
issuance of 721,581 additional shares of common stock and provided net proceeds
of $6.5 million.  The offering also resulted in the issuance of
warrants to purchase 180,395 shares of common stock at a price of $11.00 per
share at any time on or before September 30, 2006.  As of the warrant
expiration date, 170,566 shares had been issued as a result of warrant exercises
providing additional capital of $1.9 million.  Stockholders’ equity at
December 31, 2007 equaled $21.2 million.  This level of capital does
not include the $7.7 million of trust preferred securities issued by the Company
in 2005, of which approximately $6.9 million may be treated as capital for
regulatory purposes.  Under applicable provisions of federal banking
law, the Company must meet specific quantitative capital
requirements.  See Item I, “Description of Business” and “Notes to
Consolidated Financial Statements, Note 12.”





OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS





The Bank
issues financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers.  At December
31, 2007, these financial instruments included commitments to originate loans,
unused lines of credit and secured lines of credit totaling $72.9 million; $11.1
million of which involved original maturities in excess of one
year.  In addition, the Company had issued letters of credit totaling
$3.1 million at December 31, 2007.  For further information see “Notes
to Financial Statements, Note 10 (a) Financial Instruments with Off-Balance
Sheet Risk.”





For the
year ended December 31, 2007, the Company did not engage in any off-balance
sheet transactions reasonably likely to have a material effect on its financial
condition, results of operations or cash flows.





The Bank
has entered into a five year contract with Fiserv Solutions, Inc. for data
processing and item processing services.  The contract term ends on
October 1, 2010.  The minimum amount due under the terms of the
contract is $100,000 per year.  See “Notes to Financial Statements,
Note 10 (f) Data Processing Service Agreements.”





The Bank
has entered into certain lease arrangements for its headquarters and branch
facilities.  These lease obligations include commitments for payments
amounting to $6.6 million in the aggregate during the lives of the
leases.  See “Notes to Financial Statements, Note 10 (b) Lease
Commitments”.





RECENT
ACCOUNTING PRONOUNCEMENTS





In March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement No.
156, “Accounting for Servicing of Financial Assets”, which amends FASB Statement
No. 140. This Statement requires that all separately recognized servicing rights
be initially measured at fair value, if practicable. For each class of
separately recognized servicing assets and liabilities, this Statement permits
an entity to choose either of the following subsequent measurement methods: (1)
amortize servicing assets or liabilities in proportion to and over the period of
estimated net servicing income or net servicing loss, or (2) report servicing
assets or liabilities at fair value at each reporting date and report changes in
fair value in earnings in the period in which the changes occur (the “fair value
method”). This statement was effective for new transactions occurring and for
subsequent measurement as of January 1, 2007. Management did not adopt the fair
value method of accounting for its servicing rights. Therefore, the adoption of
this Statement did not have a material impact on the Company’s consolidated
financial statements.






25




In June
2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109, Accounting for Income Taxes.FIN 48 prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under FIN
48, tax positions shall initially be recognized in the financial statements when
it is more likely than not the position will be sustained upon examination by
the tax authorities. Such tax positions shall initially and subsequently be
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement with the tax authority assuming full knowledge of
the position and all relevant facts. The provisions of this interpretation were
adopted by the Company on January 1, 2007 and did not have a material impact on
the Company’s consolidated financial statements.





In
September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements."  This Statement defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
The definition of fair value retains the exchange price notion in earlier
definitions of fair value. This Statement clarifies that the exchange price is
the price in an orderly transaction between market participants to sell the
asset or transfer the liability in the market in which the reporting entity
would transact for the asset or liability, that is, the principal or most
advantageous market for the asset or liability. Emphasis is placed on fair value
being a market-based measurement, not an entity-specific measurement, and
therefore a fair value measurement should be determined based on the assumptions
that market participants would use in pricing the asset or liability. As a basis
for considering these market participant assumptions, a fair value hierarchy has
been established to distinguish between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). This Statement
is effective for the Company on January 1, 2008 and is not expected to have a
material impact on the Company’s consolidated financial statements.





In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value, with the objective
of improving financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions, and is expected to expand the use of fair value measurement. An
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The fair
value option may generally be applied instrument by instrument and is
irrevocable. This Statement is effective for the Company on January 1, 2008 and
is not expected to have a material impact on the Company’s consolidated
financial statements.





ITEM7 - FINANCIAL STATEMENTS





The
information required by this item 7 is contained on pages F-1 to F-24 of this
Form 10-KSB.





ITEM8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





There
have been no changes in or disagreements with accountants on accounting and
financial disclosure that have not been previously reported by the Company. For
information regarding the Company’s change in accountant during 2007, see the
section captioned “Audit Related Matters - Changes in Independent Registered
Public Accounting Firm” in the Proxy Statement for the 2008 Annual Meeting of
Stockholders.





ITEM8A(T) - CONTROLS AND PROCEDURES





(a)           Disclosure
Controls and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”).  Based upon their evaluation, the principal executive
officer and principal financial offer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial offers, as
appropriate to allow timely decisions regarding required
disclosure.






26





(b)           Internal
Controls Over Financial Reporting





Management’s
annual report on internal control over financial reporting is located on page 31
of this Annual Report on Form 10-KSB.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.





(c)           Changes
to Internal Control Over Financial Reporting





Except as
indicated herein, there were no changes in the Company’s internal control over
financial reporting during the three months ended December 31, 2007 that have
materially affected, or are reasonable likely to materially affect, the
Company’s internal control over financial reporting.








ITEM8B - OTHER INFORMATION





None.






27




PART
III





ITEM9- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT





Directors





For information relating to the
directors of the Company, the section captioned “Item 1 – Election of
Directors” in the Company’s Proxy Statement for the 2008 Annual Meeting
of Stockholders is incorporated herein by reference.





Executive
Officers





For information relating to the
executive officers of the Company, the section captioned “Item 1 – Election of
Directors” in the Company’s Proxy Statement for the 2008 Annual Meeting
of Stockholders is incorporated herein by reference.








Compliance
with Section 16(a) of the Exchange Act





For information regarding compliance
with Section 16(a) of the Exchange Act, the cover page to this Annual Report on
Form 10-KSB and the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance”in the Company’s Proxy Statement for the 2008
Annual Meeting of Stockholders are incorporated herein by
reference.





Disclosure
of Code of Ethics





The Board of Directors has adopted a
Code of Ethics, which includes specific requirements for the Chief Executive
Officer, the Chief Financial Officer and all other employees with financial
reporting responsibilities.  A copy of the code of ethics is available
to stockholders on the Corporate Governance portion of the Investors Relations
section on the Company’s website at www.commonwealthworcester.com.





Corporate
Governance





For information regarding the audit
committee and its composition and the audit committee financial expert, the
section captioned “Corporate
Governance – Committees of the Board of Directors – Audit Committee” in
the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.





ITEM10 - EXECUTIVE COMPENSATION





For
information regarding executive compensation the section entitled“Executive Compensation” and
“Directors’
Compensation” in the Company’s Proxy Statement for the 2008 Annual
Meeting of Stockholders are incorporated herein by reference.








ITEM11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS





(a)  Security
Ownership of Certain Owners




The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.





(b)  Security
Ownership of Management




The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.





(c)  Changes
in Control




Management
of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the registrant.






28




(d)
            Equity
      Compensation Plan Information




Information
required by this item is incorporated herein by reference to the section
entitled “Items to be Voted on
by Stockholders—Item 2—Approval of the CNB Financial Corp. 2008 Equity Incentive
Plan—Equity Compensation Plan Information”in the Proxy
Statement.








ITEM12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE





Certain
Relationships and Related Transactions





For information regarding certain
relationships and related transactions, the section captioned “Transactions with Related
Persons” in the Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders is incorporated herein by reference.





Corporate
Governance





For information regarding director
independence, the section captioned“Item 1 – Election
of Directors”in the
Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.






29





ITEM13 - EXHIBITS





Exhibit
      No.
            Description3.1
            Articles
      of Association(1)3.2
            Bylaws(1)4.1
            Common
      Stock Certificate(2)10.1
            Lease
      for 33 Waldo Street, Worcester, Massachusetts(3)10.2*
            Amended
      and Restated Stock Option Plan(4)10.3
            Lease
      for 67 Millbrook Street, Worcester, Massachusetts(5)10.4*
            Lease
      for 26 W. Boylston Street, West Boylston, Massachusetts(5)10.5*
            Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and Charles R. Valade(6)10.6*
            Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and William M Mahoney(6)10.7*
            Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and Christine Trifari(6)10.8*
            Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and Andrea J. White(6)21.0
            Subsidiaries
      of Small Business Issuer23.1
            Consent
      of KPMG, LLP23.2
            Consent
      of Wolf & Company, P.C.31.1
            Sarbanes-Oxley
      Section 302 Certification of Charles R. Valade31.2
            Sarbanes-Oxley
      Section 302 Certification of William M. Mahoney32.1
            Sarbanes-Oxley
      Section 906 Certification of Charles R. Valade32.2
            Sarbanes-Oxley
      Section 906 Certification of William M.
Mahoney


_____________________________________________________________________________________________


*      Management
contract or compensatory plan, contract or arrangement.


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


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


(3)   Incorporated
by reference in this document to the Annual Report on Form 10-KSB for the year
ended December 31, 2006.


(4)   Incorporated
by reference in this document to the Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on March 27,
2007.


(5) Incorporated
by reference in this document to the Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2006.


(6)   Incorporated
herein by reference in this document to the Form 8-K filed with the Securities
and Exchange Commission on May 22, 2006.





ITEM14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES





For
information regarding the principal accountant fees and expenses, the sections
captioned “Audit Related
Matters – Auditor Fees”and “Items to be Voted on by Stockholders
– Item 3 – Ratification of the Independent Registered Public Accounting Firm”inthe
Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
incorporated herein by reference.






30





Management’s
Report on Internal Control Over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.  The internal
control process has been designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company’s financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United States of
America.





Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2007, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  Based
on this assessment, management has determined that the Company’s internal
control over financial reporting as of December 31, 2007 is
effective.





Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisitions, use, or disposition of the
Company’s assets that could have a material affect on the Company’s financial
statements are prevented or timely detected.





All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparations and presentations.  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.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.









31








Index
to Consolidated Financial Statements





Report
      of Independent Registered Public Accounting Firm (Wolf & Company,
      P.C)
              F-1Report
      of Independent Registered Public Accounting Firm (KPMG,
    LLP)
              F-2Consolidated
      Balance Sheets at December 31, 2007 and 2006
              F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2006
              F-4Consolidated
      Statements of Stockholders’ Equity for theYears
      Ended December 31, 2007 and 2006
              F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006
              F-6Notes
      to Consolidated Financial Statements
              F-7













Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Shareholders


CNB
Financial Corp.:





We have
audited the accompanying consolidated balance sheet of CNB Financial Corp. (the
Company) and its subsidiary as of December 31, 2007, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the year then ended.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CNB Financial Corp. and
subsidiary as of December 31, 2007, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.











/s/ Wolf
& Company, P.C.








Boston,
Massachusetts


March 5,
2008








F-1




Report
of Independent Registered Public Accounting Firm











The Board
of Directors and Shareholders


CNB
Financial Corp.:





We have
audited the accompanying consolidated balance sheets of CNB Financial Corp. (the
Company) and its and subsidiary as of December 31, 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CNB Financial Corp. and
subsidiary as of December 31, 2006 and 2005, and the results of their operations
and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.





As
discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No 123(R), Share-Based
Payment, using the modified prospective transition method effective January 1,
2006.








/s/ KPMG
LLP








Boston,
Massachusetts


March 22,
2007








F-2




CNB
FINANCIAL CORP.
 
 Consolidated
Balance Sheets
 As of
December 31, 2007 and 2006


2007
            
            
            2006ASSETSCash
      and Cash Equivalents
            
            $
            8,825,000
            
            
            $
            6,736,000Investment
      Securities Available-for-Sale
            
            
            45,597,000
            
            
            
            54,582,000Investment
      Securities Held To Maturity, (Fair Value of$11,720,000
      as of December 31, 2007 and $12,450,000as
      of December 31, 2006)
            
            
            11,687,000
            
            
            
            12,513,000Federal
      Reserve Bank Stock
            
            
            761,000
            
            
            
            700,000Federal
      Home Loan Bank Stock
            
            
            3,052,000
            
            
            
            3,070,000Loans
            
            
            217,321,000
            
            
            
            200,668,000Less-Allowance
      for Loan Losses
            
            
            (2,844,000
            )
            
            
            (2,807,000
            )Loans,
      Net
            
            
            214,477,000
            
            
            
            197,861,000Premises
      and Equipment, Net
            
            
            2,378,000
            
            
            
            2,521,000Accrued
      Interest Receivable
            
            
            1,100,000
            
            
            
            1,297,000Deferred
      Tax Asset (Note 8)
            
            
            1,123,000
            
            
            
            1,553,000Prepaid
      Expenses and Other Assets
            
            
            494,000
            
            
            
            531,000$
            289,494,000
            
            
            $
            281,364,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Deposits
            
            $
            202,238,000
            
            
            $
            191,807,000Federal
      Home Loan Bank Advances
            
            
            48,750,000
            
            
            
            52,250,000Federal
      Funds Purchased
            
            
            -
            
            
            
            500,000Subordinated
      Debentures
            
            
            7,732,000
            
            
            
            7,732,000Securities
      Under Agreement to Repurchase
            
            
            7,214,000
            
            
            
            5,946,000Accrued
      Expenses and Other Liabilities
            
            
            2,407,000
            
            
            
            2,958,000Total
      Liabilities
            
            
            268,341,000
            
            
            
            261,193,000Commitments
      and Contingencies (Note 11)Stockholders’
      Equity:Common
      stock
              Par
      Value: $1.00 per share as of December 31, 2007 and 2006Shares
      Authorized: 10,000,000 as of December 31, 2007 and 2006Issued
      and Outstanding: 2,283,000 as of December 31, 2007 and
2006
            
            
            2,283,000
            
            
            
            2,283,000Additional
      Paid-in Capital
            
            
            20,291,000
            
            
            
            20,154,000Accumulated
      Deficit
            
            
            (1,754,000
            )
            
            
            (2,151,000
            )Accumulated
      Other Comprehensive Income (Loss)
            
            
            333,000
            
            
            
            (115,000
            )Total
      Stockholders’ Equity
            
            
            21,153,000
            
            
            
            20,171,000$
            289,494,000
            
            
            $
            281,364,000


See
accompanying notes to consolidated financial statements.





F-3




CNB
FINANCIAL CORP.
 
 Consolidated
Statements of Operations
 For the
Years December 31, 2007 and 2006


2007
            
            
            2006Interest
      and Divided Income:Interest
      and Fees on Loans
            
            $
            15,535,000
            
            
            $
            13,863,000Interest
      and Dividends on Investments
            
            
            3,378,000
            
            
            
            3,107,000Total
      Interest and Dividend Income
            
            
            18,913,000
            
            
            
            16,970,000Interest
      Expense:Interest
      Expense on Deposits
            
            
            7,254,000
            
            
            
            6,046,000Interest
      Expense on Borrowings
            
            
            3,288,000
            
            
            
            2,526,000Total
      Interest Expense
            
            
            10,542,000
            
            
            
            8,572,000Net
      Interest Income
            
            
            8,371,000
            
            
            
            8,398,000Provision
      for Loan Losses
            
            
            80,000
            
            
            
            216,000Net
      Interest Income, After Provisionfor
      Loan Losses
            
            
            8,291,000
            
            
            
            8,182,000Other
      Income:Fees
      on Deposit Accounts
            
            
            208,000
            
            
            
            215,000Loan
      Related Fees
            
            
            153,000
            
            
            
            214,000Other
            
            
            102,000
            
            
            
            114,000Security
      Gains
            
            
            -
            
            
            
            5,000Total
      Other Income
            
            
            463,000
            
            
            
            548,000Operating
      Expenses:Employee
      Compensation and Benefits
            
            
            4,391,000
            
            
            
            4,160,000Occupancy
      and Equipment
            
            
            1,359,000
            
            
            
            1,160,000Professional
      Fees
            
            
            705,000
            
            
            
            628,000Marketing
      and Public Relations
            
            
            299,000
            
            
            
            480,000Data
      Processing Expenses
            
            
            464,000
            
            
            
            387,000Other
      General and Administrative Expenses
            
            
            960,000
            
            
            
            807,000Total
      Operating Expenses
            
            
            8,178,000
            
            
            
            7,622,000Income
      Before Income Taxes
            
            
            576,000
            
            
            
            1,108,000Income
      Taxes Expense
            
            
            179,000
            
            
            
            472,000Net
      Income
            
            $
            397,000
            
            
            $
            636,000Net
      Income per Basic Share
            
            $
            0.17
            
            
            $
            0.29Net
      Income per Diluted Share
            
            $
            0.17
            
            
            $
            0.29Weighted
      Average Shares - Basic
            
            
            2,283,000
            
            
            
            2,173,000Weighted
      Average Shares - Diluted
            
            
            2,294,000
            
            
            
            2,221,000





See
accompanying notes to consolidated financial statements.








F-4





CNB
FINANCIAL CORP.
 
 Consolidated
Statements of Stockholders’ Equity
 For the
Years Ended December 31, 2007 and 2006


Common
      StockNumber
      of Shares
            
            
            Par
      Value
            
            
            Additional
      Paid-in Capital
            
            
            Accumulated
      Deficit
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            TotalBalance,
      December 31, 2005
            
            
            2,113,000
            
            
            $
            2,113,000
            
            
            $
            18,314,000
            
            
            $
            (2,787,000
            )
            
            $
            (414,000
            )
            
            $
            17,226,000Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            636,000
            
            
            
            -
            
            
            
            636,000Other
      Comprehensive IncomeUnrealized
      Gains on Securities
              Available-for-Sale,net
      of Deferred
              Taxes
      of $176,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            299,000
            
            
            
            299,000Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            935,000Share-Based
      Compensation
            
            
            
            
            
            
            
            
            
            
            140,000
            
            
            
            
            
            
            
            
            
            
            
            140,000Exercise
      of Warrants
            
            
            170,000
            
            
            
            170,000
            
            
            
            1,700,000
            
            
            
            
            
            
            
            
            
            
            
            1,870,000Balance,
      December 31, 2006
            
            
            2,283,000
            
            
            $
            2,283,000
            
            
            $
            20,154,000
            
            
            $
            (2,151,000
            )
            
            $
            (115,000
            )
            
            $
            20,171,000Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            397,000
            
            
            
            -
            
            
            
            397,000Other
      Comprehensive IncomeUnrealized
      Gains on Securities
              Available-for-Sale,net
      of Deferred
              Taxes
      of $279,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            448,000
            
            
            
            448,000Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            845,000Share-based
      Compensation
            
            
            
            
            
            
            
            
            
            
            137,000
            
            
            
            
            
            
            
            
            
            
            
            137,000Balance,
      December 31, 2007
            
            
            2,283,000
            
            
            $
            2,283,000
            
            
            $
            20,291,000
            
            
            $
            (1,754,000
            )
            
            $
            333,000
            
            
            $
            21,153,000









See
accompanying notes to consolidated financial statements.






F-5




CNB
FINANCIAL CORP.
  Consolidated
Statements of Cash Flows
 for
the Years Ended December 31, 2007 and 2006


Cash
      Flows from Operating Activities:
            
            2007
            
            
            2006Net
      Income
            
            $
            397,000
            
            
            $
            636,000Adjustments
      to reconcile Net Income to Net Cash Provided by Operating
      Activities–Share-Based
      Compensation
            
            
            137,000
            
            
            
            140,000Provision
      for Loan Losses
            
            
            80,000
            
            
            
            216,000Increase
      in net Deferred Loan Costs
            
            
            (30,000
            )
            
            
            (64,000
            )Depreciation,
      Amortization of Premiums and Accretion of Discounts on
      Securities
            
            
            298,000
            
            
            
            309,000Deferred
      Tax Expense
            
            
            151,000
            
            
            
            327,000Gain
      on Sale of Securities
            
            
            -
            
            
            
            (5,000
            )Changes
      in Assets and Liabilities–(Increase)
      Decrease in Accrued Interest Receivable
            
            
            197,000
            
            
            
            (326,000
            )(Increase)
      Decrease in Other Assets
            
            
            37,000
            
            
            
            (204,000
            )(Increase)
      Decrease in Accrued Expenses and Other Liabilities
            
            
            (551,000
            )
            
            
            1,457,000Net
      Cash Provided by Operating Activities
            
            
            716,000
            
            
            
            2,486,000Cash
      Flows from Investing Activities:Purchases
      of Investment Securities Held-to-Maturity
            
            
            (2,071,000
            )
            
            
            (3,377,000
            )Purchases
      of Investment Securities Available-for-Sale
            
            
            (2,999,000
            )
            
            
            (27,276,000
            )Principal
      Payments on Mortgage Backed Securities (CMOs)
            
            
            5,708,000
            
            
            
            4,944,000Proceeds
      from Maturity (Call) of Investment Securities
    Held-to-Maturity
            
            
            2,000,000
            
            
            
            1,000,000Proceeds
      from Maturity (Call) of Investment Securities
      Available-for-Sale
            
            
            8,000,000
            
            
            
            2,000,000Purchase
      of Federal Reserve Stock and FHLBB Stock
            
            
            (43,000
            )
            
            
            (1,393,000
            )Sale
      of Securities Available-for-Sale
            
            
            -
            
            
            
            4,860,000Loan
      Originations, Net of Principal Repayments
            
            
            (16,666,000
            )
            
            
            (19,780,000
            )Purchases
      of Premises and Equipment
            
            
            (255,000
            )
            
            
            (1,120,000
            )Net
      Cash Used in Investing Activities
            
            
            (6,326,000
            )
            
            
            (40,142,000
            )Cash
      Flows from Financing Activities:Advances
      from FHLBB
            
            
            86,847,000
            
            
            
            88,100,000Repayment
      of FHLBB Advances
            
            
            (90,347,000
            )
            
            
            (69,350,000
            )Federal
      Funds Purchased (Sold)
            
            
            (500,000
            )
            
            
            500,000Securities
      Under Agreement to Repurchase
            
            
            1,268,000
            
            
            
            5,946,000Net
      Increase in Deposits
            
            
            10,431,000
            
            
            
            2,355,000Common
      Stock Issuance
            
            
            -
            
            
            
            1,870,000Net
      Cash Provided by Financing Activities
            
            
            7,699,000
            
            
            
            29,421,000Net  Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            2,089,000
            
            
            
            (8,235,000
            )Cash
      and Cash Equivalents, Beginning of the Period
            
            
            6,736,000
            
            
            
            14,971,000Cash
      and Cash Equivalents, End of the Period
            
            $
            8,825,000
            
            
            $
            6,736,000Supplemental
      Disclosure of Cash Flow InformationInterest
      Paid
            
            $
            11,150,000
            
            
            $
            6,923,000Taxes
      Paid
            
            $
            45,000
            
            
            $
            222,000




See
accompanying notes to consolidated financial statements.








F-6


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


(1)                 ORGANIZATION





CNB
Financial Corp. (the “Company”) is a bank holding company.  Its wholly
owned subsidiary Commonwealth National Bank (the “Bank”) is a nationally
chartered bank operating primarily in Worcester County,
Massachusetts.  The Bank operates out of its main office at 33 Waldo
Street, Worcester, Massachusetts.  The Bank has a branch office at One
West Boylston Street, Worcester, Massachusetts; 564 Main Street, Shrewsbury,
Massachusetts; 701 Church Street, Northbridge, Massachusetts; 1393 Grafton
Street, Worcester, Massachusetts and 25A West Boylston Street, West Boylston,
Massachusetts.  The Bank is subject to competition from other
financial institutions, including commercial banks, savings banks, credit unions
and mortgage banking companies.  The Company is subject to the
regulations of, and periodic examinations by the Federal Reserve
Board.  The Bank is subject to the regulations of, and periodic
examinations by the Office of the Comptroller of the Currency (the “OCC”) and
the Federal Deposit Insurance Corporation (the “FDIC”).  The FDIC
insures the Bank’s deposits for amounts up to $100,000 and amounts up to
$250,000 for deposit retirement accounts.








Company
Formation





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





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




(2)
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Consolidated
Financial Statements





The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, the Bank.  All material
inter-company transactions have been eliminated in consolidation.  The
Company (only), as a separately incorporated bank holding company, has no
significant operations other than serving as the sole stockholder of the
Bank.  Its commitments and debt service requirement at December 31,
2007, consisted of subordinated debentures, including accrued interest amounting
to $7.8 million issued to its unconsolidated subsidiary, Commonwealth National
Bank Statutory Trust I.  Commonwealth National Bank Statutory Trust I
is an unconsolidated special purpose subsidiary of the Company that was formed
to facilitate the issuance of trust preferred securities to the
public.  The Company has one reportable operating
segment.





Use
of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of income and
expenses during the reporting period.  Actual results could differ
from those estimates.  The most significant estimates include those
that relate to the determination of the allowance for loan losses, the
recoverability of deferred tax assets, and other-than-temporary investment
losses.





Significant
Concentrations of Credit Risk





The
Company grants commercial and residential mortgages and commercial and consumer
loans to customers.  A substantial portion of the loan portfolio is
represented by commercial loans and commercial mortgages throughout Worcester
County, Massachusetts.  The ability of the Company’s debtors to honor
their contracts is dependant upon the real estate values and general economic
conditions in this area.  Commercial real estate and commercial
construction loans represent 59% and 59% of the total loan portfolio at December
31, 2007 and 2006, respectively.






F-7


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007




Cash
and Cash Equivalents





For
purpose of the statement of cash flows, cash and cash equivalents consist of
cash on hand and amounts due from banks, federal funds sold and securities
purchased under the agreement to resell, all of which mature within ninety
days.  At December 31, 2007, cash and cash equivalents consisted of
cash on hand, amounts due from banks and overnight federal funds
sold.





Investment
Securities





The
Company classifies certain of its investment securities as held-to-maturity,
which are carried at amortized cost if the Company has the positive intent and
ability to hold such securities to maturity.  Investments in debt
securities that are not classified as held-to-maturity and equity securities
that have readily determinable fair values are classified as available-for-sale
or trading securities.  Trading securities are investments purchased
and held principally for the purpose of selling in the near term;
available-for-sale securities are investments not classified as held-to-maturity
or trading.  Available-for-sale securities are carried at fair value,
which is measured at each reporting date.  The resulting unrealized
gain or loss is reflected in accumulated other comprehensive income (loss) net
of the associated tax effect.  Trading securities are also carried at
fair value, with the gains and losses recognized through the statement of
operations.





Any
security that management believes has experienced a decline in value, which is
deemed other than temporary, is reduced to its estimated fair value by a charge
to operations.  Realized gains and losses on security transactions are
computed using the specific identification method.  Amortization of
premiums and discounts is included in interest and dividend
income.  Discounts and premiums related to debt securities are
amortized using the effective interest rate method.  The Company did
not have any derivative financial instruments as of December 31, 2007 or
2006.





Loans





Loans are
stated at the amount of unpaid principal, adjusted for the allowance for loan
losses and net loan origination fees.  Loan origination fees and
certain direct loan origination costs are deferred and amortized as an
adjustment to the related loan yield over the contractual life of the
loan.  When loans are sold or fully repaid, the unamortized fees and
costs are recognized in operations.





Interest
is not accrued on loans 90 days or greater past due or on other loans when
management believes collection is doubtful.  Loans considered
impaired, as defined below, are non-accruing.  When a loan is placed
on non-accrual status, all interest previously accrued, but not collected, is
reversed against current interest income.  The interest on these loans
is accounted for on the cash basis or cost-recovery method, until qualifying for
return to accrual status.  Loans are returned to the accrual status
when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.





Allowance
for Loan Losses





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





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





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





Key
elements of the above estimates, including assumptions used in independent
appraisals, are dependent upon the economic conditions prevailing at the time of
the estimates.  Accordingly, uncertainty exists as to the final
outcome of certain of the valuation judgments as a result of economic conditions
in the Company’s lending areas.  The inherent uncertainties in the
assumptions relative to projected sales prices or rental rates may result in the
ultimate realization of amounts on certain loans that are significantly
different from the amounts reflected in these consolidated financial
statements.







F-8


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007





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





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





Credit
Related Financial Instruments





In the
ordinary course of business, the Company enters into commitments to extend
credit.  Such financial instruments are generally recorded as assets
when they are funded.





Premises
and Equipment





Buildings,
leasehold improvements, furniture, fixtures, software, computers and equipment
are stated at cost, less accumulated depreciation and
amortization.  Depreciation is computed using the straight-line method
over the estimated useful lives of the asset.  Amortization of
leasehold improvements is computed on the straight-line method over the shorter
of the estimated useful lives of the assets or the related lease
term.  Expenditures for maintenance, repairs and renewals of minor
items are charged to expense as incurred.





Transfers
of Financial Assets


Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right to pledge or exchange the transferred assets, and (3) the
Company does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.





Impairment
of Long-Lived Assets





The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Long-lived assets to be disposed of are reported at the
lower of the carrying amount or fair value less cost to sell.  The
Company evaluates the recoverability of its carrying amounts of long-lived
assets based on estimated cash flows to be generated by each of such
assets.  To the extent impairment is identified, the Company reduces
the carrying value of such assets.





Income
Taxes





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





Advertising
Costs





Advertising
costs are charged to earnings when incurred.





Share-Based
Payment


Compensation
cost is recognized for stock options and restricted stock awards issued to
employees. Compensation cost is measured as the fair value of these awards on
their date of grant.  A Black-Scholes model is utilized to estimate
the fair value of stock options.  Compensation cost is recognized on a
straight-line basis over the required service period, generally defined as the
vesting period for stock option awards.






F-9


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


Earnings
Per Share





The
calculation of basic earnings per share is based on the weighted average number
of shares of common stock outstanding during the period.  Diluted
earnings per share reflect additional common shares that would have been
dilutive if potential common shares had been issued, as well as any adjustment
to income that would result from the assumed issuance.  Potential
common shares that may be issued by the Company related to outstanding stock
options and warrants, and are determined using the treasury stock
method.




2007
            2006Net
      Income
            $   397,000
            $    636,000Weighted Average
      SharesBasic
      Shares
            2,283,000
            2,173,000Effect
      of Dilution
            11,000
            48,000Diluted
      Shares
            2,294,000
            2,221,000Net
      Income Per ShareBasic
      EPS
            $   0.17
            $         0.29Effect
      of Dilution
            -
            -Diluted
      EPS
            $   0.17
            $         0.29





Outstanding
stock options with exercise prices greater than the average price per common
share are anti-dilutive and are not included in the computation of dilutive
earnings per share.  The number of anti-dilutive options was 380,390
and 155,980 at December 31, 2007 and 2006, respectively.





Comprehensive
Income (Loss)





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
consolidated balance sheet, such items, along with net income, are components of
comprehensive income.





Recent
Accounting Pronouncements





In March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement No.
156, “Accounting for Servicing of Financial Assets”, which amends FASB Statement
No. 140. This Statement requires that all separately recognized servicing rights
be initially measured at fair value, if practicable. For each class of
separately recognized servicing assets and liabilities, this Statement permits
an entity to choose either of the following subsequent measurement methods: (1)
amortize servicing assets or liabilities in proportion to and over the period of
estimated net servicing income or net servicing loss, or (2) report servicing
assets or liabilities at fair value at each reporting date and report changes in
fair value in earnings in the period in which the changes occur (the “fair value
method”). This statement was effective for new transactions occurring and for
subsequent measurement as of January 1, 2007. Management did not adopt the fair
value method of accounting for its servicing rights. Therefore, the adoption of
this Statement did not have a material impact on the Company’s consolidated
financial statements.





In June
2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109, Accounting for Income Taxes.FIN 48 prescribes a comprehensive model for how companies should
recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. Under FIN
48, tax positions shall initially be recognized in the financial statements when
it is more likely than not the position will be sustained upon examination by
the tax authorities. Such tax positions shall initially and subsequently be
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement with the tax authority assuming full knowledge of
the position and all relevant facts. The provisions of this interpretation were
adopted by the Company on January 1, 2007 and did not have a material impact on
the Company’s consolidated financial statements.





In
September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements."


This
Statement defines fair value, establishes a framework for measuring fair value
in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The definition of fair value retains
the exchange price notion in earlier definitions of fair value. This Statement
clarifies that the exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability in the market in
which the reporting entity would transact for the asset or liability, that is,
the principal or most advantageous market for the asset or liability. Emphasis
is placed


on fair
value being a market-based measurement, not an entity-specific measurement, and
therefore a fair value measurement should be determined based on the assumptions
that market participants would use in pricing the asset or liability. As a basis
for considering these market participant assumptions, a fair value hierarchy has
been established to distinguish between (1) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs) and (2) the reporting entity's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). This Statement
is effective for the Company on January 1, 2008 and is not expected to have a
material impact on the Company’s consolidated financial statements.






F-10


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value, with the objective
of improving financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions, and is expected to expand the use of fair value measurement. An
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The fair
value option may generally be applied instrument by instrument and is
irrevocable. This Statement is effective for the Company on January 1, 2008 and
is not expected to have a material impact on the Company’s consolidated
financial statements.





(3)
            INVESTMENT
      SECURITIES





The
amortized cost and fair value of investment securities available-for-sale and
held-to-maturity by contractual maturity, with gross unrealized gains and
losses, at December 31, 2007 and 2006 are shown below.  Expected
maturities may differ from contractual maturities because issuers of these
securities may have the right to call or prepay obligations with or without call
or prepayment penalties.






2007Amortized
      cost
            
            
            Unrealized
            
            
            
            Fair
      ValueAvailable-for-sale:
            
            
            
            
            
            
            Gains
            
            
            
            Losses




Government
      Sponsored Enterprises
              Due
      within one year
            
            $
            4,999,000
            
            
            $
            -
            
            
            $
            (9,000
            )
            
            $
            4,990,000Due
      after one year through five years
            
            
            4,164,000
            
            
            
            18,000
            
            
            
            (7,000
            )
            
            
            4,175,000Due
      after five years through ten years
            
            
            941,000
            
            
            
            55,000
            
            
            
            -
            
            
            
            996,000Due
      after ten years
            
            
            3,876,000
            
            
            
            131,000
            
            
            
            -
            
            
            
            4,007,000Mortgage-backed
      Securities (including CMOs)Due
      within one year
            
            
            1,729,000
            
            
            
            12,000
            
            
            
            (3,000
            )
            
            
            1,738,000Due
      after five years through ten years
            
            
            2,911,000
            
            
            
            
            
            
            
            (45,000
            )
            
            
            2,866,000Due
      after ten years
            
            
            26,476,000
            
            
            
            476,000
            
            
            
            (127,000
            )
            
            
            26,825,000$
            45,096,000
            
            
            $
            692,000
            
            
            $
            (191,000
            )
            
            $
            45,597,000Held-to-maturity:Government
      Sponsored EnterprisesDue
      within one year
            
            $
            2,000,000
            
            
            $
            -
            
            
            $
            (3,000
            )
            
            $
            1,997,000Mortgage-backed
      Securities(including CMOs)Due
      after five years through ten years
            
            
            3,017,000
            
            
            
            15,000
            
            
            
            (7,000
            )
            
            
            3,025,000Due
      after ten years
            
            
            1,197,000
            
            
            
            -
            
            
            
            (7,000
            )
            
            
            1,190,000MunicipalsDue
      after five years through ten years
            
            
            330,000
            
            
            
            3,000
            
            
            
            -
            
            
            
            333,000Due
      after ten years
            
            
            5,043,000
            
            
            
            42,000
            
            
            
            (10,000
            )
            
            
            5,075,000Other
      Bonds
              Due
      after one year through five years
            
            
            100,000
            
            
            
            -
            
            
            
            -
            
            
            
            100,000$
            11,687,000
            
            
            $
            60,000
            
            
            
            (27,000
            )
            
            $
            11,720,000Total
      Investment Securities
            
            $
            56,783,000
            
            
            $
            752,000
            
            
            $
            (218,000
            )
            
            $
            57,317,000









F-11


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007
  2006Amortized
      cost
              
              
              
              Unrealized
              
              
              
              Fair
      ValueAvailable-for-sale:
              
              
              
              
              
              
              Gains
              
              
              
              Losses


Government
      Sponsored Enterprises
              Due
      within one year
            
            $
            6,000,000
            
            
            $
            -
            
            
            $
            (42,000
            )
            
            $
            5,958,000Due
      after one year through five years
            
            
            11,162,000
            
            
            
            -
            
            
            
            (186,000
            )
            
            
            10,976,000Due
      after five years through ten years
            
            
            930,000
            
            
            
            24,000
            
            
            
            -
            
            
            
            954,000Due
      after ten years
            
            
            1,864,000
            
            
            
            55,000
            
            
            
            -
            
            
            
            1,919,000Mortgage-backed
      Securities (including CMOs)Due
      after ten years
            
            
            34,852,000
            
            
            
            250,000
            
            
            
            (327,000
            )
            
            
            34,775,000$
            54,808,000
            
            
            $
            329,000
            
            
            $
            (555,000
            )
            
            $
            54,582,000Held-to-maturity:Government
      Sponsored EnterprisesDue
      within one year
            
            $
            1,997,000
            
            
            $
            -
            
            
            $
            (4,000
            )
            
            $
            1,993,000Due
      after one year through five years
            
            
            2,000,000
            
            
            
            -
            
            
            
            (23,000
            )
            
            
            1,977,000Mortgage-backed
      Securities(including CMOs)Due
      after five years through ten years
            
            
            3,702,000
            
            
            
            3,000
            
            
            
            (38,000
            )
            
            
            3,667,000Due
      after ten years
            
            
            1,412,000
            
            
            
            -
            
            
            
            (33,000
            )
            
            
            1,379,000MunicipalsDue
      after ten years
            
            
            3,352,000
            
            
            
            34,000
            
            
            
            (2,000
            )
            
            
            3,384,000Other
      Bonds
              Due
      after one year through five years
            
            
            50,000
            
            
            
            -
            
            
            
            -
            
            
            
            50,000$
            12,513,000
            
            
            $
            37,000
            
            
            
            (100,000
            )
            
            $
            12,450,000Total
      Investment Securities
            
            $
            67,321,000
            
            
            $
            366,000
            
            
            $
            (655,000
            )
            
            $
            67,032,000




At
December 31, 2007 and 2006, the Bank had callable investment securities of
$11,040,000 and $11,091,000, respectively, in the available-for-sale category
and $3,999,000 and $1,997,000, respectively, in the held-to-maturity
category.





At
December 31, 2007 and 2006, investment securities carried at amortized cost of
$42,659,000 and $47,700,000, respectively, (fair value of $43,183,000 and
$47,343,000, respectively), were pledged to secure public deposits and for other
purposes required or permitted by law.





The Bank
is a member of the Federal Home Loan Bank of Boston (the “FHLBB”) and is
required to invest in $100 par value stock of the FHLBB.  The Bank
must invest in FHLBB stock in an amount equal to 0.35% of certain assets of the
Bank (a minimum of $500) plus 4.5% of the Bank’s outstanding FHLBB advances and
other activity with the FHLBB.  As and when such stock is redeemed,
the Bank will receive an amount equal to the par value of the
stock.  At December 31, 2007, $48,750,000 of advances from the FHLBB
were outstanding (See Note 7) and the Bank held $3,052,000 in FHLBB
stock.





The Bank
is a member of the Federal Reserve Bank of Boston (the “FRBB”) and is required
to invest in $100 par value stock of the FRBB in an amount equal to six percent
of the Bank’s capital and surplus (one-half of the amount of the Bank’s
subscription is paid to the FRBB and the remaining half is subject to call by
the FRBB).  As and when such stock is redeemed, the Bank will receive
an amount equal to the amount paid in.  At December 31, 2007, the Bank
held $761,000 in FRBB stock.




The
following chart reflects the gross unrealized loss and fair value of the
Company’s securities with unrealized losses that are not deemed to be
other-than-temporarily impaired at December 31, 2007 and 2006.






F-12


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007




2007Less
      than 12 Months
            12
      Months or Longer
            TotalDescription
      of Securities
            Fair
      Value
            Unrealized
      Losses
            Fair
      Value
            Unrealized
      Losses
            Fair
      Value
            Unrealized
      Losses(in
      thousands)Government
      Sponsored Enterprises
            $            -
            $           -
            $      7,146
            $         (19)
            $      7,146
            $          (19)Mortgage
      Backed Securities
            -
            -
            11,527
            (189)
            11,527
            (189)Municipals
            1,560
            (10)
            -
            -
            1,560
            (10)Total
      Temporarily Impaired Securities
            $       1,560
            $         (10)
            $      18,673
            $         (208)
            $      20,233
            $         (218)2006Less
      than 12 Months
            12
      Months or Longer
            TotalDescription
      of Securities
            Fair
      Value
            Unrealized
      Loss
            Fair
      Value
            Unrealized
      Loss
            Fair
      Value
            Unrealized
      Loss(in
      thousands)Government
      Sponsored Enterprises
            $        994
            $           (6)
            $      19,911
            $         (249)
            $      20,905
            $          (255)Mortgage
      Backed Securities
            3,942
            (10)
            14,962
            (388)
            18,904
            (398)Municipals
            622
            (2)
            -
            -
            622
            (2)Total
      Temporarily Impaired Securities
            $    5,558
            $         (18)
            $      34,873
            $         (637)
            $      40,431
            $         (655)







The
Company had investment securities with an aggregate book value of $18,881,000
that have been in a continuous loss position for twelve months or more at
December 31, 2007.  The aggregate unrealized loss for these securities
equaled $208,000 at December 31, 2007.  The unrealized loss on
investments is caused by changes in the interest rate
environment.  The Company has the ability and intent to hold these
investment securities until a price recovery, which could be until maturity, and
therefore considers them not to be other-than-temporarily impaired at December
31, 2007.




During
2007, the Company did not sell any investment securities.





(4)
            LOANS





Major
classifications of loans at December 31 follow:






2007
            
            
            2006Commercial
      and Industrial
            
            $
            54,987,000
            
            
            $
            62,217,000Commercial
      Real Estate
            
            
            128,283,000
            
            
            
            110,693,000Residential
      Real Estate
            
            
            21,610,000
            
            
            
            15,048,000Consumer
            
            
            12,441,000
            
            
            
            12,710,000Total
      loans
            
            
            217,321,000
            
            
            
            200,668,000Less-Allowance
      for Loan Losses
            
            
            (2,844,000
            )
            
            
            (2,807,000
            )Total
      Loans, net
            
            $
            214,477,000
            
            
            $
            197,861,000




The
Bank’s lending activities are conducted principally in Worcester County,
Massachusetts.  The Bank originates commercial real estate loans,
commercial loans, commercial construction loans, commercial lines of credit,
consumer loans and residential real estate loans.  At December 31,
2007, no loans accruing interest were past due 90 days or more and $1,482,000 of
loans were on non-accrual status.  At December 31, 2006, no loans
accruing interest were past due 90 days or more and $67,000 of loans were on
non-accrual status.  Net deferred costs totaled $320,000 and $297,000
at December 31, 2007 and 2006, respectively.








F-13


CNB
FINANCIAL CORP.





Notes to
Consolidated Financial Statements


December
31, 2007





A summary
of changes in the allowance for loan losses for the years ended December 31
follows:





2007
            
            
            2006Balance,
      Beginning of Year
            
            $
            2,807,000
            
            
            $
            2,615,000Provision
      for Loan Losses
            
            
            80,000
            
            
            
            216,000Less:
      Loans Charged-off
            
            
            (82,000
            )
            
            
            (25,000
            )Recoveries
      of loans previously charged off
            
            
            39,000
            
            
            
            1,000Balance,
      End of Year
            
            $
            2,844,000
            
            
            $
            2,807,000




As of
December 31, 2007 and 2006, the Company’s recorded investment in impaired loans
and the related valuation allowance was as follows:





2007
            2006Recorded
              Investment
            Valuation
              Allowance
            Recorded
              Investment
            Valuation
              AllowanceImpaired
      LoansValuation
      Allowance Required
            $  1,482,000
            $  210,000
            $  67,000
            $  3,000No
      Valuation Allowance Required
            -
            -
            -
            -Total
            $  1,482,000
            $  210,000
            $  67,000
            $  3,000





The
valuation allowance is included in the allowance for loan losses on the
consolidated balance sheets.  The average recorded investment in
impaired loans for the years ended December 31, 2007 and 2006 was $585,000 and
$207,000 respectively.  Interest payments received on impaired loans
are recorded as interest income unless collection of the remaining recorded
investment is doubtful, at which time payments received are recorded as
reductions of principal.





(5)
            PREMISES
      AND EQUIPMENT





A summary
of the Bank’s premises and equipment at December 31 follows:





2007
            2006
            
            Estimated
      Useful LivesBuildings
            $  639,000
            $  639,000
            
            40
      yearsLeasehold
      Improvements
            1,334,000
            1,196,000
            
            Lesser
      of useful life or remaining term of the leaseSoftware
      and Equipment
            1,418,000
            1,228,000
            
            5
      yearsComputers
            375,000
            344,000
            
            3
      yearsFurniture
      and Fixtures
            281,000
            225,000
            
            10
      yearsProjects
      in Process
            5,000
            164,000
            
            N/ATotal
            4,052,000
            3,796,000Less-Accumulated
      Depreciation and Amortization
            (1,674,000)
            (1,275,000)Net
      Premises and Equipment
            $
      2,378,000
            $
      2,521,000





Depreciation
expense for the year ended December 31, 2007 and 2006 was $398,000 and $380,000,
respectively and is classified as occupancy and equipment expense in the
accompanying Consolidated Statements of Operations.






F-14


CNB
FINANCIAL CORP.





Notes to
Consolidated Financial Statements


December
31, 2007





(6)
            DEPOSITS





A summary
of deposits at December 31 follows:





2007
            
            
            2006Demand
      Deposits
            
            $
            29,219,000
            
            
            $
            24,478,000Savings
      and NOW Accounts
            
            
            65,609,000
            
            
            
            43,211,000Certificates
      of Deposit
            
            
            107,410,000
            
            
            
            124,118,000Total
      Deposits
            
            $
            202,238,000
            
            
            $
            191,807,000




Certificates
of deposit of $100,000 and over totaled $37,208,000 and $48,524,000 at December
31, 2007 and 2006, respectively.  Certificates of deposit of under
$100,000 totaled $70,202,000 and $75,594,000 at December 31, 2007 and 2006,
respectively.





The following is a summary of original
maturities of certificates of deposits at December 31, 2007:


2008
            
            $
            102,362,0002009
            
            
            3,022,0002010
            
            
            1,848,0002012
            
            
            79,0002014
            
            
            99,000Total
            
            $
            107,410,000







(7)                           Borrowings





Advances
from the FHLBB at December 31, 2007 and 2006, have the following
maturities:


($
      thousands)
            2007
            2006Year ending December 31:
            Amount
            Weighted Average Rate
            Amount
            Weighted Average Rate2007
            
            
            $  35,000
            4.88%2008
            $  12,000
            4.41%
            4,500
            3.892009
            13,250
            4.50
            5,250
            4.372010
            500
            3.97
            500
            3.972011
      and beyond
            23,000
            4.27
            7,000
            4.04Total
            $   48,750
            4.37%
            $   52,250
            4.62%





Under
terms of a blanket collateral agreement, advances from the FHLBB are
collateralized by qualifying first mortgages.





Subordinated
debt at December 31, 2007 consists of subordinated debentures payable to the
company’s unconsolidated special purpose entity, Commonwealth National Bank
Statutory Trust I that issued trust preferred securities to a pooled investment
vehicle on December 16, 2005.  The issue has a maturity date of March
15, 2036 and bears a floating rate of interest that reprices quarterly (March,
June, September and December).  The interest rate at December 31, 2007
was 6.84% and the next repricing date is June 15, 2008.  A special
redemption provision allows the issue to be callable at 103.525% of par for the
first year and thereafter on a sliding scale down to 100% of par upon the fifth
year and thereafter.





No
federal funds purchased were outstanding at December 31, 2007.





Securities
under agreement to repurchase at December 31, 2007 equaled $7,214,000 and were
generated by the customer deposit overnight sweep product.  The
overnight rate paid on December 31, 2007 was 3.37%.  At December 31,
2006, securities under agreement to repurchase equaled
$5,946,000.  The overnight rate paid on December 31, 2006 was
4.88%






F-15


CNB
FINANCIAL CORP.





Notes to
Consolidated Financial Statements


December
31, 2007








(8)                 INCOME
TAXES





The
components of federal and state income tax expense for the years ended December
31, 2007 and 2006 are as follows:


2007
            
            
            2006Current
      Expense:Federal
      Expense
            
            $
            8,000
            
            
            $
            26,000State
      Expense
            
            
            20,000
            
            
            
            119,000Total
      Current Expense
            
            
            28,000
            
            
            
            145,000Deferred
      Expense (Benefit):Federal
      Expense
            
            
            163,000
            
            
            
            353,000State
      Benefit
            
            
            (12,000
            )
            
            
            (26,000
            )Total
      Deferred Expense
            
            
            151,000
            
            
            
            327,000Income
      Tax Expense
            
            $
            179,000
            
            
            $
            472,000





A
reconciliation of federal income tax expense to the amount computed by applying
the statutory federal income tax rate to loss before federal income tax for the
years ended December 31, 2007 and 2006 follows:


2007
            
            
            2006Pre-Tax
      Income
            
            $
            576,000
            
            
            $
            1,108,000Expected
      Federal Tax at 34%
            
            
            196,000
            
            
            
            377,000State
      Tax, net of Federal
            
            
            5,000
            
            
            
            61,000Impact
      of municipal income
            
            
            (53,000
            )
            
            
            (20,000
            )Impact
      of share based payments
            
            
            47,000
            
            
            
            48,000Other
            
            
            (16,000
            )
            
            
            6,000Total
      Income Tax Expense
            
            $
            179,000
            
            
            $
            472,000





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
follow:






2007
            
            
            2006Deferred
      Income Tax AssetsAllowance
      for Loan Loss
            
            $
            1,164,000
            
            
            $
            1,149,000Net
      Operating Loss
            
            
            137,000
            
            
            
            340,000Unrealized
      Loss on Investment Securities
            
            
            -
            
            
            
            111,000Other
            
            
            96,000
            
            
            
            94,000Net
      Deferred Tax Asset
            
            
            1,397,000
            
            
            
            1,694,000Deferred
      Income Tax LiabilitiesUnrealized
      Gain on Investment Securities
            
            
            168,000
            
            
            
            -Depreciation
            
            
            106,000
            
            
            
            141,000Gross
      Deferred Liabilities
            
            
            274,000
            
            
            
            141,000Net
      Deferred Taxes
            
            $
            1,123,000
            
            
            $
            1,553,000





Initial
operating losses, coupled with recent periods of profitable operations, have
resulted in available tax loss carry-forwards of approximately
$432,000.  These carry-forwards expire in 2025 and are subject to
review and possible adjustment by the Internal Revenue Service.  The
United States Tax Reform Act of 1986 contains provisions that may limit the net
operating loss carry-forwards available to be used in any given year under
certain circumstances, including significant changes in ownership
interests.  Projections for continued levels of profitability will be
reviewed quarterly and any necessary adjustments to the deferred tax assets will
be recognized in the provision or benefit for income taxes.  A
deferred tax asset valuation allowance is required to reduce the potential tax
benefit when it is more likely than not






F-16


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007




that all
or some portion of the potential benefit will not be realized due to the lack of
sufficient taxable income in the carry-forward period.  It is
management’s belief that it is more likely than not that the reversal of
deferred tax liabilities and results of future operations will generate
sufficient taxable income to realize the deferred tax
asset.  Therefore, no valuation allowance was deemed necessary at
December 31, 2007 or 2006.  It should be noted, however, that factors
beyond management’s control, such as the general state of the economy and real
estate values, can affect future levels of taxable income and that no assurance
can be given that sufficient taxable income will be generated to fully absorb
gross deductible temporary differences.





(9)  STOCK-BASED
PLANS





Stock
Option Plan





On
November 6, 2001, the shareholders’ voted to approve the Bank’s 2001 Stock
Option Plan (the Plan) for employees and directors of the Bank.  The
Compensation Committee of the Board of Directors administers the Plan, which has
authorized 400,000 shares for grant (as amended on May 19,
2005).  Both incentive stock options and non-qualified stock options
may be granted under the Plan.  The authorization of grants, the
determination of number of shares to be granted, the exercise date and the
option price of each award will be determined by the Compensation Committee of
the Board of Directors on the date of grant.  The options vest
annually at a rate of 25% over a four-year period and will expire on the tenth
anniversary of the grant date.  On March 22, 2007, the Board of
Directors authorized the granting of 69,670 shares at the then fair market value
of $11.60 per share to employees of the Bank under the provisions of this
Plan.




The
following table summarizes the Company’s activities with respect to its stock
option plan for the year 2007:


Options
            
            Number of
              Shares
            
            
            Weighted-
              Average
              Exercise Price
              Per Share
            
            Weighted-Average
      Remaining Contractual TermOutstanding
      at January 1, 2007
            
            252,305
            
            
            $
            11.77
            
            7.35
      yearsGranted
            
            69,670
            
            
            
            11.60
            
            9.23
      yearsExercised
            
            -Forfeited
            
            34,085
            
            
            
            11.76Outstanding
      at December 31, 2007
            
            287,890
            
            
            $
            11.73
            
            6.97
      yearsExercisable
      at December 31, 2007
            
            154,173
            
            
            $
            11.20
            
            5.69
      years





The
aggregate intrinsic value of the options exercisable and outstanding at
December 31, 2007 equals $415,000 and $869,000, respectively.  Total
unrecognized compensation costs associated with the unvested options outstanding
at December 31, 2007 equals $320,000 and will be recognized over an average of
1.8 years.




Effective
January 1, 2006, the Company adopted the provisions of SFAS
123R.  Under the previously employed intrinsic value method, no
share-based compensation expense related to stock option awards granted to
employees had been recognized in the Company’s Consolidated Statements of
Operations, as all stock option awards granted under the plans had an exercise
price equal to or greater than the market value of the common stock on the date
of the grant.




The
Company adopted SFAS 123R using the modified prospective transition
method.  Under this method, compensation expense recognized during the
twelve months ended December 31, 2007 and 2006 equaled $137,000 and $140,000,
respectively and reflected (a) compensation expense for all share-based awards
granted prior to December 31, 2005 but not yet vested, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123, and
(b) compensation expense for all share-based awards granted subsequent to
December 31, 2005 but not yet vested, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R.  Share-based
awards involving 69,670 options were granted by the Company during
2007.  In accordance with the modified prospective transition method,
the Company’s Consolidated Financial Statements for periods prior to adoption
have not been restated to reflect the impact of SFAS 123R.





The
Company records compensation expense for employee stock options based on the
estimated fair value of the options on the date of grant using the National
Economic Research Associates, Inc. employee stock option pricing model with the
assumptions included in the table below. The Company uses historical data among
other factors to estimate the expected price volatility, the expected option
life and the expected forfeiture rate. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant for the estimated life of
the option.  The following table depicts the weighted average of the
assumptions that were used to estimate the fair value of options that were
granted in 2007 and 2006.







F-17


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


2007
            
            
            2006Dividend
      yield
            
            
            2.75
            %
            
            
            2.70
            %Expected
      volatility
            
            
            35.00
            %
            
            
            35.00
            %Risk
      free interest rate
            
            
            3.78
            %
            
            
            3.60
            %Expected
      lives
            
            6.0
      years
            
            
            6.0
      yearsGrant
      date fair value
            
            $
            3.24
            
            
            $
            3.74




Warrants





On
November 19, 2001, certain of the initial investors in the Bank were issued
92,500 warrants, each of which is able to purchase one share of common stock of
the Bank.  These warrants became exercisable in one-third annual
increments beginning one year from the date of issuance.  The warrants
have a ten-year life and are exercisable for $10.00 per share.  As of
December 31, 2007, none of these organizers’ warrants had been
exercised.





The
Bank’s 2003 capital stock offering included the issuance of 721,581 warrants to
purchase an aggregate of 180,395 common shares.  The warrants expired
on September 30, 2006.  Upon the reorganization of the Bank into a
holding company structure all outstanding warrants were assumed and restated by
the Company on the same terms and conditions as were the Bank’s.  All
shares of common stock of the Bank which remained available through the exercise
of warrants on the date of reorganization were converted into the same number of
warrants for shares of common stock of the Company.  Four warrants
were required to purchase one common share.  Fractional shares were
not issued in connection with the exercise of warrants.  The exercise
price of the warrants was $11.00 per whole share.  As of the
expiration date of the warrants, a total of 682,264 warrants had been exercised
resulting in the issuance of 170,566 common shares.




(10)                           RELATED
PARTY TRANSACTIONS





In the
ordinary course of business, the Bank may make loans to directors and officers,
including their families and companies with which they are
affiliated.  Such loans are made under normal credit terms, including
interest rates and collateral prevailing at the time for comparable transactions
with other persons and do not represent more than normal credit
risk.  An analysis of the aggregate loan activity to these related
parties for the years ended December 31, 2007 and 2006 are as
follows:


2007
            
            
            2006Balance,
      Beginning of Year
            
            $
            6,147,000
            
            
            $
            9,734,000New
      Loans Granted During the Year
            
            
            6,482,000
            
            
            
            3,130,000Less-Repayments
            
            
            (4,222,000
            )
            
            
            (6,717,000
            )Balance,
      End of Year
            
            $
            8,407,000
            
            
            $
            8,147,000





The Bank
entered into a related-party lease agreement with a Director of the Company for
its main branch and administrative facility at 33 Waldo Street, Worcester,
Massachusetts. The 15-year lease was entered into on December 1, 2001 for the
amount of $152,000 per year for the initial three years of the lease term,
increasing by 7% on each third year anniversary. The lease agreement has two
separate five-year renewal options. This agreement represents an arms length
transaction.





(11)                 COMMITMENTS
AND CONTINGENCIES





(a)
            Financial
      Instruments With Off-Balance-Sheet
Risk





The Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments, held for purposes other than
trading, include commitments to originate loans, unused lines of credit and
commercial and standby letters of credit.  The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the accompanying balance sheet.  The contract or
notional amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.





The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and commercial and
standby letters of credit is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.








F-18


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007





Financial
instruments with off-balance-sheet risk at December 31, 2007 and 2006
follow:





2007
            
            
            2006Commitments
      to Originate Loans
            
            $
            3,024,000
            
            
            $
            12,968,000Unadvanced
      Loan Proceeds
            
            
            21,868,000
            
            
            
            32,000,000Unused
      Lines of Credit
            
            
            16,752,000
            
            
            
            14,250,000Secured
      Commercial Lines of Credit
            
            
            29,052,000
            
            
            
            26,504,000Letters
      of Credit
            
            
            2,230,000
            
            
            
            3,122,000





Commitments
to originate loans are agreements to lend to customers provided there are no
violations of any conditions established in the
contracts.  Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.  Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.  The Company evaluates each customer’s creditworthiness
on a case-by-case basis.  The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based upon management’s
credit evaluation of the borrower.





Lines of
Credit represent approved extensions of credit which may be drawn upon at the
option of the borrower.  Amounts that are not outstanding and may be
drawn upon at the option of the borrower are reported as unused lines of
credit.





Commercial
and standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party.  The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.





(b) Lease
Commitments





The
following is a schedule of future minimum lease payments for non-cancelable
lease obligations as of December 31, 2007:





Year
      Ending December 31,2008
            
            $
            534,0002009
            
            
            537,0002010
            
            
            541,0002011
            
            
            538,0002012
            
            
            472,000Thereafter
            
            
            3,486,000Total
      Future Minimum Lease Payments
            
            $
            6,108,000





(c) Employment
Agreements





The
Company does not have any written employment contracts with any executive
officers, all of whom are employees at will.  The Bank has entered
into change of control agreements with each of its four Executive Officers,
which would provide for severance pay in the event a change in control
occurred.





(d) Legal
Proceedings





Various
legal claims may arise from time to time in the ordinary course of
business.  At December 31, 2007, no such claims existed which, in the
opinion of management, would have a material effect on the Company’s
consolidated financial statements.





(e) Officer
Life Insurance





The Bank
owns term life insurance policies insuring members of senior
management.  The Bank is the beneficiary under these
policies.  Officer life insurance costs for the years ended December
31, 2007 and 2006 were $3,000 during each year.











F-19


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007





(f)
            Data
      Processing Service Agreements





The Bank
has entered into a contract for data and items processing services with Fiserv
Solutions, Inc.  The contract agreement originally was scheduled to
expire on November 19, 2006;
however, it was amended on October 1, 2005 and extended for a period ending on
October 1, 2010.  The Bank has the right to terminate the agreement
with 60 days notice to Fiserv Solutions, Inc.  Annual minimum charges
per the Fiserv agreement for the entire remaining term are
$100,000.  Total fees to be paid may be the same as or exceed the
minimum fee depending on transaction volume during the remaining term of the
contract.





(12)
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
Company is required to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the consolidated balance
sheet, as well as the methods and significant assumptions used to estimate the
fair value of its financial instruments.  Fair value estimates are
made at a specific point in time, based on relevant market information and
information about specific financial instruments.  These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company’s entire holdings of a particular financial
instrument.  Because no active observable market exists for a portion
of the Company’s financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.  Changes in assumptions could significantly
affect the estimates.





Cash
and Cash Equivalents, Accrued Interest Receivable and Accrued Interest
Payable





The
carrying amounts for these financial items approximate fair value because they
have original maturities of less than three months.





Investment
Securities





The fair
value of investment securities, other than FHLBB stock and FRBB stock, is based
on quoted market prices.  The fair value of FHLBB stock and the FRBB
stock are equal to cost, since there is no market for these instruments and they
are redeemable at par.





Loans,
Net





Fair
value estimates are based on loans with similar financial
characteristics.  Loans have been segregated by homogeneous groups for
calculation purposes and presented as a single line item for disclosure
purposes.  Fair value estimates are estimated by discounting
contractual cash flows adjusted for prepayment estimates and using rates
approximately equal to current market rates on loans with similar
characteristics and maturities.  Incremental credit risk for
classified and non-accrual loans has been considered.





Deposits





Fair
value of deposits with no stated maturity, such as non-interest-bearing demand
deposits, savings and NOW accounts is equal to the amount payable on demand,
that is, the carrying amount.  The fair value reported for time
deposits are based upon the discounted value of contractual cash
flows.  The discounted rates are representative of approximate rates
currently offered on time deposits with similar remaining
maturities.





FHLBB
Advances





The fair
value of the FHLBB advances is based on the discounted value of cash flows
applying interest rates currently being offered for similar
instruments.





Federal
Funds Purchased





The fair
value of federal funds purchased is determined by estimating future cash flows
and discounting them using interest rates currently available on similar
borrowings.





Securities
Under Agreement to Repurchase





The fair
value of federal funds purchased is determined by estimating future cash flows
and discounting them using interest rates currently available on similar
borrowings.







F-20


CNB
FINANCIAL CORP.





Notes to
Consolidated Financial Statements


December
31, 2007





Subordinated
Debentures





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





Commitments
to Extend Credit and Commercial and Standby Letters of Credit





The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties.  The fair value of financial commercial and standby
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligation with
the counterparties.  The fair value of these fees at December 31, 2007
and 2006 was immaterial to the consolidated financial statements as a
whole.





The
carrying amount and estimated fair values of the Company’s financial instruments
are as follows at December 31, 2007 and 2006:




2007
            
            
            2006(Dollars
      in thousands)
            
            Carrying
      Amount
            
            
            Fair Value
            
            
            Carrying
      Amount
            
            
            Fair ValueFinancial
      AssetsCash
      and Cash Equivalents
            
            $
            8,825
            
            
            $
            8,825
            
            
            $
            6,736
            
            
            $
            6,736Securities
      Available-for-Sale
            
            
            45,597
            
            
            
            45,597
            
            
            
            54,582
            
            
            
            54,582Securities
      Held-to-Maturity
            
            
            11,687
            
            
            
            11,720
            
            
            
            12,513
            
            
            
            12,450Federal
      Reserve Bank Stock
            
            
            761
            
            
            
            761
            
            
            
            700
            
            
            
            700Federal
      Home Loan Bank Stock
            
            
            3,052
            
            
            
            3,052
            
            
            
            3,070
            
            
            
            3,070Loans,
      Net
            
            
            214,477
            
            
            
            212,009
            
            
            
            197,861
            
            
            
            195,481Accrued
      Interest Receivable
            
            
            1,100
            
            
            
            1,100
            
            
            
            1,297
            
            
            
            1,297Financial
      LiabilitiesDepositsDemand
      Deposits
            
            
            29,219
            
            
            
            29,219
            
            
            
            24,478
            
            
            
            24,483Savings
      and NOW Accounts
            
            
            65,609
            
            
            
            65,609
            
            
            
            43,211
            
            
            
            43,211Certificates
      of Deposit
            
            
            107,410
            
            
            
            107,453
            
            
            
            124,118
            
            
            
            123,889FHLBB
      Advances
            
            
            48,750
            
            
            
            48,713
            
            
            
            52,250
            
            
            
            51,570Federal
      Funds Purchased
            
            
            -
            
            
            
            -
            
            
            
            500
            
            
            
            500Securities
      Under Agreements to Repurchase
            
            
            7,214
            
            
            
            7,214
            
            
            
            5,946
            
            
            
            5,946Subordinated
      Debentures
            
            
            7,732
            
            
            
            7,732
            
            
            
            7,732
            
            
            
            7,732Accrued
      Interest Payable
            
            
            1,650
            
            
            
            1,650
            
            
            
            2,258
            
            
            
            2,258




(13)
            MINIMUM
      REGULATORY CAPITAL REQUIREMENTS





The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the Federal banking
agencies.  Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company’s
consolidated financial statements and the Bank’s financial
statements.  Under capital adequacy guidelines and the regulatory
framework for Prompt Corrective Action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.  The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.  Management believes, as of December 31,
2007 that the Company and the Bank met all capital adequacy requirements to
which they are subject





Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table on the next page)
of total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets (as
defined).  The minimum amounts and ratios necessary for the Bank to be
categorized as “Well Capitalized” are also reflected in the table
below.  At December 31, 2007, the Bank is categorized as “Well
Capitalized” as defined by federal regulations.  There are no
conditions or events since the last filing with the FDIC that management
believes have changed the Bank’s category.







F-21


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007







Actual
            
            For
      Capital
              Adequacy
      Purposes
            To
      be “Well Capitalized” Under Prompt Corrective Action
      Provisions




December 31, 2007
            Amount
            
            Ratio
            Amount
            Ratio
            Amount
            RatioTotal
      Capital to Risk Weighted AssetsThe
      Company
            $29,951,000
            
            ≥ 13.36%
            ≥ $17,930,000
            ≥
      8 .00%
            N/A
            N/AThe
      Bank
            27,856,000
            
            12.45%
            ≥   17,904,000
            ≥
      8.00%
            ≥    22,381,000
            ≥ 10.00%Tier
      1 Capital to Risk Weighted AssetsThe
      Company
            27,153,000
            
            ≥ 12.12%
            ≥    8,965,000
            ≥  4.00
            N/A
            N/AThe
      Bank
            25,058,000
            
            11.20%
            ≥    8,952,000
            ≥  4.00
            ≥   13,428,000
            ≥  6.00Tier
      1 Leverage Capital to Average AssetsThe
      Company
            27,153,000
            
            9.40%
            ≥  11,555,000
            ≥ 4.00
            N/A
            N/AThe
      Bank
            25,058,000
            
            8.68%
            ≥  11,542,000
            ≥ 4.00
            ≥   14,428,000
            ≥  5.00





Actual
            
            For
      Capital
              Adequacy
      Purposes
            To
      be “Well Capitalized” Under Prompt Corrective Action
      Provisions




December 31, 2006
            Amount
            
            Ratio
            Amount
            Ratio
            Amount
            RatioTotal
      Capital to Risk Weighted AssetsThe
      Company
            $
      28,805,000
            
            13.43%
            ≥$
      17,159,000
            ≥ 8.00%
            N/A
            N/AThe
      Bank
            26,477,000
            
            12.36%
            ≥   17,138,000
            ≥ 8.00%
            ≥ $
      21,423,000
            ≥ 10.00%Tier
      1 Capital to Risk Weighted AssetsThe
      Company
            26,125,000
            
            12.18
            ≥    8,579,000
            ≥  4.00
            N/A
            N/AThe
      Bank
            23,797,000
            
            11.11
            ≥    8,569,000
            ≥  4.00
            ≥   12,854,000
            ≥  6.00Tier
      1 Leverage Capital to Average AssetsThe
      Company
            26,125,000
            
            9.36
            ≥  11,158,000
            ≥  4.00
            N/A
            N/AThe
      Bank
            23,797,000
            
            8.53
            ≥
       11,158,000
            ≥  4.00
            ≥   13,948,000
            ≥  5.00









F-22


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


(13)
            CNB
      FINANCIAL CORP. ONLY FINANCIAL
STATEMENTS




Balance
      Sheet
            
            2007
            
            
            2006ASSETSTotal
      Cash and Due From Banks
            
            $
            2,588,000
            
            
            $
            3,078,000Total
      Investment in Subsidiary
            
            
            26,237,000
            
            
            
            24,825,000Prepaid
      Taxes
            
            
            43,000
            
            
            
            26,000Deferred  Taxes
            
            
            38,000
            
            
            
            -$
            28,906,000
            
            
            $
            27,929,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accrued
      Interest Payable on Subordinated Debentures
            
            $
            21,000
            
            
            $
            26,000Subordinated
      Debentures
            
            
            7,732,000
            
            
            
            7,732,000Total
      Liabilities
            
            
            7,753,000
            
            
            
            7,758,000Stockholders’
      Equity:Total
      Stockholders’ Equity
            
            
            21,153,000
            
            
            
            20,171,000$
            28,906,000
            
            
            $
            27,929,000Statement
      of OperationsInterest
      Income on Deposits
            
            $
            93,000
            
            
            $
            -Total
      Income
            
            
            93,000
            
            
            
            -Operating
      Expenses:Interest
      Expense
            
            
            554,000
            
            
            
            525,000Legal
            
            
            -
            
            
            
            61,000Other
      General and Administrative Expenses
            
            
            -
            
            
            
            115,000Total
      Operating Expenses
            
            
            554,000
            
            
            
            701,000








Loss
      Before Equity in Undistributed Income of Subsidiary
            
            
            (461,000
            )
            
            
            (701,000
            )Equity
      in Undistributed Income of Subsidiary
            
            
            858,000
            
            
            
            1,337,000Net
      Income
            
            $
            397,000
            
            
            $
            636,000










F-23




CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2007


Statement of Cash Flows


Cash
      Flows from Operating Activities:
            2007
            2006Net
      Income
            $397,000
            $636,000Adjustments
      to Reconcile Net Income to Net Cash Used in Operating
      Activities–(Increase)
      in Other Assets
            (16,000)
            (26,000)Decrease  in
      Accrued Expenses and Other Liabilities
            (5,000)
            (34,000)Equity
      in Undistributed Income of Subsidiary
            (866,000)
            (1,337,000)Net
      Cash Used in Operating Activities
            (490,000)
            (761,000)Cash
      Flows from Financing Activities:Exercise
      of Warrants
            -
            1,870,000Net
      Cash Provided by Financing Activities
            -
            1,870,000Net
      Increase in Cash and Cash Equivalents
            (490,000)
            1,109,000Cash
      and Cash Equivalents, Beginning of the Period
            3,078,000
            1,969,000Cash
      and Cash Equivalents, End of the Period
            $2,588,000
            $3,078,000The
      Statement of Stockholders’ Equity for the parent company is identical to
      the
              Consolidated
      Statement of Stockholders’ Equity which appears on page
F-7










F-24





Signatures








In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.







CNB
      FINANCIAL CORP.By:   /s/ Charles R.
      ValadeDated:
      March 20, 2008
            Charles
      R. Valade, President







In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.





Signature
            Title
            Date/s/
      Charles R. Valade
            
            March
      20, 2008Charles
      R. Valade
            President/s/
      William M. Mahoney
            
            March
      20, 2008William
      M. Mahoney
            Treasurer
      and CFO/s/
      Gerald D. Cohen
            
            March
      20, 2008Gerald
      D. Cohen
            Director/s/
      Cary J. Corkin
            
            March
      20, 2008Cary
      J. Corkin
            Director/s/
      Lawrence J. Glick
            
            March
      20, 2008Lawrence
      J. Glick
            Director/s/
      Stephen J. Granger
            
            March
      20, 2008Stephen
      J. Granger
            Director/s/
      George L. Kaplan
            
            March
      20, 2008George
      L. Kaplan
            Director/s/
      John P. Lauring
            
            March
      20, 2008John
      P. Lauring
            Director








S-1








Signature
            Title
            Date/s/
      Ralph D. Marois
            
            March
      20, 2008Ralph
      D. Marois
            Director/s/
      Henry T. Michie
            
            March
      20, 2008Henry
      T. Michie
            Director/s/
      Harris L. MacNeill
            
            March
      20, 2008Harris
      L. MacNeill
            Director/s/
      Claire A. O’Connor
            
            March
      20, 2008Claire
      A. O’Connor
            Director/s/
      Bryan T. Rich
            
            March
      20, 2008Bryan
      T. Rich
            Director/s/
      J. Robert Seder
            
            March
      20, 2008J.
      Robert Seder
            Director





S-2