UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





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


for
the fiscal year ended December 31, 2008


OR


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


for
the transition period from _______________to______________





Commission
File Number: 000-51685





CNB
FINANCIAL CORP.


(Exact
name of registrant as specified 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)





Registrant’s
Telephone Number, including area code: (508)
752-4800





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


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





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


Common
Stock, par value $1.00 per share





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act     YES
[   ]  No [X]





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act.      YES
[   ]   No [X]





Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.YES
[X]   NO [   ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]







Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      Accelerated Filer [  ]
            Accelerated
      Filer [  ]Non-accelerated
      Filer [  ]
            Smaller
      Reporting Company [X]





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





The aggregate market value of the
issuer’s voting and non voting common equity held by non-affiliates (based upon
the trading price of $6.00 per share for the issuer’s common stock on June 30,
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
$11,391,000.





At March 19, 2009, the registrant had
2,283,208 shares of common stock issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Proxy Statement for the 2009 Annual Meeting of Stockholders are
incorporated herein by reference in Part III of this Form 10-K.









CNB
Financial Corp.





Annual
Report on Form 10-K


For
the Fiscal Year Ended December 31, 2008





TABLE
OF CONTENTS








PART
      I
              PageItem
      1
              Business
              1Item
      1A
              Risk
      Factors
              7Item
      1B
              Unresolved
      Staff Comments
              11Item
      2
              Properties
              11Item
      3
              Legal
      Proceedings
              12Item
      4
              Submission
      of Matters to a Vote of Security Holders
              12PART
      IIItem
      5
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              13Item
      6
              Selected
      Financial Data
              13Item
      7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              13Item
      7A
              Quantitative
      and Qualitative Disclosures About Market Risk
              28Item
      8
              Financial
      Statements and Supplementary Data
              28Item
      9
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              29Item
      9A(T)
              Controls
      and Procedures
              29Item
      9B
              Other
      Information
              29PART
      IIIItem
      10
              Directors,
      Executive Officers and Corporate Governance
              31Item
      11
              Executive
      Compensation
              31Item
      12
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              31Item
      13
              Certain
      Relationships and Related Transactions, and Director
      Independence
              32Item
      14
              Principal
      Accountant Fees and Services
              32Item
      15
              Exhibits
      and Financial Statement Schedules
              33Signatures
              S-1








PART
I





ITEM1 - 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 subsidiaries 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 Item 1A - “Risk
Factors”.





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 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”).





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
Company relies mainly on local advertising and promotional activities and on
personal contacts by its directors, officers, employees, advisory board 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.





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.




1


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, 2008, the Bank employed 60 full-time employees and 11 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.








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 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.





2





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.





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 CNB Financial Corp. to acquire 25% or more of the voting stock of
another depository institution.  Similarly, prior regulatory approval
would




3


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
purposes 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.





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,
2008.





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)




4


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.  Under
the FDIC’s risk-based assessment 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, with less risky institutions
paying lower assessments.  For 2008, assessments ranged from five to
forty-three basis points of assessable deposits.  No institution may
pay a dividend if in default of the federal deposit insurance
assessment.





Due to losses incurred by the Deposit
Insurance Fund from failed institutions in 2008, and anticipated future losses,
the FDIC has adopted, pursuant to a Restoration Plan to replenish the fund, an
across the board seven basis point increase in the assessment range for the
first quarter of 2009.  The FDIC subsequently adopted further
refinements to its risk-based assessment system, effective April 1, 2009, that
effectively make the range seven to 77.5 basis points.  The FDIC may
adjust the scale uniformly from one quarter to the next, except that no
adjustment can deviate more than three basis points from the base scale without
notice and comment rulemaking.  The FDIC has also imposed on all
insured institutions an emergency special assessment of 20 basis points of
assessable deposits as of June 30, 2009 in order to cover losses to the Deposit
Insurance Fund and has mentioned the possibility of additional emergency
assessments of up to ten basis points per quarter, as deemed
necessary.





Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until January 1, 2010.  In addition, the FDIC
adopted an optional Temporary Liquidity Guarantee Program by which, for a fee,
noninterest bearing transaction accounts would receive unlimited insurance
coverage until December 31, 2009 and certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and June 30,
2009 would be guaranteed by the FDIC through June 30, 2012.  The Bank
made the business decision to participate in the unlimited noninterest bearing
transaction account coverage and the Bank, and CNB Financial Corp. opted to not
participate in the unsecured debt guarantee program.





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, 2008 averaged 1.12 basis points of
assessable deposits.





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.





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, 2008, the Bank’s limit on loans to one borrower was $4.0 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




5


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 officers 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.





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.”




6


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 $44.4
million or less (subject to adjustment by the FRB) the reserve requirement is
3%; and for accounts aggregating greater than $44.4 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 $44.4
million.  The first $10.3 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 (the
“FHLBB”), is required to acquire and hold shares of capital stock in the
FHLBB.  The Bank was in compliance with this requirement with an
investment in FHLB stock at December 31, 2008 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.





On
February 26, 2009 the FHLBB announced a 2008 net loss as a result of an “other
than temporary impairment” charge (OTTI).  In response, the FHLBB also
announced the suspension of dividends for the current quarter and that it is
unlikely they will pay dividends in 2009.








ITEM1A - 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-K, 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
allowance for loan losses may prove to be insufficient to absorb losses in our
loan portfolio.





In
evaluating the adequacy of our allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and classified loans.  In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers.  Finally, we also consider many qualitative
factors, including general and economic business conditions, current general
market collateral valuations, trends apparent in any of the factors we take into
account and other matters, which are by nature more subjective and
fluid.  Our estimates of the risk of loss and amount of loss on any
loan are complicated by the significant uncertainties surrounding our borrowers’
abilities to successfully execute their business models through changing
economic environments, competitive challenges and other
factors.  Because of the degree of uncertainty and susceptibility of
these factors to change, our actual losses may vary from our current
estimates.





At
December 31, 2008, our allowance for loan losses as a percentage of total loans
was 1.19%.  Our regulators, as an integral part of their examination
process, periodically review our allowance for loan losses and may require us to
increase our allowance for loan losses by recognizing additional provisions for
loan losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries.  Any such additional
provisions for loan losses or charge-offs, as required by these regulatory
agencies, could have a material adverse effect on our financial condition and
results of operations.








7





The
current economic environment poses significant challenges for us and could
adversely affect our financial condition and results of operation.





We currently are operating in a
challenging and uncertain economic environment, both nationally and in the local
markets that we serve. Financial institutions continue to be affected by sharp
declines in financial and real estate values.  Continued declines in
real estate values and home sales, and an increase in the financial stress on
borrowers stemming from an uncertain economic environment, including rising
unemployment, could have an adverse effect on our borrowers or their customers,
which could adversely impact the repayment of the loans we have made. The
overall deterioration in economic conditions also could subject us to increased
regulatory scrutiny. In addition, a prolonged recession, or further
deterioration in local economic conditions, could result in an increase in loan
delinquencies; an increase in problem assets and foreclosures; and a decline in
the value of the collateral for our loans.  Furthermore, a prolonged
recession or further deterioration in local economic conditions could drive the
level of loan losses beyond the level we have provided for in our loan loss
allowance, which could necessitate our increasing our provision for loans
losses, which would reduce our earnings.  Additionally, the demand for
our products and services could be reduced, which would adversely impact our
liquidity and the level of revenues we generate.


Future FDIC
Assessments Will Hurt Our Earnings





In February 2009, the FDIC adopted an
interim final rule imposing a special assessment on all insured institutions due
to recent bank and savings association failures.  The emergency
assessment amounts to 20 basis points of insured deposits as of June 30,
2009.  The assessment will be collected on September 30,
2009.  The special assessment will negatively impact the Company’s
earnings and the Company expects that the special assessment will amount to
approximately $400,000.  In addition, the interim rule would also
permit the FDIC to impose additional emergency special assessments after June
30, 2009, of up to 10 basis points per quarter if necessary to maintain public
confidence in federal deposit insurance or as a result of deterioration in the
deposit insurance fund reserve ratio due to institution failures.  Any
additional emergency special assessments imposed by the FDIC will further hurt
the Company’s earnings.





Additionally, the Federal Deposit
Insurance Corporation increased the assessment rates for deposits by seven basis
points for the first quarter of 2009.  The FDIC has the authority to
further increase insurance assessments, which would have an adverse impact on
our non-interest expenses and results of operations.





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





Recent declines in the housing market
have resulted in declines in the real estate values in our market
area.  With most of our loans concentrated in central Massachusetts, a
continued decline in local economic conditions could adversely affect the value
of the real estate collateral securing our loans.  A further decline
in property values diminishes 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.





8








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 dropped to historically low levels, while longer-term market interest
rates (which we use as a guide to price our longer-term loans) have reduced to a
lesser degree.  This “steepening” of the market yield curve has had a
favorable impact on our net interest margin, which has improved our
profitability.  For the years ended December 31, 2008 and 2007,
respectively, our net interest margin was 3.45% compared to
3.03%.  Recently, however, the U.S. Federal Reserve decreased its
target for the federal funds rate to a range of between 0.00% and
0.25%.  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.  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 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, 2008, our loan
portfolio consisted of $152.1 million, or 63%, of commercial real estate loans
and $53.4 million, or 22%, 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 national and local
economic conditions 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 for the year ended
December 31, 2007.  During 2008, we incurred a loss of $0.69 per share
primarily as a result of the impairment of our investments in Fannie Mae and
Freddie Mac.  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, 2008, we held 2.2% of the deposits in
Worcester County, Massachusetts, which was the 19th largest
market share of deposits out of the 39 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.





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 $45.8 million, or 18%, from $249.4
million at December 31, 2005 to $295.2 million at December 31, 2008, 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




9


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.





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 three years and
could open at least one more branch within the next three-year
period.  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 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 $150.2 million at December
31, 2005 to $205.5 million at December 31, 2008, a 37% increase.  A
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 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 or a deterioration in asset quality 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
or to replace capital depleted by declines in asset quality.  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.








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.





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;
  10
 ·
              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.





ITEM1B – UNRESOLVED STAFF COMMENTS





None.





ITEM2 - PROPERTIES





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 $33.14 per square foot ($93,456 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, 2008, the lease payment was $37,338 per
year.





11


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 (10/1/08 to 9/30/09) is $73,158.





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 first 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
administrative 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, 2008, the base rent equaled
$33,554 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





Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business.  We are not a party to any
pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.





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-K to a vote of the Company’s security holders.





12


PART
II





ITEM5 -MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





The
Company’s common stock is listed on the Over-The-Counter (“OTC”) Bulletin Board
under the symbol “CFNA.”  As of February 28, 2009, 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 2007
              
              $
      12.70
              
              $
      10.752nd
      Quarter 2007
              
              11.60
              
              9.503rd
      Quarter 2007
              
              10.25
              
              8.204th
      Quarter 2007
              
              9.00
              
              7.101st
      Quarter 2008
              
              8.00
              
              6.202nd
      Quarter 2008
              
              8.25
              
              5.653rd
      Quarter 2008
              
              6.75
              
              3.504th
      Quarter 2008
              
              5.20
              
              2.10





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’s 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 – SELECTED FINANCIAL DATA





Not
applicable.





ITEM7 - 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 8 of this
Form 10-K.





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 investment securities, and interest




13


expense
on interest-bearing liabilities, primarily deposits.  Net earnings are
also affected by non-interest income as well as non-interest expenses, such as
compensation and benefits, building and occupancy expense, and other operating
expenses.





This
discussion and analysis covers material changes in financial condition and
liquidity that have occurred since December 31, 2007, as well as the results of
operations for the years ended December 31, 2008 and 2007.





Executive
Summary





During
2008, the Company experienced net interest margin improvement, largely the
result of a decrease in short-term interest rates, which caused a steepening of
the interest yield curve, an increase in the portion of assets held in the loan
portfolio versus the lower yielding investment portfolio (loans grew by 12%
while total assets grew by 2% from year-end 2007 to year-end 2008) and the
ability to retain deposits at the lower interest rate levels in spite of
continued competitive market conditions.  The economic climate during
2008 brought increased pressures on loan quality and loan portfolio
performance.  Non-performing assets and loan losses increased
significantly during 2008.  In addition, the Company suffered an
impairment loss on its investment in the preferred stock of Fannie Mae and
Freddie Mac when those institutions were placed under conservatorship in
September 2008.





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 3 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.





Recent
Accounting Pronouncements





See Note
3 of the consolidated financial statements - “Summary of Significant Accounting
Policies” for a description of accounting changes and recent accounting
pronouncements, including the expected dates of adoption and estimated effects,
if any, on our consolidated financial statements.








RESULTS
OF OPERATIONS





Summary





The
Company recorded a consolidated net loss of $1,567,000 for 2008 compared to net
income of $397,000 for 2007.  The primary reason for the decline in
earnings was the impairment loss ($2.0 million loss net of taxes) suffered in
the Fannie Mae and Freddie Mac preferred stock investments.  Net
interest income during 2008 improved by $1.5 million, or 18%, compared to 2007
as short-term interest rates declined and the yield curve returned to a more
normal upward slope.  This allowed the Company to reduce its cost of
funds to a greater magnitude than the reduction in asset yields.  The
provision for loan losses increased significantly ($1,359,000 in 2008 compared
to $80,000 in 2007) as national and local economic conditions negatively
impacted the quality of the loan portfolio.





(Dollars
      in thousands)
                2008
                2007Net
      income (loss)
                $
      (1,567)
                $     397Return
      on average assets
                (0.53%)
                0.14%Return
      on average equity
                (7.51%)
                1.94%Average
      equity to average assets
                7.03%
                7.12%





14





Net
Interest Income





During
2008, the Company generated $17,731,000 in interest and dividend income, which
was offset by interest expense of $7,846,000 resulting in net interest income of
$9,885,000, a $1,514,000 or 18% increase compared to 2007, when the Company
generated $18,913,000 in interest income, interest expense of $10,542,000 and
net interest income of $8,371,000.





Interest
income decreased $1,182,000, or 6.2%, primarily due to a decrease in the average
yield on interest earning assets, which was partially offset by an increase in
the average balance of loans.  The average balance of interest-earning
assets grew by 4% to average $288.8 million during 2008.  The average
balance of loans grew by 8% while the average balance of the lower yielding
investments, federal funds and other interest earning assets decreased by 11%
compared to 2007.  This composition change mitigated the impact of the
lower interest rate environment on the earning asset yield, which declined to
6.17% compared to 6.81% in 2007, a 64 basis point reduction.





Interest
expense decreased $2,696,000, or 25.6%, due primarily to a decrease in the
average rate paid on deposits and borrowed funds.  Total deposits and
borrowed funds increased by 4% from year to year and averaged $273.7 million
during 2008.  The growth of time deposits (the higher cost category of
deposits) was strategically limited to 1%, while the lower cost savings, NOW and
MMDAs grew a combined 4% and non-interest bearing demand deposits increased by
3%.   Borrowed funds increased by 11%, as the Bank’s customers
carried increased balances in the overnight cash management sweep product and
advances (borrowings) from the FHLBB increased.  These balance
changes, coupled with the changed interest rate environment caused the total
cost of deposits and borrowed funds to equal 2.87% during 2008 compared to 3.99%
for the prior year, a reduction of 112 basis points, which is significantly more
than the reduction in asset yield.    The resulting net
interest margin equaled 3.45% for the year, compared to 3.03% for 2007, an
increase of 42 basis points.





15


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, 2008, 2007 and 2006.  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, 2008
                  Year
      Ended
                    December 31, 2007
                  Year
      Ended
                    December 31, 2006(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)
                  $229,005
                  $14,822
                  6.47%
                  $211,646
                  $15,535
                  7.34%
                  $190,282
                  $13,863
                  7.29%Investments,
      Fed Funds and Other Interest Earning Assets
                  59,771
                  2,991
                  5.00%
                  67,299
                  3,459
                  5.14%
                  67,749
                  3,149
                  4.65%Total
      Interest Earnings Assets
                  288,776
                  17,813
                  6.17%
                  278,945
                  18,994
                  6.81%
                  258,031
                  17,012
                  6.59%Allowance for Loan
      Losses
                  (2,829)
                  
                  
                  (2,803)
                  
                  
                  (2,724)Cash and Due from
      Banks
                  4,989
                  
                  
                  5,405
                  
                  
                  5,242Premises and
      Equipment
                  2,249
                  
                  
                  2,486
                  
                  
                  2,101Other Assets
                  3,515
                  
                  
                  3,164
                  
                  
                  4,888Total
      Assets
                  $296,700
                  
                  
                  $287,197
                  
                  
                  $267,538INTEREST
      BEARING LIABILITIESSavings,
      NOW and Money Market Deposits
                  54,586
                  740
                  1.35%
                  52,737
                  1,324
                  2.51%
                  46,645
                  811
                  1.74%Time
      Deposits
                  118,037
                  4,310
                  3.65%
                  117,448
                  5,930
                  5.05%
                  121,081
                  5,235
                  4.32%Borrowed
      Funds
                  66,309
                  2,410
                  3.63%
                  59,807
                  2,735
                  4.57%
                  45,515
                  2,001
                  4.40%Trust
      Preferred
                  7,500
                  386
                  5.15%
                  7,500
                  553
                  7.37%
                  7,500
                  525
                  6.90%Total Interest Bearing
      Liabilities
                  246,432
                  7,846
                  3.18%
                  237,492
                  10,542
                  4.44%
                  220,741
                  8,572
                  3.88%Demand
      Deposits
                  27,304
                  
                  
                  26,465
                  
                  
                  26,415Total Deposits and Borrowed
      Funds
                  273,736
                  7,846
                  2.87%
                  263,957
                  10,542
                  3.99%
                  247,156
                  8,572
                  3.47%Other
      Liabilities
                  2,097
                  
                  
                  2,785
                  
                  
                  2,104Stockholders’
      Equity
                  20,867
                  
                  
                  20,455
                  
                  
                  18,278Total
      Liabilities and Stockholders’ Equity
                  $296,700
                  
                  
                  $287,197
                  
                  
                  $267,538Net
      Interest Income (tax equivalent basis)
                  
                  9,967
                  
                  
                  8,452
                  
                  
                  8,440Interest
      Rate Spread
                  
                  
                  3.30%
                  
                  
                  2.82%
                  
                  
                  3.12%Less:
      adjustment of tax exempt income
                  
                  (82)
                  
                  
                  (81)
                  
                  
                  (42)Net
      interest income
                  
                  $      9,885
                  
                  
                  $      8,371
                  
                  
                  $      8,398Net
      Yield on Interest Earning Assets
                    (Net
      Interest Margin)
                  
                  
                  3.45%
                  
                  
                  3.03%
                  
                  
                  3.27%




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


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




16


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
              2008
              2007As
      a percentage of average earning assetsLoans
              79.3%
              75.9%Other
      earning assets
              20.7%
              24.1%Average
      earning assets
              100.0%
              100.0%Savings
      and NOWs and MMDAs
              18.9%
              18.9%Certificates
      of deposit
              40.9%
              42.1%Borrowed
      funds
              25.6%
              24.1%Average
      interest bearing liabilities
              85.4%
              85.1%Earning
      asset ratio
              97.3%
              97.1%





Rate/Volume
Analysis.  The following
tables set forth the effects of changing rates and volumes on our net interest
income for 2008 compared to 2007 and for 2007 compared to 2006.  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.





2008
      Compared to 2007(In
      thousands)
                    
                    Volume
                    
                    
                    Rate
                    
                    
                    NetInterest
      income:Total
      Loans
                    
                    $
                    1,597
                    
                    
                    $
                    (2,361
                    )
                    
                    $
                    (713
                    )Investments,
      fed funds and other interest-earning assets
                    
                    
                    (383
                    )
                    
                    
                    (34
                    )
                    
                    
                    (469
                    )Total
                    
                    
                    1,214
                    
                    
                    
                    (2,395
                    )
                    
                    
                    (1,182
                    )Interest
      expense:Deposits
                    
                    
                    78
                    
                    
                    
                    (2,284
                    )
                    
                    
                    (2,204
                    )FHLB
      advances and other borrowed
      funds
                    
                    
                    366
                    
                    
                    
                    (690
                    )
                    
                    
                    (325
                    )Subordinated
      Debentures
                    
                    
                    -
                    
                    
                    
                    (166
                    )
                    
                    
                    (167
                    )Total
                    
                    
                    444
                    
                    
                    
                    (3,140
                    )
                    
                    
                    (2,696
                    )Increase
      in net interest income (tax equivalent basis)
                    
                    $
                    770
                    
                    
                    $
                    745
                    
                    
                    $
                    1,514








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


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


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








17








Provision
for Loan Losses





The
Company reported a provision for loan losses of $1,359,000 for 2008, compared to
a provision of $80,000 for 2007.  The increase in the provision for
loan losses reflected an increase in net charge-offs and nonaccrual loans,
continued deterioration of the economy and an increase in loans, primarily
commercial real estate loans, which carry a greater risk of default than
one-to-four-family real estate loans.  The allowance for loan losses
equaled $2,873,000, or 1.19% of total loans, at December 31, 2008, compared to
1.31% at December 31, 2007.  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
2008, loans in the net amount of $1,330,000 were charged off and no recoveries
were recorded compared to $43,000 for 2007.  At December 31, 2008,
loans in the amount of $3,409,000 were in non-accrual status compared to
$1,482,000 at December 31, 2007.  Loans accruing interest in the
amount of $1,241,000 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 or cost-recovery method,
until qualifying for return to accrual status.




Total
Non-Interest Income





Excluding
the $3.0 million impairment loss recorded on the Company’s investment in
preferred equity securities of Fannie Mae and Freddie Mac, total non-interest
income amounted to $725,000 for 2008 compared to $463,000 for 2007, a 57%
increase.  Non-interest income during 2008 includes $238,000 of
realized gains on the sale of $4,800,000 in investment securities, compared to
no realized gains or losses on the sale of investment securities during
2007.  The primary sources of non-interest income are fees and service
charges on deposit accounts, loan document preparation fees and mortgage loan
referral fees.  During 2008, the combination of these categories
increased by $24,000, or 5%, compared to 2007.





Operating
Expenses





Total
operating expenses amounted to $8,670,000 for 2008 compared to $8,178,000 during
2007, a 6% increase.  This increase was caused by the growth of the
Company, as evidenced by growth in asset, loan and deposit size, growth in the
numbers of deposit and loan accounts, information processing costs related to
the increased size of the Company, as well as increased audit, legal, compliance
and loan related costs.  Compensation and employee benefit costs
increased by $395,000, or 9%, over 2007.  The increase was caused by
staff additions and merit increases.  Occupancy and equipment costs
decreased by $64,000, or 5%, compared to 2007 as declines in depreciation and
weather-related costs offset increases in utility costs and real estate
taxes.  Marketing and public relations expense decreased by $109,000,
or 36%, compared to the prior year as the Company significantly reduced
marketing in local newspapers and outdoor billboards and devoted promotional
efforts toward more effective direct mail marketing.  Data processing
costs increased by $86,000, or 19%, compared to the prior year as a result of
increased numbers of loan and deposit accounts maintained on the data processing
systems and increased software maintenance expenses.  Professional
services (primarily legal, audit, director fees, consulting, shareholder
relations and appraisal expenses) increased by $227,000, or 32%, on a year to
year basis as a result of increased appraisal and legal work involving loan
workouts, and increased expenditures for shareholder relations and audit
services.  Other general and administrative costs declined by $43,000,
or 4%, versus the prior year as efficiencies were gained in the process related
to the clearing of deposited checks and expense control measures were employed
throughout the Company.





Provision
for Income Taxes





The
income tax benefit of $870,000 that was recorded during 2008 resulted primarily
from the tax benefit associated with the impairment loss on Fannie Mae and
Freddie Mac preferred equity.  During the prior year, 2007, the
company incurred a $179,000 tax expense.





18





FINANCIAL
CONDITION





Overview





Total
assets at December 31, 2008, amounted to $295.2 million compared to $289.5 at
December 31, 2007, a $5.7 million, or 2%, increase.  Approximately 98%
of the total assets at year-end 2008 were held in earning assets, with total
loans equaling $239.5 million (a $25.0 million, or 12%, increase since year-end
2007), investment securities equaling $40.3 million (a $17.0 million, or 30%,
decrease) and interest bearing cash equivalents totaling $4.5 million (down by
$4.3 million, or 49%).  At December 31, 2007, earning assets also
equaled approximately 98% of total assets, with total loans equaling $214.5
million, investment securities totaling $57.3 million and interest bearing cash
equivalents totaling $8.8 million.  The aggregate of deposits and
borrowed funds equaled $274.0 million at December 31, 2008, a 3% increase over
$265.9 million at December 31, 2007.





Loans





The 12%
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
      31,2008
            2007
            2006
            2005
            2004(Dollars
      in thousands)
            Amount
            Percent
            Amount
            Percent
            Amount
            Percent
            Amount
            Percent
            Amount
            PercentReal
      estate loans:
            $
            %
            $
            %
            $
            %
            $
            %
            $
            %Residential
            24,001
            9.91
            21,610
            9.96
            15,048
            7.51
            15,278
            8.46
            17,392
            11.65Commercial
            152,014
            62.80
            128,283
            59.12
            110,693
            55.25
            91,497
            50.69
            78,571
            52.61Total
      real estate loans
            176,015
            72.71
            149,893
            69.08
            125,741
            62.75
            106,775
            59.16
            95,963
            64.26Commercial
      loans
            53,167
            21.96
            54,667
            25.19
            61,931
            30.91
            58,681
            32.51
            41,180
            27.57Consumer
      loans
            12,893
            5.33
            12,441
            5.73
            12,710
            6.34
            15,030
            8.33
            12,197
            8.17Total
      loans
            242,075
            100.00
            217,001
            100.00
            200,382
            100.00
            180,486
            100.00
            149,340
            100.00Net
      deferred loan fees
            321
            
            320
            
            286
            
            362
            
            353Allowance
      for losses
            (2,873)
            
            (2,844)
            
            (2,807)
            
            (2,615)
            
            (2,025)Loans,
      net
            239,523
            
            214,477
            
            197,861
            
            178,233
            
            147,668





The following table sets forth certain
information at December 31, 2008 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 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, 2008 (In thousands)
                  Real
      Estate
                    Loans
                  Commercial
      Loans
                  Consumer
                    Loans
                  Total
                    LoansAmounts
      due in:One
      year or less
                  $
      19,544
                  $
      6,353
                  $      16
                  $
      25,913More
      than one to five years
                  39,844
                  15,236
                  383
                  55,463More
      than five years
                  116,627
                  31,578
                  12,494
                  160,699Total
                  $
      176,015
                  $
      53,167
                  $
      12,893
                  $
      242,075Interest
      rate terms on amounts due after one year:Fixed-rate
      loans
                  $
      41,804
                  $
      13,192
                  $
      3,485
                  $
      58,481Adjustable-rate
      loans
                  114,667
                  33,622
                  9,392
                  157,681Total
                  $154,471
                  $46,814
                  $12,877
                  $216,162





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 mortgage backed securities.  Maturities, calls and sales
of securities during 2008 were used to fund the growth of the loan
portfolio.  At December 31, 2008, approximately $3.1 million of the
portfolio was scheduled to mature within one year and $37.2 million was
scheduled to mature after




19




one
year.  Approximately $5.3 million of the portfolio securities are
subject to calls prior to final maturity.  During 2008, the Company
purchased $6.0 million of mortgage-backed securities and $3.0 million of
preferred equities.  The preferred equities were considered
impaired prior to year end and written down.  The average
years-to-maturity of the mortgage-backed securities portfolio at December 31,
2008 was 16.1 years.





December
      31,2008
                2007
                2006(In
      thousands)
                Amortized
                  Cost
                Fair
                  Value
                Amortized
                  Cost
                Fair
                  Value
                Amortized
                  Cost
                Fair
                  ValueSecurities
      available-for-sale:Gov’t
      Sponsored Enterprises
                $1,888
                $2,001
                $13,980
                $14,168
                $19,956
                $19,807Mortgage-backed
      securities
                29,244
                29,313
                31,116
                31,429
                34,852
                34,775Total
      available-for-sale
                31,132
                31,314
                45,096
                45,597
                54,808
                54,582Securities
      held-to-maturity:Gov’t
      Sponsored Enterprises
                -
                -
                2,000
                1,997
                3,997
                3,970Mortgage-backed
      securities
                3,428
                3,364
                4,214
                4,215
                5,114
                5,046Municipals
                5,372
                5,284
                5,373
                5,408
                3,352
                3,384Other
      bonds
                150
                150
                100
                100
                50
                50Total
      held-to-maturity
                8,950
                8,798
                11,687
                11,720
                12,513
                12,450Total
                $40,082
                $40,112
                $56,783
                $57,317
                $67,321
                $67,032





The following table sets forth the
stated maturities and weighted average yields of our investment securities at
December 31, 2008.  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, 2008
                        (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
                      2,001
                      5.21
                      -
                      -
                      -
                      -
                      -
                      -
                      2,001
                      5.21Mortgage-backed
      securities
                      -
                      -
                      -
                      -
                      5,219
                      4.08
                      24,094
                      5.65
                      29,313
                      5.27Total
      available-for-sale
                      2,001
                      5.21
                      -
                      -
                      5,219
                      4.08
                      24,094
                      5.65
                      31,314
                      5.27Securities
      held-to-maturity:Mortgage-backed
      securities
                      -
                      -
                      -
                      -
                      3,428
                      5.67
                      -
                      -
                      3,428
                      5.67Municipals.
                      1,103
                      4.13
                      -
                      -
                      -
                      -
                      4,269
                      4.48
                      5,373
                      4.41Other
      bonds
                      -
                      -
                      150
                      4.28
                      -
                      -
                      -
                      -
                      150
                      4.28Total
      held-to-maturity
                      1,103
                      4.13
                      150
                      4.28
                      3,428
                      5.67
                      4,269
                      4.48
                      8,950
                      4.89Total
                      3,104
                      4.83
                      150
                      4.28
                      8,647
                      4.71
                      28,363
                      5.37
                      40,264
                      5.18





Cash
and Cash Equivalents





Cash and
cash equivalents amounted to $4.5 million at December 31, 2008 compared to $8.8
million at December 31, 2007.  The decrease of $4.3 million was
primarily due to a lower level of federal funds sold at December 31,
2008.





Liabilities





Deposits





At
December 31, 2008, total deposits amounted to $196.6 million compared to $202.2
million at December 31, 2007, a $5.7 million, or 3%, decrease.  The
dramatically lower interest rate environment during 2008 was a primary cause of
significant balance fluctuations within the deposit
portfolio.  Personal and commercial savings accounts declined by $10.8
million, or 29%, and equaled $26.3 million at year-end, as depositors
transferred funds to higher yielding accounts either within the Bank (i.e.
certificates of deposits) or elsewhere.  Money market and NOW accounts
reduced by $5.0 million, or 18%, and equaled $23.5 million at December 31,
2008.  Demand deposit




20




accounts
declined by $2.3 million, or 8%, and equaled $26.9 million, or 14%, of total
deposits.  Numerous balances were transferred internally to the
certificates of deposit category, and the Bank acquired new certificate of
deposit customers, causing certificates of deposit to increase $12.5 million, or
12%, to equal $119.9 million at December 31, 2008.  Of the total
certificates of deposit, 89%, or approximately $106.9 million, are scheduled to
mature in 2009.  The Bank’s strategy of shortening the maturity
structure of its certificates allowed for a rapid reaction to the lower interest
rate environment, as evidenced by the previously mentioned significant reduction
in the cost of funds (the cost of deposits and borrowed funds declined by 112
basis points compared to 2007).  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.





The following table indicates the
amount of certificates of deposit by time remaining until maturity at December
31, 2008.  At December 31, 2008, total certificates of deposit
included $16.5 million of brokered deposits.





Certificates
      of Deposit (In thousands)
                    December
      31, 2008
                  Less
      than $100,000
                  $100,000
      or more
                  Total
      Certificates
                    of
      DepositMaturity
      PeriodThree
      months or less
                  $  15,238
                  $  15,746
                  $  30,984Over
      three through six months
                  18,698
                  22,159
                  40,857Over
      six through twelve months
                  24,930
                  10,126
                  35,056Over
      twelve months
                  9,484
                  3,492
                  12,976Total
                  $  68,350
                  $  51,523
                  $
      119,873





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 at the 3-month LIBOR rate
plus 1.85%.  The interest rate at December 31, 2008 was
3.85%.  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 2008.  The
use of FHLBB advances as a source of funds increased during 2008.  The
following table details the borrowing activity for the past three
years.





21





Year
      Ended December 31,(Dollars
      in thousands)
            2008
            2007
            2006Maximum
      amount outstanding at any month-end during the period:FHLB
      advances
            $
      61,650
            $
      61,250
            $
      59,500Overnight
      Repurchase Agreements
            15,534
            13,587
            7,169Federal
      Funds Purchased
            3,000
            1,325
            500Subordinated
      Debt
            7,732
            7,732
            7,732Average
      amount outstanding during the period (1):FHLB
      advances
            $
      56,684
            $
      51,000
            $
      43,687Overnight
      Repurchase Agreements
            9,342
            8,466
            1,618Federal
      Funds Purchased
            282
            342
            211Subordinated
      Debt
            7,732
            7,732
            7,732Weighted
      average interest rate during the period (1):FHLB
      advances
            3.97%
            4.61%
            4.37%Overnight
      Repurchase Agreements
            1.64%
            4.33%
            4.89%Federal
      Funds Purchased
            2.40%
            5.49%
            5.49%Subordinated
      Debt
            5.15%
            7.38%
            7.00%Balance
      outstanding at end of period:FHLB
      advances
            $
      55,650
            $
      48,750
            $
      52,250Overnight
      Repurchase Agreements
            11,035
            7,214
            5,946Federal
      Funds Purchased
            3,000
            -
            500Subordinated
      Debt
            7,732
            7,732
            7,732Weighted
      average interest rate at end of period:FHLB
      advances
            3.68%
            4.37%
            4.62%Overnight
      Repurchase Agreements
            0.49%
            3.37%
            4.88%Federal
      Funds Purchased
            0.55%
            -
            5.50%Subordinated
      Debt
            3.85%
            6.84%
            7.21%


(1)
            Averages
      are based on daily balances.





Capital
Resources





The FRB,
the OCC 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, 2008, the Company and the Bank exceeded the
minimum requirements for both Tier 1 risk-based and total risk-based
capital.  The Tier 1 risk-based capital ratio for the Company and the
Bank was 10.43% and 9.90%, respectively.  The total risk-based capital
ratio for the Company and the Bank was 12.09% and 11.14%,
respectively.  A minimum requirement of 4.0% of Tier 1 leverage
capital is also mandated.  On December 31, 2008, the Tier 1 leverage
capital ratio for the Company and the Bank was 8.33% and 7.92%, respectively.At December 31, 2008, the Bank was categorized as “well
capitalized” as defined by federal regulators.





The
maintenance of appropriate capital ratio levels are impacted by various factors
such as current earnings, asset growth, loan quality and the potential for loan
losses caused by the economic climate.  The Company anticipates that
current levels of stockholders’ equity, coupled with a return to profitable
operations, will be sufficient to continue meeting the FDIC, OCC and FRB
requirements for capital adequacy.  However, recognizing the unknowns
that exist in the current economic climate, the Company is evaluating sources of
additional capital should the need arise going forward.





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.  In all cases, loans are placed on non-accrual at an earlier
date if collection of principal or interest is considered doubtful.  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




22




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)
                2008
                2007
                2006
                2005
                2004Nonaccrual
      loans:
                $
                $
                $
                $
                $Residential
      real estate
                450
                -
                -
                -
                -Commercial
      real estate
                95
                490
                -
                151
                -Construction
                2,526
                -
                -
                -
                -Commercial
                338
                992
                67
                1,136
                -Consumer
                -
                -
                -
                -
                -Total
                3,409
                1,482
                67
                1,287
                -Accruing
      loans past due 90 days or more:
                -
                -
                -
                -
                -Total
      of nonaccrual and 90 days or more past due loans
                3,409
                1,482
                67
                1,287
                -Other
      nonperforming assets
                879
                -
                -
                -
                -Total
      nonperforming assets
                4,288
                1,482
                67
                1,287
                -Troubled
      debt restructurings
                -
                -
                -
                -
                -Total
      nonperforming assets
                $          4,288
                $1,482
                $           67
                $        1,287
                $           -Total
      nonperforming loans to total loans
                1.41%
                0.68%
                0.03%
                0.71%
                -Total
      nonperforming loans to total assets
                1.15%
                0.51%
                0.02%
                0.52%
                -Total
      nonperforming assets and troubled debt restructurings to total
      assets
                1.45%
                0.51%
                0.02%
                0.52%
                -





Total nonperforming loans increased
from December 31, 2007 to December 31, 2008 as a result of the migration of
certain loans to nonaccrual status.  This trend has been caused
primarily by the current economic climate, which has reduced the sales of
single-family housing units for which the Bank has provided construction
financing.  Interest income that would have been recorded for the year
ended December 31, 2008, had nonaccruing loans been current according to their
original terms amounted to $215,000.  No interest related to
nonaccrual loans was included in interest income for the year ended December 31,
2008.  Interest income related to currently non-accrual loans in the
amount of $185,000 was recorded and received during 2008 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, which consists of the President, the Chief Credit Officer and
each commercial loan officer.  All extensions of credit over
$1,499,000 to any one borrower, or related party interest, are reviewed and
approved by the Executive Committee of the Bank’s Board of
Directors.





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, asset quality trends, the size and
composition of the loan portfolio, 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




23


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, 2008, $1,241,000 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, 2008, sixteen
loans in the amount of $3,409,000 were on nonaccrual status.





The ALL
consists of two components:





Specific Allowance –
represents management’s assessment of probable 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.





Allocated Allowance – The
allocated portion of the reserve represents a reflection of risk and the
probable, but as yet unidentified specific losses associated with the bank’s
loan portfolio which includes consumer, residential real estate, pass grade
commercial loans and watch list loans which are not
impaired.  Additionally, this portion of the ALL provides for probable
losses due to: changes in economic conditions; trends in delinquency and asset
quality; changes in or detected weaknesses in lending and collection practices
and control mechanisms; concentrations of credit; off-balance sheet credit risk;
and the experience and ability of lending and collection
management.





The
following table sets forth the breakdown of the allowance for loan losses by
loan category at December 31st of each year indicated.




2008
                    2007
                    2006
                    2005
                    2004(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
                    $      100
                    9.9%
                    $       76
                    10.0%
                    $       27
                    7.5%
                    $       34
                    8.4%
                    $      52
                    11.6%Commercial
      real estate
                    1,692
                    62.8
                    1,840
                    59.1
                    1,624
                    55.2
                    1,352
                    50.7
                    1,073
                    52.6Commercial
                    1,002
                    22.0
                    856
                    25.2
                    1,107
                    31.0
                    1,174
                    32.6
                    826
                    27.7Consumer
                    79
                    5.3
                    72
                    5.7
                    49
                    6.3
                    55
                    8.3
                    74
                    8.1Total
      allowance for loan losses
                    $  2,873
                    100.0%
                    $  2,844
                    100.0%
                    $  2,807
                    100.0%
                    $  2,615
                    100.0%
                    $  2,025
                    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 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.





24





(Dollars
      in thousands
                        2008
                        2007
                        2006
                        2005
                        2004Allowance
      at beginning of period
                        $   2,844
                        $   2,807
                        $   2,615
                        $   2,025
                        $   1,413Provision
      for loan losses
                        1,359
                        80
                        216
                        590
                        612Charge
      offs:Residential
      real estate loans
                        (47)
                        -
                        -
                        -
                        -Commercial
      real estate loans
                        (710)
                        -
                        -
                        -
                        -Commercial
      loans
                        (570)
                        (82)
                        (13)
                        -
                        -Consumer
      loans
                        (3)
                        -
                        (12)
                        -
                        -Total
      charge-offs
                        (1,330)
                        (82)
                        (25)
                        -
                        -RecoveriesCommercial
      loans
                        -
                        33Consumer
      loans
                        -
                        6
                        1
                        -
                        -Total
      Recoveries
                        -
                        39Net
      charge-offs
                        (1,330)
                        (43)
                        (24)
                        -
                        -Allowance
      at end of period
                        $   2,873
                        $   2,844
                        $   2,807
                        $   2,615
                        $   2,025Allowance
      to nonperforming loans
                        0.8
      X
                        1.9
      X
                        41.9
      X
                        2.0
      X
                        (*)Allowance
      to total loans outstanding at the end of the period
                        1.19%
                        1.31%
                        1.40%
                        1.45%
                        1.35%Net
      charge-offs to average loans outstanding during the period
                        0.58%
                        0.02%
                        0.01%
                        -
                        -


(*) 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-earning assets in order to match the variability of
interest rates paid on the Company’s interest-bearing
liabilities.  Imbalance among interest-earning assets and
interest-bearing liabilities at any point in time constitutes interest rate
risk.





Interest
rate risk includes interest rate sensitivity.  Sensitivity refers to
the responsiveness of interest-earning 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.





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




25


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 and 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 maximum limits for the change in net
interest income over a twelve-month period, with higher levels of change
tolerated with higher levels of forecasted total risk-based
capital.  At the currently forecasted level of total risk-based
capital, the limits require that NII for the projected next twelve-month period
will not reduced by more than 6% for every 100 basis point (given a gradual
ramp) change in interest rates.  The Company’s most recent simulation
reflects a 2.9% reduction in NII if market rates rise by 300 basis points
(compared to the 18% tolerance limit), a 2.1% decline in NII if market rates
decline by 50 basis points (compared to the 3% tolerance limit) over a one year
period.  These changes fall within the ALCO established limits for
change in NII for the projected next twelve months.  Although the
likelihood of a decline in the interest rate environment appears remote,
management and ALCO develop strategies that would be implemented to limit the
reduction in NII 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, 2008.





26





Changes
      in Net Interest Income and Return on Assets(over
      a two-year period)
                            (Dollars
      in thousands)
                          
                          as
      of November 30, 2008Change
      in Interest Rates During
                            Year
      One
                          
                          Net
      Interest Income
                          
                          
                          Percent
      Change
                          
                          Change
      in Return on Assets300
      basis point rise
                          
                          $
                          10,313
                          
                          
                          
                          (2.9
                          %)
                          
                          
                          0.00
                          %Flat-rate
      scenario
                          
                          
                          10,62250
      basis point decline
                          
                          
                          10,402
                          
                          
                          
                          (2.1
                          %)
                          
                          
                          (0.12
                          %)Change
      in Interest Rates During
                            Year
      Two
                          
                          Net
      Interest Income
                          
                          
                          Percent
      Change
                          
                          Change
      in Return on Assets300
      basis point rise
                          
                          $
                          11,460
                          
                          
                          
                          (6.2
                          %)
                          
                          
                          (0.08
                          %)Flat-rate
      scenario
                          
                          
                          12,22150
      basis point decline
                          
                          
                          11,236
                          
                          
                          
                          (8.1
                          %)
                          
                          
                          (0.24
                          %)





Forecast
is adjusted to reflect the interest rate environment that existed as of January
30, 2009





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 has changed and the Company’s balance sheet
structure has also changed in reaction to market conditions.  A year
ago, the simulation of the Company’s net interest income was based upon
different interest rate change assumptions (one year ago it was highly probable
that interest rates would decline during 2008, current expectations are for a
continued low rate environment for the foreseeable future) and a different
balance sheet structure (the maturity structure of liabilities is now
shorter).  The current balance sheet is positioned such that simulated
changes in interest rates have a nearly neutral impact upon net interest income
and are within Board established policy limits for one-year exposure to rate
changes.  The more unfavorable year-two impact of a 50 basis point
decline in the rate environment has caused ALCO to develop strategies to lessen
the interest rate risk associated with such an environment; however this
simulated environment is highly unlikely.





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-earning asset and interest-bearing 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, 2008 or 2007.





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




27


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.





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 outflows, 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 4.2 years, and is available to be used as a source of funds, if
needed.  Seventy-eight 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 4.0
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.  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, 2008 equaled $19.5
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
$6.5 million may be treated as Tier 1 capital for regulatory purposes and an
additional $1.0 million may be treated as Tier 2 capital for regulatory
purposes.  Under applicable provisions of federal banking law, the
Company must meet specific quantitative capital requirements.  See
Item 1, “Business” and “Notes to Consolidated Financial Statements, Note
13.”





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, 2008, these financial instruments included commitments to originate loans,
unused lines of credit and secured lines of credit totaling $65.1 million; $1.5
million of which involved original maturities in excess of one
year.  In addition, the Company had issued letters of credit totaling
$2.3 million at December 31, 2008.  For further information see “Notes
to Financial Statements, Note 12(a) Financial Instruments with Off-Balance Sheet
Risk.”





For the
year ended December 31, 2008, 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 12(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 $5.6 million in the aggregate during the lives of the
leases.  See “Notes to Financial Statements, Note 12(b) Lease
Commitments”.








ITEM7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
information required by this Item 7A is contained in Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Risk
Management – Interest Rate Risk.








ITEM8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this item 8 is contained on pages F-1 to F-26 of this
Form 10-K.





28





ITEM9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM9A(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.





(b)           Internal
Controls Over Financial Reporting





Management’s
annual report on internal control over financial reporting is located on page 32
of this Annual Report on Form 10-K.





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





There
were no changes in the Company’s internal control over financial reporting
during the three months ended December 31, 2008 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.








ITEM9B - OTHER INFORMATION





On November 14, 2008, the Bank and the
Company entered into an amended and restated change in control severance
agreement (the “Agreement”) with Charles R. Valade, the President and Chief
Executive Officer of the Bank and the Company.  The effective date of
the Agreement is May 30, 2008.  The Agreement constitutes a
restatement, in its entirety, of the change in control severance agreement
between the Bank and Mr. Valade effective as of May 18, 2006.  The
initial term of the Agreement is two years from the effective date of May 30,
2008, provided, however, that the Agreement will be automatically extended so
that the term remains twenty-five months, unless 60 days prior notice is given
to not extend the Agreement.





The Agreement provides that, no later
than ten days following a Change in Control (as defined in the Agreement), Mr.
Valade is entitled to a lump sum cash payment equal to two and one-half times
(1) his annual base salary in effect immediately prior to the Change in Control;
and (2) the greater of (a) his annual incentive bonus for the year in which the
Change in Control occurs, or (b) if no incentive bonus has been determined, the
greater of his annual incentive bonus earned in the immediately preceding year
or the target annual incentive bonus for the year in which the Change in Control
occurs.  If Mr. Valade terminates employment with the Bank for Good
Reason (as defined in the Agreement) or the Bank terminates Mr. Valade’s
employment without Cause (as defined in the Agreement) within twenty-four months
following a Change in Control, Mr. Valade is entitled to receive:





·
            his
      base salary through the date of termination  and all other
      amounts to which he is entitled under any benefit
  plan;


·
            his
      annual incentive bonus that would be payable for such year on a pro rata
      basis;


·
            cash
      equal to the additional benefits under the Bank’s 401(k) Plan or other
      similar qualified plan that he would have been entitled to had he
      continued as an employee of the Bank for a
  30-month












29




·
            period
      following the date of termination and made contributions under the plan at
      a rate equal to that at which he made contributions to the plan in the
      plan year immediately preceding the date of termination; at least
      quarterly reimbursement for expenditures for outplacement and job search
      activities in amounts up to 20% of his annual base salary and annual
      incentive compensation; ·
              all
      unvested stock options, restricted stock or other stock awards held by Mr.
      Valade for which vesting is service based, will become fully vested and
      exercisable, and all performance objectives upon which the earning of
      performance-based restricted stock or deferred stock awards depend shall
      be deemed met at target level at the date of
  termination;
 ·
              life
      and health insurance benefits no less favorable than those which he
      received immediately prior to the Notice of Termination (as defined in the
      Agreement), and Mr. Valade shall pay the same portion of the cost of
      coverage that existed at that time;
and
 ·
              continued
      reimbursement for the cost of perquisites he received immediately before
      the date of termination.


Pursuant to the Agreement, the Bank is
obligated to reimburse Mr. Valade for reasonable legal fees and expenses
incurred for any successful action to obtain or enforce his rights under the
Agreement.





The Agreement provides that if the
payments and benefits provided under the Agreement, either alone or together
with other payments and benefits Mr. Valade has the right to receive from the
Bank, would constitute a “parachute payment” under Section 280G of the Internal
Revenue Code of 1986, as amended (the “Code”), the payments and benefits under
the Agreement will be reduced or revised, in the manner determined by Mr.
Valade, by the minimum amount necessary to result in no portion of the payment
and benefits being non-deductible to the Bank under the Code or subject to
excise tax imposed under the Code.





The Agreement requires that, in
consideration for the compensation and benefits provided for by the Agreement,
Mr. Valade agrees not to compete with the Bank, as defined in the Agreement, for
a period of eighteen months.





The foregoing description of the
Agreement is qualified in its entirety by reference to the Agreement, which is
filed as an exhibit to this Form 10-K.





30


PART
III





ITEM10- DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE





Directors





For information relating to the
directors of the Company, the section captioned “Items to Be Voted on By
Stockholders - Item 1 –
Election of Directors” in the Company’s Proxy Statement for the 2009
Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by
reference.





Executive
Officers





For information relating to the
executive officers of the Company, the section captioned “Items to Be Voted on
By Stockholders - Item 1 –
Election of Directors” in the Proxy Statement 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-K and the section captioned “Other Information Relating to Directors and
Executive Officers - Section
16(a) Beneficial Ownership Reporting Compliance”in the Proxy Statement
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 other employees.  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 and Board Matters – Committees of the Board of Directors – Audit
Committee” in the Proxy Statement is incorporated herein by
reference.





ITEM11 - EXECUTIVE COMPENSATION





For
information regarding executive compensation, the section entitled“Executive Compensation” and
“Corporate Governance and Board Matters - Directors’ Compensation” in
the Proxy Statement are incorporated herein by reference.








ITEM12 - 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.




31







(d)
            Equity
      Compensation Plan Information




The
following table sets forth information about the Company common stock that may
be issued upon the exercise of stock options, warrants and rights under all of
the Company’s equity compensation plans as of December 31, 2008.





Plan
      category
            (a)
              
              
              
              Number
      of securities
              to
      be issued upon exercise
              of
      outstanding options,
              warrants
      and rights
            (b)
              
              
              
              Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            (c)
              
              Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation
              plans
      (excluding securities reflected in column (a))Equity
      compensation
              plans
      approved by security holders
            449,395
            $10.63
            143,105Equity
      compensation
              plans
      not approved by security holders
            -
            -
            -Total
            449,395
            $10.63
            143,105








ITEM13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE





Certain
Relationships and Related Transactions





For information regarding certain
relationships and related transactions, the sections captioned “Other Information Relating to
Directors and Executive Officers – Policies and Procedures for Approval of
Related Person Transactions” and “–Transactions with Related
Persons” in the Proxy Statement is incorporated herein by
reference.





Corporate
Governance





For information regarding director
independence, the section captioned“Corporate
Governance and Board Matters – Director Independence”in the Proxy Statement is incorporated
herein by reference.








ITEM14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES





For
information regarding the principal accountant fees and expenses, the section
captioned “Audit Related
Matters – Auditor Fees”inthe Proxy Statement is
incorporated herein by reference.




32


ITEM15 - EXHIBITS







Exhibit No.
              Description3.1
              Articles
      of Organization(1)3.2
              Amendment to Articles of
  Organization3.3
              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*
              CNB
      Financial Corp. 2008 Equity Incentive Plan(5)10.4
              Lease
      for 67 Millbrook Street, Worcester, Massachusetts(6)10.5
              Lease
      for 26 W. Boylston Street, West Boylston, Massachusetts(6)10.6*
              Amended and Restated Change in Control Severance
      Agreement, dated as of May 30, 2008, between the Bank and Charles R.
      Valade10.7*
              Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and William M Mahoney(7)10.8*
              Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and Christine Trifari(7)10.9*
              Change
      in Control Severance Agreement, dated as of May 18, 2006, between the Bank
      and Andrea J. White(7)21.0
              Subsidiaries23.1
              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 Appendix A to the Proxy Statement for the
      2008 Annual Meeting filed with the Securities and Exchange Commission on
      April 11, 2008.(6)
            Incorporated
      by reference in this document to the Quarterly Report on Form 10-QSB for
      the quarter ended June 30, 2006.(7)
            Incorporated
      herein by reference in this document to the Form 8-K filed with the
      Securities and Exchange Commission on May 22,
  2006.







33





Management’sReport 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, 2008, 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, 2008 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.








34








Indexto Consolidated Financial Statements

















Report
      of Independent Registered Public Accounting Firm
            F-1Consolidated
      Balance Sheets at December 31, 2008 and 2007
            F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
            F-3Consolidated
      Statements of Stockholders’ Equity for theYears
      Ended December 31, 2008 and 2007
            F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
            F-5Notes
      to Consolidated Financial Statements
            F-6





35


Reportof 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 subsidiary as of December 31, 2008 and 2007, 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 audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CNB Financial Corp. and
subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.





We were
not engaged to examine management’s assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.











/s/ Wolf
& Company, P.C.








Boston,
Massachusetts


March 12,
2009




F-1
 
 CNB
FINANCIAL CORP. AND SUBSIDIARY
 
 Consolidated
Balance Sheets
 As of
December 31, 2008 and 2007


2008
                
                2007ASSETSCash
      and Cash Equivalents
                $4,508,000
                
                $8,825,000Investment
      Securities Available-for-Sale
                31,314,000
                
                45,597,000Investment
      Securities Held To Maturity, (Fair Value of$8,798,000
      as of December 31, 2008 and $11,720,000as
      of December 31, 2007)
                8,950,000
                
                11,687,000Federal
      Reserve Bank Stock
                786,000
                
                761,000Federal
      Home Loan Bank Stock
                3,143,000
                
                3,052,000Loans
                242,396,000
                
                217,321,000Less-Allowance
      for Loan Losses
                (2,873,000)
                
                (2,844,000)Loans,
      Net
                239,523,000
                
                214,477,000Premises
      and Equipment, Net
                2,107,000
                
                2,378,000Accrued
      Interest Receivable
                977,000
                
                1,100,000Deferred
      Tax Asset
                2,132,000
                
                1,123,000Other
      Real Estate Owned
                879,000
                
                -Prepaid
      Expenses and Other Assets
                840,000
                
                494,000$295,159,000
                
                $289,494,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Non
      Interest-bearing Deposits
                $26,904,000
                
                $29,219,000Interest-bearing
      Deposits
                $169,661,000
                
                $173,019,000Total
      Deposits
                $196,565,000
                
                $202,238,000Federal
      Funds Purchased
                3,000,000
                
                -Securities
      Under Agreement to Repurchase
                11,035,000
                
                7,214,000Federal
      Home Loan Bank Advances
                55,650,000
                
                48,750,000Subordinated
      Debentures
                7,732,000
                
                7,732,000Accrued
      Expenses and Other Liabilities
                1,638,000
                
                2,407,000Total
      Liabilities
                275,620,000
                
                268,341,000Commitments
      and Contingencies (Note 12)Stockholders’
      Equity:Common
      stock
                  Par
      Value: $1.00 per share as of December 31, 2008 and 2007.  Shares
      Authorized: 10,000,000 as of December 31, 2008 and 2007.  Issued
      and Outstanding: 2,283,000 as of December 31, 2008 and
    2007.
                2,283,000
                
                2,283,000Additional
      Paid-in Capital
                20,448,000
                
                20,291,000Accumulated
      Deficit
                (3,321,000)
                
                (1,754,000)Accumulated
      Other Comprehensive Income
                129,000
                
                333,000Total
      Stockholders’ Equity
                19,539,000
                
                21,153,000$295,159,000
                
                $289,494,000


See
accompanying notes to consolidated financial statements.
 
 F-2


CNB
FINANCIAL CORP. AND SUBSIDIARY
 
 Consolidated
Statements of Operations
 For the
Years December 31, 2008 and 2007





2008
                      
                      2007Interestand Dividend Income:Interest
      and Fees on Loans
                      $14,822,000
                      
                      $15,535,000Interest
      and Dividends on Investments
                      2,909,000
                      
                      3,378,000Total
      Interest and Dividend Income
                      17,731,000
                      
                      18,913,000Interest
      Expense:Interest
      Expense on Deposits
                      5,050,000
                      
                      7,254,000Interest
      Expense on Borrowings
                      2,796,000
                      
                      3,288,000Total
      Interest Expense
                      7,846,000
                      
                      10,542,000Net
      Interest Income
                      9,885,000
                      
                      8,371,000Provision
      for Loan Losses
                      1,359,000
                      
                      80,000Net
      Interest Income, After Provisionfor
      Loan Losses
                      8,526,000
                      
                      8,291,000Non-Interest
      Income (Loss):Fees
      on Deposit Accounts
                      232,000
                      
                      208,000Loan
      Related Fees
                      87,000
                      
                      153,000Other
                      168,000
                      
                      102,000Investment
      Security Gains
                      238,000
                      
                      -Impairment
      Loss on Preferred Equity Securities
                      (3,018,000)
                      
                      -Total
      Non-Interest Income (Loss)
                      (2,293,000)
                      
                      463,000Non-Interest
      Expenses:Employee
      Compensation and Benefits
                      4,786,000
                      
                      4,391,000Occupancy
      and Equipment
                      1,295,000
                      
                      1,359,000Professional
      Fees
                      932,000
                      
                      705,000Marketing
      and Public Relations
                      190,000
                      
                      299,000Data
      Processing Expenses
                      550,000
                      
                      464,000Other
      General and Administrative Expenses
                      917,000
                      
                      960,000Total
      Non-Interest Expenses
                      8,670,000
                      
                      8,178,000(Loss)
      Income Before Income Taxes
                      (2,437,000)
                      
                      576,000Income
      Tax (Benefit)  Expense
                      (870,000)
                      
                      179,000Net
      (Loss) Income
                      $(1,567,000)
                      
                      $397,000Net
      (Loss) Income per Basic Share
                      $
      (0.69)
                      
                      $
      0.17Net
      (Loss) Income per Diluted Share
                      $
      (0.69)
                      
                      $
      0.17Weighted
      Average Shares - Basic
                      2,283,000
                      
                      2,283,000Weighted
      Average Shares - Diluted
                      2,283,000
                      
                      2,294,000





See
accompanying notes to consolidated financial statements.








F-3


CNB
FINANCIAL CORP. AND SUBSIDIARY
 
 Consolidated
Statements of Stockholders’ Equity
 For the
Years Ended December 31, 2008 and 2007








CommonStockNumber
      of Shares
                Par
      Value
                Additional
      Paid-in
                  Capital
                Accumulated
      Deficit
                Accumulated
      Other Comprehensive Income (Loss)
                TotalBalance,
      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
                $      21,153,000Net
      Loss
                
                
                
                (1,567,000)
                
                (1,567,000)Other
      Comprehensive  LossUnrealized  Losses  on
      Securities Available-for-Sale, net of Deferred Tax Benefits of $115,000
      and reclassification adjustment for gains of $ 238,000 realized in
      income
                
                
                
                
                (204,000)
                (204,000)Total
      Comprehensive Loss
                
                
                
                
                
                (1,771,000)Share-based
      Compensation
                
                
                157,000
                
                
                157,000Balance,
      December 31, 2008
                2,283,000
                $         2,283,000
                $          20,448,000
                $        (3,321,000)
                $           129,000
                $      19,539,000








See
accompanying notes to consolidated financial statements.




F-4
 
 CNB
FINANCIAL CORP. AND SUBSIDIARY
 
 Consolidated
Statements of Cash Flows
 for the
Years Ended December 31, 2008 and 2007


CashFlows from Operating Activities:
                                            2008
                                            
                                            2007Net
      (Loss) Income
                                            $(1,567,000)
                                            
                                            $397,000Adjustments
      to reconcile Net (Loss) Income to Net Cash Provided by Operating
      Activities:Share-Based
      Compensation
                                            157,000
                                            
                                            137,000Provision
      for Loan Losses
                                            1,359,000
                                            
                                            80,000Increase
      in net Deferred Loan Costs
                                            (1,000)
                                            
                                            (30,000)Depreciation,
      Amortization of Premiums and Accretion of Discounts on
      Securities
                                            253,000
                                            
                                            298,000Deferred
      Tax (Benefit) Expense
                                            (898,000)
                                            
                                            151,000Impaired
      Loss on Preferred Equity Securities
                                            3,018,000
                                            
                                            -Gain
      on Sale of Securities Available for Sale
                                            (238,000)
                                            
                                            -Changes
      in:Accrued
      Interest Receivable
                                            123,000
                                            
                                            197,000Other
      Assets
                                            (346,000)
                                            
                                            37,000Accrued
      Expenses and Other Liabilities
                                            (769,000)
                                            
                                            (551,000)Net
      Cash Provided by Operating Activities
                                            1,091,000
                                            
                                            716,000Cash
      Flows from Investing Activities:Purchases
      of Investment Securities Held-to-Maturity
                                            (50,000)
                                            
                                            (2,071,000)Purchases
      of Investment Securities Available-for-Sale
                                            (9,016,000)
                                            
                                            (2,999,000)Principal
      Payments on Mortgage Backed Securities (CMOs)
                                            5,105,000
                                            
                                            5,708,000Proceeds
      from Maturity (Call) of Investment Securities
    Held-to-Maturity
                                            2,000,000
                                            
                                            2,000,000Proceeds
      from Maturity (Call) of Investment Securities
      Available-for-Sale
                                            11,165,000
                                            
                                            8,000,000Sale
      of Securities Available-for-Sale
                                            4,795,000
                                            
                                            -Purchase
      of Federal Reserve Stock and FHLBB Stock
                                            (116,000)
                                            
                                            (43,000)Loan
      Originations, Net of Principal Repayments
                                            (27,283,000)
                                            
                                            (16,666,000)Purchases
      of Premises and Equipment
                                            (56,000)
                                            
                                            (255,000)Net
      Cash Used in Investing Activities
                                            (13,456,000)
                                            
                                            (6,326,000)Cash
      Flows from Financing Activities:Advances
      from FHLBB
                                            36,900,000
                                            
                                            86,847,000Repayment
      of FHLBB Advances
                                            (30,000,000)
                                            
                                            (90,347,000)Net
      Increase (decrease) in Federal Funds Purchased
                                            3,000,000
                                            
                                            (500,000)Securities
      Under Agreement to Repurchase
                                            3,821,000
                                            
                                            1,268,000Net
      (Decrease) Increase in Deposits
                                            (5,673,000)
                                            
                                            10,431,000Net
      Cash Provided by Financing Activities
                                            8,048,000
                                            
                                            7,699,000Net  Increase
      (Decrease) in Cash and Cash Equivalents
                                            (4,317,000)
                                            
                                            2,089,000Cash
      and Cash Equivalents, Beginning of the Period
                                            8,825,000
                                            
                                            6,736,000Cash
      and Cash Equivalents, End of the Period
                                            $4,508,000
                                            
                                            $8,825,000Supplemental
      Disclosure of Cash Flow InformationInterest
      Paid
                                            $  8,700,000
                                            
                                            $  11,150,000Taxes
      Paid
                                            $     163,000
                                            
                                            $         45,000Transfer
      of Loans to OREO
                                            $     879,000
                                            
                                            $                   -








See
accompanying notes to consolidated financial statements.





F-5
 
 CNBFINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


(1)
            ORGANIZATION





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





Company
Formation





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





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




(2)
            BASIS
      OF PRESENTATION





The
consolidated financial statements include the accounts of the Company and the
Bank.  All material inter-company transactions have been eliminated in
consolidation.  The Company, as a separately incorporated bank holding
company, has no significant operations other than serving as the sole
stockholder of the Bank.  Its commitments and debt service requirement
at December 31, 2008 consist of subordinated debentures, including accrued
interest on $7.8 million of debentures issued to the unconsolidated subsidiary,
Commonwealth National Bank Statutory Trust I.  The Company’s one
reportable operating segment is the Bank.





(3)
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





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, construction loans and
commercial and consumer loans to customers.  A substantial portion of
the loan portfolio is represented by commercial loans and commercial mortgages
throughout Worcester County, Massachusetts.  The ability of the
Company’s debtors to honor their contracts is dependent upon the real estate
values and general economic conditions in this area.  Commercial real
estate, including commercial construction loans, represent 63% and 59% of
the total loan portfolio at December 31, 2008 and 2007,
respectively.





F-6
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


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
of the date of purchase.





The bank
is required to maintain average balances on hand or with the Federal Reserve
Bank of Boston.  At December 31, 2008 and 2007, these reserve balances
amounted to $581,000 and $637,000, respectively.





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 securities.  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 has experienced a decline in value, which management believes is
deemed other than temporary, is reduced to its estimated fair value by a charge
to operations.  In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.  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, 2008 or 2007.





Federal
Home Loan Bank Stock





The Bank,
as a member of the Federal Home Loan Bank (“FHLB”) system, is required to
maintain an investment in capital stock of the FHLB.  Based on
redemption provisions of the FHLB, the stock has no quoted market value and is
carried at cost.  At its discretion, the FHLB may declare dividends on
the stock.  The Company reviews the impairment based on the ultimate
recoverability of its cost basis in the FHLB stock.  At December 31,
2008, no impairment has been recognized.





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, (120 days for consumer installment loans) 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 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 collectability 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 estimated to occur.  Factors
considered in evaluating the adequacy of the allowance include previous loss
experience, the size and composition of the loan portfolio, current economic
conditions and its effect on




F-7
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008




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.





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.





Foreclosed
Assets





Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value, less cost to sell, at the date of foreclosure,
establishing a new cost basis.  Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower
of carrying amount or fair value less cost to sell.  Revenue and
expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.





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.





F-8
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





Income
Taxes





The
Company records income taxes under the asset and liability
method.  Under this method, deferred tax assets and liabilities are
established for the temporary difference between the accounting bases
and


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





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





Advertising
Costs





Advertising
costs are charged to earnings when incurred.





Share-Based
Payment





Compensation
cost is recognized for stock options and restricted stock awards 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.  The fair value of restricted stock and stock options is
determined on the date of grant and amortized to compensation expense, with a
corresponding increase in additional paid-in-capital, on a straight-line basis
over the required service period, generally defined as the vesting period for
stock option awards.





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.




2008
                      2007Net
      (Loss) Income
                      $   (1,567,000)
                      $   397,000Weighted Average SharesBasic
      Shares
                      2,283,000
                      2,283,000Effect
      of Dilution
                      -
                      11,000Diluted
      Shares
                      2,283,000
                      2,294,000Net Income Per ShareBasic
      EPS
                      $   (0.69)
                      $   0.17Effect
      of Dilution
                      -
                      -Diluted
      EPS
                      $   (0.69)
                      $   0.17




Outstanding
stock options and warrants 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 and
warrants was 449,395 and 380,390 at December 31, 2008 and 2007,
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
September 2006, the Financial Accounting Standards Board (“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




F-9
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


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).  In
February 2008, the FASB issued a Staff Position which delays the effective date
of Statement No. 157 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, to fiscal years beginning after November 15,
2008.  The Company adopted this statement, except for items covered by
the Staff Position, as of January 1, 2008 and the adoption did not have a
material impact on the consolidated financial statements.





In
October, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(“FSP 157-3”).  FSP 157-3 clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP 157-3 was
effective immediately upon issuance, and includes prior periods for which
financial statements have not been issued.  The Company applied the
guidance contained in FSP 157-3 in determining fair values at December 31, 2008,
and it did not have a material impact on the 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
was adopted by the Company on January 1, 2008 and did not have a material impact
on the Company’s consolidated financial statements.





In
December 2007, the FASB issued Statement No. 141 (revised 2007), “Business
Combinations” (“Statement No. 141(R)”). Statement No. 141(R) establishes
principles and requirements for how the acquirer in a business combination
recognizes and measures identifiable assets acquired, liabilities assumed, and
non-controlling interests in the acquiree.  Statement No. 141(R)
further addresses how goodwill acquired or a gain from a bargain purchase is to
be recognized and measured and determines what disclosures are needed to enable
users of the financial statements to evaluate the effects of the business
combination. Statement No. 141(R) is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Earlier application is not permitted.





In
January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20” (“FSP 99-20-1”).  FSP 99-20-1
amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets, “ to achieve more consistent
determination of whether an other-than-temporary impairment has
occurred.  The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “Accounting for Certain Investments
in Debt and Equity Securities,” and other related
guidance.  FSP 99-20-1 is effective for interim and annual reporting
periods ending after December 15, 2008.  The Company adopted this FSP
at December 31, 2008 and it did not have a material impact on the consolidated
financial statements.





F-10
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





(4)
            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, 2008 and 2007 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.




2008Amortized cost
                            Unrealized
                            Fair ValueAvailable-for-sale:
                            
                            Gains
                            LossesGovernment
      Sponsored Enterprises
                              Due
      within one year
                            $     1,888,000
                            $  113,000
                            $   -
                            $2,001,000Mortgage-backed
      Securities (including CMOs)Due
      after five years through ten years
                            5,119,000
                            100,000
                            -
                            5,219,000Due
      after ten years
                            24,125,000
                            719,000
                            (750,000)
                            24,094,000$   31,132,000
                            $ 
      932,000
                            $   (750,000)
                            $   31,314,000Held-to-maturity:Mortgage-backed
      Securities(including CMOs)Due
      after five years through ten years
                            $     3,428,000
                            $    36,000
                            $    (100,000)
                            $   3,364,000MunicipalsDue
      within one year
                            1,103,000
                            7,000
                            (1,000)
                            1,109,000Due
      after five years through ten years
                            4,269,000
                            23,000
                            (117,000)
                            4,175,000Other
      Bonds
                              Due
      after one year through five years
                            150,000
                            -
                            -
                            150,000$   
       8,950,000
                            $  66,000
                            $   (218,000)
                            $   8,798,000Total
      Investment Securities
                            $   40,082,000
                            $   998,000
                            $   (968,000)
                            $  40,112,000





F-11
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





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





At
December 31, 2008 and 2007, mortgage-backed securities include privately-issued
collateralized mortgage obligations with an aggregate book value of $7,222,000
and $6,230,000, respectively and fair value of $6,420,000 and $6,151,000,
respectively.





At
December 31, 2008 and 2007, the Bank had callable investment securities of $0
and $11,040,000, respectively, in the available-for-sale category and $5,372,000
and $3,999,000, respectively, in the held-to-maturity category.





At
December 31, 2008 and 2007, investment securities carried at amortized cost of
$34,559,000 and $42,659,000, respectively, (fair value of $34,678,000 and
$43,183,000, respectively), were pledged to secure public deposits and for other
purposes required or permitted by law.





During
the third quarter of 2008, a non-cash pre-tax impairment loss of $3,018,000 was
recognized on preferred stock issued by Federal National Mortgage Association
(FNMA or Fannie Mae) and Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac) as a result of both institutions being placed in conservatorship by
the United States Treasury.  Federal legislation became law on October
3, 2008 which allowed the Company to treat the loss as an ordinary loss for tax
purposes and recognize the tax impact of $1.0 million during the fourth quarter
of 2008.





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 between 4.0% and 4.5% of the Bank’s outstanding
FHLBB advances (depending upon the term of each advance) 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, 2008,
$55,650,000 of advances from the FHLBB were outstanding (See Note 8) and the
Bank held $3,143,000 in FHLBB stock.  On December 8, 2008, the FHLBB
placed a moratorium on stock repurchase requests to preserve capital and this
moratorium remains in effect as of December 31, 2008 and will continue until
further notice by the FHLBB.





F-12
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


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, 2008, the Bank
held $786,000 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, 2008 and 2007.




2008Less
      than 12 Months
                            12
      Months or Longer
                            TotalDescription
      of Securities
                            Fair
      Value
                            Unrealized
      Losses
                            Fair
      Value
                            Unrealized
      Losses
                            Fair
      Value
                            Unrealized
      Losses(in
      thousands)Mortgage
      Backed Securities
                            $       5,351
                            $        (526)
                            $       2,323
                            $      (324)
                            $         7,674
                            $        (850)Municipals
                            2,791
                            (117)
                            298
                            (1)
                            3,089
                            (118)Total
      Temporarily Impaired Securities
                            $      8,142
                            $        (643)
                            $      2,621
                            $      (325)
                            $      10,763
                            $        (968)2007Less
      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
                            $              -
                            $              -
                            $      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)







The
Company had investment securities with an aggregate book value of $2,946,000
that have been in a continuous loss position for twelve months or more at
December 31, 2008.  The aggregate unrealized loss for these securities
equaled $325,000 at December 31, 2008.  The unrealized loss on
investments is caused primarily 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, 2008.




During
2008, the Company sold three available-for-sale investment securities, received
total proceeds of $4,795,000 and recorded a gain of $238,000.  There
were no investment securities sales during 2007.





F-13
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


(5)
            LOANS





Major
classifications of loans at December 31 follow:





2008
                      
                      
                      2007Commercial
      and Industrial
                      
                      $
                      53,389,000
                      
                      
                      $
                      54,987,000Commercial
      Real Estate
                      
                      
                      152,080,000
                      
                      
                      
                      128,283,000Residential
      Real Estate
                      
                      
                      24,001,000
                      
                      
                      
                      21,610,000Consumer
                      
                      
                      12,926,000
                      
                      
                      
                      12,441,000Total
      loans
                      
                      
                      242,396,000
                      
                      
                      
                      217,321,000Less-Allowance
      for Loan Losses
                      
                      
                      (2,873,000
                      )
                      
                      
                      (2,844,000
                      )Total
      Loans, net
                      
                      $
                      239,523,000
                      
                      
                      $
                      214,477,000




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,
2008, no loans accruing interest were past due 90 days or more and $3,409,000 of
loans were on non-accrual status.  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.  Net deferred costs totaled $321,000 and $320,000
at December 31, 2008 and 2007, respectively.








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





2008
                      
                      
                      2007Balance,
      Beginning of Year
                      
                      $
                      2,844,000
                      
                      
                      $
                      2,807,000Provision
      for Loan Losses
                      
                      
                      1,359,000
                      
                      
                      
                      80,000Less:
      Loans Charged-off
                      
                      
                      (1,330,000
                      )
                      
                      
                      (82,000
                      )Recoveries
      of loans previously charged off
                      
                      
                      -
                      
                      
                      
                      39,000Balance,
      End of Year
                      
                      $
                      2,873,000
                      
                      
                      $
                      2,844,000




As of
December 31, 2008 and 2007, the Company’s recorded investment in impaired loans
and the related valuation allowance was as follows:





2008
                
                
                2007Recorded
      Investment
                
                
                Valuation
      Allowance
                
                
                Recorded
      Investment
                
                
                Valuation
      AllowanceImpaired
      LoansValuation
      Allowance Required
                
                $
                166,000
                
                
                $
                18,000
                
                
                $
                1,482,000
                
                
                $
                210,000No
      Valuation Allowance Required
                
                
                3,312,000
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                3,478,000
                
                
                $
                18,000
                
                
                $
                1,482,000
                
                
                $
                210,000





The
valuation allowance on impaired loans 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, 2008 and 2007 was
$2,318,000 and $585,000 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.  Interest income related to
currently non-accrual loans in the amount of $185,000 was recorded and received
during 2008 prior to the placement of these loans on non-accrual
status.





During
2008, the Bank acquired title to two properties through foreclosure and recorded
the assets as Other Real Estate Owned (OREO).  The first property was
acquired May 15, 2008 for a value of $879,000.  This value satisfied
the outstanding balance of the particular loan which the real estate was
securing and no charge to the allowance for loan losses was
required.  This property is comprised of three separate
parcels.  The entire property is currently listed for sale and the
Bank has received, and is evaluating, two offers to purchase all three parcels
of the property.  If the offers to purchase convert to an actual sale,
the Bank will not be required to take any loss on this
property.   The second property was




F-14
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


acquired
on August 21, 2008 and fair value was estimated to be $65,600.  A
charge of $33,000 to the allowance for loan losses was recorded at the time of
the foreclosure.  This property was subsequently sold on November 5,
2008 with no further loss to the Bank.





(6)
            PREMISES
      AND EQUIPMENT





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





2008
                        2007
                        
                        Estimated
      Useful LivesBuildings
                        $  639,000
                        $  639,000
                        
                        40
      yearsLeasehold
      Improvements
                        1,334,000
                        1,334,000
                        
                        Lesser
      of useful life or remaining term of the leaseSoftware
      and Equipment
                        1,460,000
                        1,418,000
                        
                        5
      yearsComputers
                        394,000
                        375,000
                        
                        3
      yearsFurniture
      and Fixtures
                        281,000
                        281,000
                        
                        10
      yearsProjects
      in Process
                        -
                        5,000
                        
                        N/A4,108,000
                        4,052,000Less-Accumulated
      Depreciation and Amortization
                        (2,001,000)
                        (1,674,000)Net
      Premises and Equipment
                        $
      2,107,000
                        $
      2,378,000





Depreciation
expense for the years ended December 31, 2008 and 2007 was $327,000 and
$398,000, respectively and is classified as occupancy and equipment expense in
the accompanying Consolidated Statements of Operations.





(7)
            DEPOSITS





A summary
of deposits at December 31 follows:





2008
                      
                      
                      2007Demand
      Deposits
                      
                      $
                      26,904,000
                      
                      
                      $
                      29,219,000Savings
      and NOW Accounts
                      
                      
                      49,788,000
                      
                      
                      
                      65,609,000Certificates
      of Deposit
                      
                      
                      119,873,000
                      
                      
                      
                      107,410,000Total
      Deposits
                      
                      $
                      196,565,000
                      
                      
                      $
                      202,238,000




Certificates
of deposit of $100,000 and over totaled $51,523,000 and $37,208,000 at December
31, 2008 and 2007, respectively.  Certificates of deposit under
$100,000 totaled $68,350,000 and $70,202,000 at December 31, 2008 and 2007,
respectively.





The following is a summary of original
maturities of certificates of deposits at December 31, 2008:




2009
                $   106,897,0002010
                11,251,0002011
                1,143,0002012
                483,0002014
                99,000Total
                $   119,873,000








F-15


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008




(8) 
BORROWINGS





Advances
from the FHLBB at December 31, 2008 and 2007 have the following
maturities:




2008
                  2007Year ending December 31:
                  Amount
                  Weighted Average Rate
                  Amount
                  Weighted Average Rate2008
                  $                     -
                  %
                  $
      12,000,000
                  4.41%2009
                  17,250,000
                  3.11
                  13,250,000
                  4.502010
                  2,500,000
                  3.56
                  500,000
                  3.972011
                  8,900,000
                  3.26
                  -
                  -2012
      and beyond
                  27,000,000
                  4.20
                  23,000,000
                  4.27Total
                  $   55,650,000
                  3.68%
                  $
      48,750,000
                  4.37%





FHLBB
advances include $26 million with call or put options associated with maturities
in 2009, 2012, 2013, 2014 and 2017.





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





Subordinated
debt at December 31, 2008 equaled $7.7 million and 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.  The interest rate at December 31,
2008 was 3.85% and the next repricing date is March 15, 2009.  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.





$3.0
million in overnight federal funds purchased was outstanding at December 31,
2008.  The borrowing was at a rate of 0.55%.  No overnight
federal funds purchased were outstanding on December 31, 2007.





Securities
under agreement to repurchase at December 31, 2008 equaled $11,035,000 and were
secured by mortgage-backed securities with a fair value of
$14,261,000.  These were generated by the customer deposit overnight
sweep product.  The weighted average overnight rate paid on December
31, 2008 was 0.49%.  At December 31, 2007, securities under agreement
to repurchase equaled $7,214,000 and were secured by mortgage-backed securities
and government sponsored enterprises with a fair value of
$18,985,000.  The overnight rate paid on December 31, 2007 was
3.37%.





(9)  
INCOME TAXES





The
components of federal and state income tax expense for the years ended December
31, 2008 and 2007 are as follows:




2008
                        2007Current
      Expense:Federal
                        $         2,000
                        $         8,000State
                        26,000
                        20,000Total
      Current Expense
                        28,000
                        28,000Deferred
      Expense (Benefit):Federal
                        (927,000)
                        163,000State
                        29,000
                        (12,000)Total
      Deferred (Benefit) Expense
                        (898,000)
                        151,000Income
      Tax (Benefit) Expense
                        $      (870,000)
                        $      179,000





F-16


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





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, 2008 and 2007 follows:




2008
                2007Pre-Tax
      Income
                $      (2,437,000)
                $      576,000Expected
      Federal Tax at 34%
                (829,000)
                196,000State
      Tax, net of Federal
                37,000
                5,000Impact
      of municipal income
                (91,000)
                (53,000)Impact
      of share based payments
                53,000
                47,000Impact
      of dividends received
                (41,000)
                -Other
                1,000
                (16,000)Total
      Income Tax (Benefit) Expense
                $       (870,000)
                $       179,000





The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
follow:





2008
                                  2007Deferred
      Income Tax AssetsAllowance
      for Loan Loss
                                  $         1,148,000
                                  $         1,164,000Net
      Operating Loss
                                  -
                                  137,000Impairment
      Loss on Investment Securities
                                  1,026,000
                                  -Other
                                  54,000
                                  96,000Net
      Deferred Tax Asset
                                  2,228,000
                                  1,397,000Deferred
      Income Tax LiabilitiesUnrealized
      Gain on Investment Securities
                                  53,000
                                  168,000Depreciation
                                  43,000
                                  106,000Gross
      Deferred Liabilities
                                  96,000
                                  274,000Net
      Deferred Taxes
                                  $        2,132,000
                                  $        1,123,000





Periods
of profitable operations have offset the 2008 loss and the initial operating
losses, to the extent of using all available tax loss
carry-forwards.  Carry-forwards, when available, 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 are
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 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, 2008 or 2007.  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.





(10)
            EMPLOYEE
      BENEFIT 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




F-17
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


on the
tenth anniversary of the grant date.  On May 28, 2008, the Board of
Directors authorized the granting of 72,365 shares exercisable at the then fair
market value of $7.00 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 2008:




Options
              
              Number of
                Shares
              
              
              Weighted-
                Average
                Exercise Price
                Per Share
              
              Weighted-Average
      Remaining Contractual TermOutstanding
      at January 1, 2008
              
              287,890
              
              
              $
              11.21
              
              6.97
      yearsGranted
              
              72,365
              
              
              
              7.00
              
              9.42
      yearsExercised
              
              -Forfeited
              
              3,360
              
              
              
              9.86Outstanding
      at December 31, 2008
              
              356,895
              
              
              $
              10.79
              
              6.64
      yearsExercisable
      at December 31, 2008
              
              203,900
              
              
              $
              11.55
              
              5.24
      years





The
weighted average grant date fair value of options granted during the years ended
December 31, 2008 and 2007 was $1.55 and $3.24, respectively.





The
aggregate intrinsic value of the options exercisable and outstanding at
December 31, 2008 equaled $584,000 and $973,000, respectively.  Total
unrecognized compensation costs associated with the unvested options outstanding
at December 31, 2008 equals $269,000 and will be recognized over an average of
1.8 years.




Compensation
expense recognized during the twelve months ended December 31, 2008 and 2007
equaled $157,000 and $137,000, respectively (the recognized tax benefit related
to this expense was $53,000 and $47,000, 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.





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 2008 and 2007.




2008
                2007Dividend
      yield
                0.00%
                3.00%Expected
      volatility
                19.00%
                35.00%Risk
      free interest rate
                3.53%
                4.60%Expected
      lives
                6.3
      years
                6.0
      yearsGrant
      date fair value
                $1.55
                $3.24







Equity
Incentive Plan





On May
15, 2008, the shareholders voted to approve the Company’s 2008 Equity Incentive
Plan (the “Equity Plan”) for employees, officers and directors of the Company or
any affiliate of the Company.  The Compensation Committee of the Board
of Directors administers the Equity Plan, which has authorized 100,000 shares
for grant.  Shares of restricted stock, incentive stock options and
non-qualified stock options may be granted under the Equity Plan.  The
authorization of grants, the type of award, the determination of number of
shares to be granted, the vesting schedule and the option price of each award
will be determined by the Compensation Committee of the Board of Directors on
the date of grant.





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, 2008, none of these organizers’ warrants had been
exercised.





F-18


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





401(k)
Plan





The
Company has a 401(k) Plan whereby substantially all employees participate in the
Plan.  Employees may contribute up to 75% of their compensation
subject to certain limits based on federal tax laws.  The Company
makes matching contributions equal to 100% of the first 3% and 50% of the next
3% of an employee's compensation contributed to the Plan.  For the
years ended December 31, 2008 and 2007, expense attributable to the Plan
amounted to $137,000 and $129,000, respectively.





(11)
            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, 2008 and 2007 are as
follows:




2008
                2007Balance,
      Beginning of Year
                $  8,407,000
                $  6,147,000Pre-existing
      Loans to New Related Party
                552,000
                -New
      Loans Granted During the Year
                6,158,000
                6,482,000Less-Repayments
                (3,986,000)
                (4,222,000)Balance,
      End of Year
                $  11,131,000
                $  8,407,000





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.





(12)
            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.





Financial
instruments with off-balance-sheet risk at December 31, 2008 and 2007
follow:





2008
                2007Commitments
      to Originate Loans
                $    4,470,000
                $    3,024,000Unadvanced
      Loan Proceeds
                12,136,000
                21,868,000Unused
      Lines of Credit
                17,559,000
                16,752,000Secured
      Commercial Lines of Credit
                30,917,000
                29,052,000Letters
      of Credit
                2,293,000
                2,230,000





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




F-19
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008




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, 2008:





Years
      Ending December 31,2009
            $     537,0002010
            541,0002011
            538,0002012
            472,0002013
            477,000Thereafter
            3,009,000Total
      Future Minimum Lease Payments
            $  5,574,000





Total
rent expense for the years ended December 31, 2008 and 2007 amounted to $560,000
and $556,000, respectively.





(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 under certain circumstances 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, 2008, 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, 2008 and 2007 were $6,000 and $3,000, respectively.





(f)
            Data
      Processing Service Agreements





The Bank
has entered into a contract for data and items processing services with Fiserv
Solutions, Inc.  The contract expires 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.





(13)
            MINIMUM
      REGULATORY CAPITAL REQUIREMENTS





The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies.  Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial statements and the
Bank’s financial statements.  Under capital adequacy guidelines and
the regulatory framework for Prompt Corrective Action (“PCA”), the Company and
the Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.  The Bank’s capital
amounts and classification are also subject to




F-20
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008




qualitative
judgments by the regulators about components, risk weightings and other
factors.  As of December 31, 2008, the Company and the Bank met all
capital adequacy requirements to which they are subject.





Federal
and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company.  The total amount
for dividends which may be paid in any calendar year cannot exceed the Bank’s
net income for the current year, plus the Bank’s net income retained for the two
previous years, without regulatory approval.  Loans or advances are
limited to 10% of the Bank’s capital stock and surplus on a secured
basis.  In addition, dividends paid by the Bank to the Company would
be prohibited if the effect thereof would cause the Bank’s capital to be reduced
below applicable minimum capital requirements.





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of Total and Tier I
Capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as
defined).  The following table reflects the capital ratios of the
Company and the Bank at December 31, 2008 and 2007.  The minimum
ratios necessary for the Bank to be categorized as “Well Capitalized” are also
reflected in the table below.  At December 31, 2008 and 2007, the Bank
was categorized as “Well Capitalized” as defined by federal
regulations.  There are no conditions or events since the last filing
with the FDIC that management believes have changed the Bank’s
category.





(Dollars
      in Thousands)
                                              Company
                                              
                                              Bank
                                              
                                              Minimum
      Capital Require-ments
                                              
                                              For
      Bank to be “Well Capitalized” under PCA provisionsAs of December 31, 2008:
                                              Amount
                                              Ratio
                                              
                                              Amount
                                              RatioTier
      1 Leverage Ratio
                                              $24,861
                                              8.33%
                                              
                                              $23,606
                                              7.92%
                                              
                                              4.00%
                                              
                                              5.00%Tier
      1 Risk-Based ratio
                                              24,861
                                              10.43%
                                              
                                              23,606
                                              9.90%
                                              
                                              4.00%
                                              
                                              6.00%Total
      Risk-Based ratio
                                              28,828
                                              12.09%
                                              
                                              26,540
                                              11.14%
                                              
                                              8.00%
                                              
                                              10.00%




As of December 31, 2007:Tier
      1 Leverage Ratio
                  $27,153
                  9.40%
                  
                  $25,058
                  8.68%
                  
                  4.00%
                  
                  5.00%Tier
      1 Risk-Based ratio
                  27,153
                  12.12%
                  
                  25,058
                  11.20%
                  
                  4.00%
                  
                  6.00%Total
      Risk-Based ratio
                  29,951
                  13.36%
                  
                  27,856
                  12.45%
                  
                  8.00%
                  
                  10.00%











(14)
            FAIR
      VALUES OF ASSETS AND LIABILITIES





Determination
of Fair Value





The
Company uses fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. In accordance
with FASB Statement No. 157, the fair value of a financial instrument is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement
date.  Fair value is best determined based upon quoted market
prices.  However, in many instances, there are no quoted market prices
for the Company’s various financial instruments.  In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques.  Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows.  Accordingly, the fair value estimates
may not be realized in an immediate settlement of the instrument.





Fair
Value Hierarchy





In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities generally measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability
of the assumptions used to determine fair value.





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





F-21


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


Level 2 –
Valuation is based on observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.  For example, Level 2 assets and liabilities may include
debt securities with quoted prices that are traded less frequently than
exchange-traded instruments.








Level 3 –
Valuation is based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities.  Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or
estimation.





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





Cash and
cash equivalents - The carrying amounts of cash and short-term instruments
approximate fair values based on the short-term nature of the
assets.





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





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





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





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





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





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





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





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





Commitments
to Extend Credit and Commercial and Standby Letters of Credit- The fair value of
commitments to extend credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present






F-22
 
 CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008


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, 2008 and 2007 was immaterial to the consolidated financial
statements as a whole.





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





Assets
and Liabilities Measured at Fair Value on a Recurring Basis





Assets
and liabilities measured at fair value on a recurring basis are summarized
below:





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








Assets
Measured at Fair Value on a Non-recurring Basis





The
Company may also be required, from time to time, to measure certain other
financial assets on a nonrecurring basis in accordance with generally accepted
accounting principles. These adjustments to fair value usually result from
application of lower-of cost-or-market accounting or write-downs of individual
assets. The following table summarizes the fair value hierarchy used to
determine each adjustment and the carrying value of the related individual
assets as of December 31, 2008.


Level 1
              Level 2
              Level 3AssetsImpaired
      Loans
              $            -
              $              -
              $
      1,852,000Total
      Assets
              $            -
              $              -
              $
      1,852,000





The
amount of loans represents the carrying value and related write-downs of
impaired loans for which adjustments are based on the estimated value of the
collateral.  Determination of the fair value of level 3 items in the
above table included management’s consideration of the value of loan collateral
such as accounts receivable (discounted for the probability of collection), and
equipment, (estimating the equipment value at the time of a potential sale) plus
the value of underlying personal guarantees of principals of the borrowing
entities.  Real estate acquired through foreclosure is initially
recorded at fair value less estimated selling costs, and thereafter is adjusted
to the lower of carrying value or market value.  The fair value of
other real estate owned is based upon property appraisals and an analysis of
similar properties where possible.





During
2008, $3,544,000 in loans carried at fair value on a nonrecurring basis were
written-down by charges of $1,079,000 to the allowance for loan losses and
principal reductions of $613,000 were received to bring their fair value to
$1,852,000 at December 31, 2008.





Summary
of Fair Values of Financial Instruments





As
required under FASB Statement No. 107, “Disclosures about Fair Value of
Financial Instruments,” the estimated fair values, and related carrying or
notional amounts, of the Company’s financial instruments are as follows at
December 31, 2008 and 2007.  Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements.  Accordingly, the aggregate fair value amounts presented
herein may not necessarily represent the underlying fair value of the
Company.





F-23


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





2008
                          
                          
                          2007(Dollars
      in thousands)
                          
                          Carrying
      Amount
                          
                          
                          Fair Value
                          
                          
                          Carrying
      Amount
                          
                          
                          Fair ValueFinancial AssetsCash
      and Cash Equivalents
                          
                          $
                          4,508
                          
                          
                          $
                          4,508
                          
                          
                          $
                          8,825
                          
                          
                          $
                          8,825Securities
      Available-for-Sale
                          
                          
                          31,314
                          
                          
                          
                          31,314
                          
                          
                          
                          45,597
                          
                          
                          
                          45,597Securities
      Held-to-Maturity
                          
                          
                          8,950
                          
                          
                          
                          8,798
                          
                          
                          
                          11,687
                          
                          
                          
                          11,720Federal
      Reserve Bank Stock
                          
                          
                          786
                          
                          
                          
                          786
                          
                          
                          
                          761
                          
                          
                          
                          761Federal
      Home Loan Bank Stock
                          
                          
                          3,143
                          
                          
                          
                          3,143
                          
                          
                          
                          3,052
                          
                          
                          
                          3,052Loans,
      Net
                          
                          
                          239,523
                          
                          
                          
                          240,642
                          
                          
                          
                          214,477
                          
                          
                          
                          212,009Accrued
      Interest Receivable
                          
                          
                          977
                          
                          
                          
                          977
                          
                          
                          
                          1,100
                          
                          
                          
                          1,100Financial LiabilitiesDepositsDemand
      Deposits
                          
                          
                          26,904
                          
                          
                          
                          26,155
                          
                          
                          
                          29,219
                          
                          
                          
                          29,219Savings
      and NOW Accounts
                          
                          
                          49,788
                          
                          
                          
                          48,728
                          
                          
                          
                          65,609
                          
                          
                          
                          65,609Certificates
      of Deposit
                          
                          
                          119,873
                          
                          
                          
                          120,790
                          
                          
                          
                          107,410
                          
                          
                          
                          107,453FHLBB
      Advances
                          
                          
                          55,650
                          
                          
                          
                          56,788
                          
                          
                          
                          48,750
                          
                          
                          
                          48,713Federal
      Funds Purchased
                          
                          
                          3,000
                          
                          
                          
                          3,000
                          
                          
                          
                          -
                          
                          
                          
                          -Securities
      Under Agreements to Repurchase
                          
                          
                          11,035
                          
                          
                          
                          11,035
                          
                          
                          
                          7,214
                          
                          
                          
                          7,214Subordinated
      Debentures
                          
                          
                          7,732
                          
                          
                          
                          7,732
                          
                          
                          
                          7,732
                          
                          
                          
                          7,732Accrued
      Interest Payable
                          
                          
                          795
                          
                          
                          
                          795
                          
                          
                          
                          1,650
                          
                          
                          
                          1,650








F-24


CNB
FINANCIAL CORP.
 
 Notes to
Consolidated Financial Statements
 December
31, 2008





(15)
            CNB
      FINANCIAL CORP. ONLY FINANCIAL
STATEMENTS





Balance
      Sheet
                      
                      2008
                      
                      
                      2007ASSETSTotal
      Cash and Due From Banks
                      
                      $
                      2,089,000
                      
                      
                      $
                      2,588,000Total
      Investment in Subsidiary
                      
                      
                      24,983,000
                      
                      
                      
                      26,237,000Due
      to /from Commonwealth National Bank
                      
                      
                      213,000
                      
                      
                      
                      -Prepaid
      Taxes
                      
                      
                      -
                      
                      
                      
                      43,000Deferred  Taxes
                      
                      
                      -
                      
                      
                      
                      38,000$
                      27,285,000
                      
                      
                      $
                      28,906,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Accrued
      Interest Payable on Subordinated Debentures
                      
                      $
                      14,000
                      
                      
                      $
                      21,000Subordinated
      Debentures
                      
                      
                      7,732,000
                      
                      
                      
                      7,732,000Total
      Liabilities
                      
                      
                      7,746,000
                      
                      
                      
                      7,753,000Stockholders’
      Equity:Total
      Stockholders’ Equity
                      
                      
                      19,539,000
                      
                      
                      
                      21,153,000$
                      27,285,000
                      
                      
                      $
                      28,906,000Statement
      of OperationsIncome:Interest
      Income on Deposits
                      
                      $
                      27,000
                      
                      
                      $
                      93,000Total
      Income
                      
                      
                      27,000
                      
                      
                      
                      93,000Operating
      Expenses:Interest
      Expense
                      
                      
                      386,000
                      
                      
                      
                      554,000Total
      Operating Expenses
                      
                      
                      386,000
                      
                      
                      
                      554,000Loss
      Before Equity in Undistributed Income of Subsidiary
                      
                      
                      (359,000
                      )
                      
                      
                      (461,000
                      )Equity
      in Undistributed (Loss) Income of Subsidiary
                      
                      
                      (1,208,000
                      )
                      
                      
                      858,000Net
      (Loss) Income
                      
                      $
                      (1,567,000
                      )
                      
                      $
                      397,000





F-25


CNB
FINANCIAL CORP.
 
 Notes
to Consolidated Financial Statements
 December
31, 2008




Statement
of Cash Flows


Cash
      Flows from Operating Activities:
                    
                    2008
                    
                    
                    2007Net
      (Loss) Income
                    
                    $
                    (1,567,000
                    )
                    
                    $
                    397,000Adjustments
      to Reconcile Net Income to Net Cash Used in Operating
      Activities–Increase
      in Other Assets
                    
                    
                    (133,000
                    )
                    
                    
                    (16,000
                    )Decrease  in
      Accrued Expenses and Other Liabilities
                    
                    
                    (7,000
                    )
                    
                    
                    (5,000
                    )Equity
      in Undistributed Income of Subsidiary
                    
                    
                    1,208,000
                    
                    
                    
                    (866,000
                    )Net
      Cash Used in Operating Activities
                    
                    
                    (499,000
                    )
                    
                    
                    (490,000
                    )Net
      Decrease in Cash and Cash Equivalents
                    
                    
                    (499,000
                    )
                    
                    
                    (490,000
                    )Cash
      and Cash Equivalents, Beginning of the Period
                    
                    
                    2,588,000
                    
                    
                    
                    3,078,000Cash
      and Cash Equivalents, End of the Period
                    
                    $
                    2,089,000
                    
                    
                    $
                    2,588,000The
      Statement of Stockholders’ Equity for the parent company is identical to
      the Consolidated Statement of Stockholders’ Equity which appears on page
      F-4




F-26






Signatures








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








CNB
      FINANCIAL CORP.By:
            /s/ Charles R. ValadeDated:
      March 19, 2009
            
            Charles
      R. Valade, President





Pursuant to the requirements of
Securities Exchange Act of 1934, 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 19, 2009Charles
      R. Valade
            President/s/ William M. Mahoney
            
            March 19, 2009William
      M. Mahoney
            Treasurer
      and CFO/s/ Paula A. Aiello
            
            March 19, 2009Paula
      A. Aiello
            Director/s/ Gerald D. Cohen
            
            March 19, 2009Gerald
      D. Cohen
            Director/s/ Cary J. Corkin
            
            March 19, 2009Cary
      J. Corkin
            Director/s/ Lawrence J. Glick
            
            March 19, 2009Lawrence
      J. Glick
            Director/s/ Stephen J. Granger
            
            March 19, 2009Stephen
      J. Granger
            Director/s/ George L. Kaplan
            
            March 19, 2009George
      L. Kaplan
            Director/s/ John P. Lauring
            
            March 19, 2009John
      P. Lauring
            Director





S-1








Signature
              Title
              Date/s/ Ralph D. Marois
              
              March 19, 2009Ralph
      D. Marois
              Director/s/ Henry T. Michie
              
              March 19, 2009Henry
      T. Michie
              Director/s/ Harris L. MacNeill
              
              March 19, 2009Harris
      L. MacNeill
              Director/s/ Claire A. O’Connor
              
              March 19, 2009Claire
      A. O’Connor
              Director/s/ Bryan T. Rich
              
              March 19, 2009Bryan
      T. Rich
              Director/s/ J. Robert Seder
              
              March 19, 2009J.
      Robert Seder
              Director/s/ Thomas J. Wickstrom
              
              March 19, 2009Thomas
      J. Wickstrom
              Director





S-2