**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-KSB**





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


**for
      the fiscal year ended December 31, 2006**


**OR**


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


**for
      the transition period from _______________to______________**





**Commission
      File Number: 000-51685**





**CNB
      FINANCIAL CORP.**


(Name
      of
      small business issuer in its charter)





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





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





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


Title
                of each class
            Name
                of each exchange on which registered**None**
            **N/A**





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


**Common
      Stock** **,
      par value $1.00 per share**




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





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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. [ ]





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





The
      issuer’s revenues for its fiscal year ended December 31, 2006, were
      $17,518,000.





The
      aggregate market value of the issuer’s voting and non voting common equity held
      by non-affiliates (based upon the trading price of $11.75 per share for the
      issuer’s common stock on February 28, 2007, and for the purpose of this
      computation only, on the assumption that all of the issuer’s directors and
      officers are affiliates) was approximately $21,503,000.





At
      March
      26, 2007, the registrant had 2,283,208 shares of common stock issued and
      outstanding.





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





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Proxy Statement for the 2007 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-KSB**


**For
      the Fiscal Year Ended December 31, 2006**





**TABLE
      OF CONTENTS**








**PART
                I**
            **Page**Item
                1
            Description
                of Business
            1Item
                2
            Description
                of Property
            10Item
                3
            Legal
                Proceedings
            11Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            11**PART
                II**Item
                5
            Market
                for Common Equity Related Stockholder
                Matters
            12Item
                6
            Management’s
                Discussion and Analysis or Plan of
                Operation
            12Item
                7
            Financial
                Statements
            28Item
                8
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            28Item
                8A
            Controls
                and Procedures
            28Item
                8B
            Other
                Information
            28**PART
                III**Item
                9
            Directors,
                Executive Officers, Promoters and Control
                Persons and Corporate Governance; Compliance Section 16(a) of the
                Exchange
                Act
            28Item
                10
            Executive
                Compensation
            29Item
                11
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            29Item
                12
            Certain
                Relationships and Related Transactions, and
                Director Independence
            30Item
                13
            Exhibits
            31Item
                14
            Principal
                Accountant Fees and Services
            31Signatures
            S-1,
                S-2














**PART
      I**





**ITEM
      1 - DESCRIPTION OF BUSINESS**





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





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





**General
      Description of Business**





**Organization**





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





**Company
      Formation**





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





**The
      Business of CNB Financial Corp. and Commonwealth National
      Bank**





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





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




1


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.
      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, 2006, the Bank employed 56 full-time employees and 12 part-time
      employees. The Bank provides a number of benefits such as health, disability,
      and life insurance for qualified employees. None of the Bank’s employees are
      subject to collective bargaining agreements.





**Risk
      Factors:**





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





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





Our
      assets have increased $204.7 million, or 267%, from $76.6 million at December
      31, 2002 to $281.4 million at December 31, 2006, primarily due to increases
      in
      loans and investment securities. We expect to continue to experience growth
      in
      the amount of our assets, the level of our deposits and the scale of our
      operations. Achieving our growth targets requires us to attract customers that
      currently bank at other financial institutions in our market, thereby increasing
      our share of the market. Our ability to successfully grow will depend on a
      variety of factors, including our ability to attract and retain experienced
      bankers, the continued availability of desirable business opportunities, the
      competitive responses from other financial institutions in our market areas
      and
      our ability to manage our growth. While we believe we have the management
      resources and internal systems in place to successfully manage our future
      growth, there can be no assurance growth opportunities will be available or
      that
      we will successfully manage our growth. If we do not manage our growth
      effectively, we may not be able to achieve our business plan, and our business
      and prospects could be harmed.





2


**Certain
      interest rate movements may hurt our earnings.**





Interest
      rates have recently been at historically low levels. However, since
      June 30, 2004, the U.S. Federal Reserve has increased its target for the
      federal funds rate seventeen times, from 1.00% to 5.25%. While these short-term
      market interest rates (which we use as a guide to price our deposits) have
      increased, longer-term market interest rates (which we use as a guide to price
      our longer-term loans) have not. This
      “flattening” of the market yield curve has resulted in our net interest margin
      declining from 3.44% for 2004 to 3.27% for 2006. If short-term interest rates
      continue to rise, and if rates on our deposits and borrowings continue to
      reprice upwards faster than the rates on our long-term loans and investments,
      we
      would experience further compression of our interest rate spread and net
      interest margin, which would have a negative effect on our
      profitability.





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





At
      December 31, 2006, our loan portfolio consisted of $110.7 million, or 55% of
      commercial real estate loans and $62.2 million, or 31% of commercial business
      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.**





We
      have
      achieved significant growth in earnings per share 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. Various factors, such as
      economic conditions, regulatory and legislative considerations and competition,
      may also impede or restrict our ability to increase earnings at this same rate.





**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, 2006, we held 2.2% of the deposits
      in Worcester County, Massachusetts, which was the 20 th 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.





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





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





3


**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 $80.2 million at December
      31,
      2003 to $172.9 million at December 31, 2006. A large portion of our commercial
      loan portfolio is unseasoned and does not provide us with a significant payment
      history pattern with which to judge future collectibility. These loans have
      also
      not been subjected to unfavorable economic conditions. As a result, it is
      difficult to predict the future performance of this part of our loan portfolio.
      These loans may have delinquency or charge-off levels above our historical
      experience, which could adversely affect our future performance. Further,
      commercial loans generally have larger balances and involve a greater risk
      than
      one-to-four-family residential mortgage loans. Accordingly, if we make any
      errors in judgment in the collectibility of our commercial loans, any resulting
      charge-offs may be larger on a per loan basis than those incurred with our
      residential mortgage loan portfolio.





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





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





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





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





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





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





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





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





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.





4


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





·  actual
      or
      anticipated fluctuations in our operating results;




·  changes
      in interest rates;




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




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




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




·  future
      sales of our common stock;




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




·  other
      developments affecting our competitors or us.




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





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





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





**Regulation
      and Supervision**





**General**





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





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





5


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





**Holding
      Company Regulation**





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





A
      bank
      holding company generally is prohibited from engaging in, or acquiring direct
      or
      indirect control of more than 5% of the voting securities of any company
      conducting non-banking activities. One of the principal exceptions to this
      prohibition is for activities found by the FRB to be so closely related to
      banking or managing or controlling banks to be a proper incident thereto. Some
      of the principal 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 of 1999 authorizes 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 authorizes 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.





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.
      See
“Capital Requirements.” CNB Financial Corp.’s total and Tier 1 capital exceed
      these requirements.





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





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





6


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





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





***Massachusetts
      Holding Company Regulation.*** In
      addition to the federal holding company regulations, a bank holding
      company organized or doing business in Massachusetts must comply with
      regulations under Massachusetts law. Approval of the Massachusetts regulatory
      authorities would be required for the CNB Financial Corp. to acquire 25% or
      more
      of the voting stock of another depository institution. Similarly, prior
      regulatory approval would be necessary for any person or company to acquire
      25%
      or more of the voting stock of CNB Financial Corp. The term “bank holding
      company,” for the purpose of Massachusetts law, is defined generally to include
      any company which, directly or indirectly, owns, controls or holds with power
      to
      vote more than 25% of the voting stock of each of two or more banking
      institutions, including commercial banks and state co-operative banks, savings
      banks and savings and loan association and national banks, federal savings
      banks
      and federal savings and loan associations. In general, a holding company
      controlling, directly or indirectly, only one banking institution will not
      be
      deemed to be a bank holding company for the purposes of Massachusetts law.
      Under
      Massachusetts law, the prior approval of the Board of Bank Incorporation is
      required before the following: any company may become a bank holding company;
      any bank holding company acquires direct or indirect ownership or control of
      more than 5% of the voting stock of, or all or substantially all of the assets
      of, a banking institution; or any bank holding company mergers 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. CNB Financial Corp.
      has
      no current plan or arrangement to acquire ownership or control, directly or
      indirectly, of 25% or more of the voting stock of another banking
      institution.




**Acquisition
      of CNB Financial Corp.**





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





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





**Federal
      Banking Regulations**





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





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





7


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





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





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





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





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





In
      addition to the assessment for deposit insurance, institutions are required
      to
      make payments on bonds issued in the late 1980s by the Financing Corporation
      to
      recapitalize a predecessor deposit insurance fund. This payment is established
      quarterly and during the calendar year ending December 31, 2006 averaged 1.28
      basis points of assessable deposits.





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




8


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, 2006, 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 $2.8 million.





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





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





***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 compensation,
      fees
      and benefits. If the appropriate federal banking agency determines that an
      institution fails to meet any standard prescribed by the Guidelines, the agency
      may require the institution to submit to the agency an acceptable plan to
      achieve compliance with the standard. The final rule establishes deadlines
      for
      the submission and review of such safety and soundness compliance plans when
      such plans are required.





9


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





***USA
      Patriot Act.*** The
      USA
      Patriot Act of 2001 (the “Patriot Act”), designed to deny terrorists and others
      the ability to obtain anonymous access to the United States financial system,
      has significant implications for depository institutions, brokers, dealers
      and
      other businesses involved in the transfer of money. The Patriot Act mandated
      that financial institutions implement additional policies and procedures with
      respect to, or additional measures designed to address, matters such as money
      laundering, suspicious activities and currency transaction
      reporting.





**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 $45.8
      million or less (subject to adjustment by the FRB) the reserve requirement
      is
      3%; and for accounts aggregating greater than $45.8 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 $45.8
      million. The first $8.5 million of otherwise reservable balances (subject to
      adjustments by the FRB) are exempted from the reserve requirements.





**Federal
      Home Loan Bank System**





The
      Bank
      is a member of the Federal Home Loan Bank System, which consists of 12 regional
      Federal Home Loan Banks (“FHLBs”). The FHLB provides a central credit facility
      primarily for member institutions. The Bank, as a member of the FHLB of Boston,
      is required to acquire and hold shares of capital stock in the FHLB of Boston.
      The Bank was in compliance with this requirement with an investment in FHLB
      stock at December 31, 2006 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.





**ITEM
      2 - DESCRIPTION OF PROPERTY**





**Company
      and Bank Premises**





The
      Bank
      leases administrative and banking offices located at 33 Waldo Street, Worcester,
      Massachusetts. The Waldo Street facility lease is for an initial term of fifteen
      years, which term ends in 2016, and provides two five-year renewal options.
      Leasehold improvements were made at a cost of approximately $440,000. This
      amount includes the construction of a drive-through teller and ATM lane. Gross
      rentals during the initial term were $16.73 per square foot including parking
      for employees and customers, heating and air conditioning. Rentals increase
      at
      the rate of 7% every third year. The lease is currently in the second three
      year
      period of the initial term and the Bank’s effective costs are now $17.91 per
      square foot plus escalations. The Bank directly pays costs for electricity
      serving the Bank’s premises and signs, as well as cleaning and snow removal
      costs. The lease includes escalation clauses wherein the Bank will share in
      30%
      of the increases in the costs for electricity servicing tenant common areas,
      heating and real estate tax incurred by the landlord compared to the base year
      of 2000.




10


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. Leasehold improvements were made at
      a
      cost of approximately $133,000. Gross rentals during the initial term are $28.50
      per square foot ($80,370 per annum) including parking for employees and
      customers, heating and air conditioning. Lease payments increase to $32.78
      per
      square foot ($92,440 per annum) at the commencement of the fourth year of the
      lease term. 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).
      The lease includes escalation clauses wherein the Bank will share in increases
      in the common area maintenance costs.





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 are $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. The Bank constructed a building upon the leased site at a
      cost
      of approximately $523,000, which opened as a bank branch facility on January
      27,
      2003.





During
      2004, the Bank purchased a parcel of land at 701 Church Street, Northbridge,
      Massachusetts and constructed an office building at a cost of approximately
      $580,000. Upon completion of the building, the Bank sold the premises and
      entered into a leaseback agreement for an initial term of twenty years, which
      term ends in 2024 and provides for two five-year extension options. On November
      15, 2004, the Bank opened a bank branch facility at the building. Gross rentals
      will increase by 3% annually during the initial twenty year term. The gross
      rent
      for the current twelve-month period (11/1/06 to 10/31/07) is equal to
      $69,131.





On
      January 27, 2006, the Bank executed a lease for approximately 2,000 square
      feet
      in a multi-tenant building at 1393 Grafton Street, Worcester, Massachusetts
      for
      a branch facility. The lease includes an initial term of ten years and provides
      three five-year renewal options. Gross rentals during the five years are $16.00
      per square foot ($32,000 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. The lease includes
      escalation clauses wherein the Bank will share in increases in the common area
      maintenance costs, insurance and real estate taxes.





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





On
      August
      14, 2006, the Bank entered into a lease for a building located at 26 West
      Boylston Street, West Boylston, Massachusetts for a bank branch. The term of
      the
      lease is ten years, commencing on July 1, 2006. Under the terms of the lease,
      base rent is $2,400 per month during the first year with a 3% increase each
      year. 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.








**ITEM
      3 - LEGAL PROCEEDINGS**





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





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





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





11


**PART
      II**





**ITEM
      5 -**  **MARKET
      FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS**





The
      Company’s common stock is listed on the Over-The-Counter Bulletin Board under
      the symbol CFNA. At the date hereof, there are approximately 728 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.





**Sales
                Price**High
            
            Low1stQuarter 2005
            
            $
                13.00
            
            $
                12.402ndQuarter 2005
            
            $
                12.85
            
            $
                10.803rd
                Quarter 2005
            
            $
                11.95
            
            $
                10.254th
                Quarter 2005
            
            $
                14.75
            
            $  
                8.651stQuarter 2006
            
            $
                24.00
            
            $
                12.152ndQuarter 2006
            
            $
                14.50
            
            $
                12.553rd
                Quarter 2006
            
            $
                14.50
            
            $
                12.754th
                Quarter 2006
            
            $
                13.80
            
            $
                11.25




The
      Company is subject to Massachusetts law, which prohibits distributions to
      stockholders if, after giving effect to the distribution, the corporation would
      not be able to pay its debts as they become due in the usual course of business
      or the corporation’s total assets would be less than the sum of its total
      liabilities plus the amount that would be needed, if the corporation 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.





**ITEM
      6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATION**





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





**General**





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




12


This
      discussion and analysis covers material changes in financial condition and
      liquidity that have occurred since December 31, 2005 as well as the results
      of
      operations during the year ended December 31, 2006.





**Liquidity
      and Interest Rate Sensitivity**





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





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





**Capital
      Adequacy**





The
      Company has been successful in achieving the primary targets contained within
      its business plan, as evidenced by the growth in the loan and deposit portfolios
      and thus, growth in total assets. The business plan for 2007 reflects continued
      levels of growth in quality loans, deposits and total assets, and continued
      profitability on a quarter-to-quarter basis. The Company anticipates in its
      2007
      Business Plan that current levels of Stockholders’ Equity, coupled with a
      continuation of profitable operations, will be sufficient to support such growth
      in total assets by meeting the FDIC, OCC and FRB requirements for capital
      adequacy.





**Executive
      Summary**





During
      2006 the Company experienced net interest margin contraction, largely the result
      of the flat to inverted yield curve, competitive deposit pricing conditions
      and
      a higher cost of funds. In response to these conditions, the Company took
      various actions to reduce low net interest margin matches of assets and
      liabilities. Accordingly, asset growth slowed considerably during the latter
      half of 2006 yet total assets at December 31, 2006 were $32 million or 13%
      higher than at December 31, 2005. During 2006, the Company opened two branches
      in leased facilities and leased additional space to accommodate the growth
      of
      its Operations Department.





**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.




13


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




**RESULTS
      OF OPERATIONS**





**Summary**





The
      Company recorded consolidated net income of $636,000 for 2006 compared to
      $2,565,000 for the full year 2005. The 2005 results include the impact of the
      $1.5 million tax benefit caused by the reduction of the valuation reserve for
      the tax loss carry forward. Net interest income growth of 9% was achieved by
      the
      combination of a 20% year over year growth in average earning assets, offset
      by
      a 33 basis points reduction in the net interest margin. This margin contraction
      was caused by the above mentioned flat to inverted yield curve, competitive
      deposit pricing conditions and a higher cost of funds.





**Net
      Interest Income**





During
      2006, the Company generated $16,970,000 in interest income, which was offset
      by
      interest expense of $8,572,000, resulting in net interest income of $8,398,000,
      an increase of 9% versus 2005. The increase in net interest income was primarily
      due to a 20% increase in the average balance of interest-earning assets and
      a 71
      basis point increase in the average yield of interest-earning assets, offset
      by
      a 21% increase in the average balance of deposits and borrowed funds and a
      108
      basis point increase in the cost of funds. The net yield on interest-earning
      assets equaled 3.27% for the year, a decrease of 33 basis points from the prior
      year. This contraction was caused by the previously mentioned flat to inverted
      yield curve environment, competitive pricing conditions and a greater reliance
      upon higher cost deposit and borrowed funds categories to support earning
      assets. During the prior year, the Company generated $12,580,000 in interest
      income, which was offset by interest expense of $4,877,000, resulting in net
      interest income of $7,703,000. The resulting net yield on interest earning
      assets equaled 3.60% for the full year 2005.





14


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, 2006, 2005 and 2004. 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 Differential****Year
                Ended**
              **December
                31, 2006**
            
            **Year
                Ended**
              **December
                31, 2005**
            
            **Year
                Ended**
              **December
                31, 2004**(Dollars
                in thousands)
            
            **Average**
              **Balance**
            
            **Interest**
              **Income
                and**
              **Expense**
              **(Taxable**
              **Equivalent)**
            
            **Average**
              **Yield/Rate**
            
            **Average**
              **Balance**
            
            **Interest**
              **Income
                and**
              **Expense**
              **(Taxable**
              **Equivalent)**
            
            **Average**
              **Yield/Rate**
            
            **Average**
              **Balance**
            
            **Interest**
              **Income
                and**
              **Expense**
              **(Taxable**
              **Equivalent)**
            
            **Average**
              **Yield/Rate**INTEREST
                EARNING ASSETS:Total
                Loans(1)
            
            $
            190,282
            
            $
            13,863
            
            
            7.29
            %
            $
            163,577
            
            $
            10,638
            
            
            6.50
            %
            $
            127,952
            
            $
            7,406
            
            
            5.79
            %Investments,
                Fed Funds and Other Interest Earning Assets
            
            
            67,749
            
            
            3,149
            
            
            4.65
            %
            
            50,566
            
            
            1,944
            
            
            3.84
            %
            
            37,995
            
            
            1,172
            
            
            3.08
            %Total
                Interest Earnings Assets
            
            
            258,031
            
            
            17,012
            
            
            6.59
            %
            
            214,143
            
            
            12,582
            
            
            5.88
            %
            
            165,947
            
            
            8,578
            
            
            5.17
            %Allowance
                for Loan Losses
            
            
            (2,724
            )
            
            
            
            
            
            
            
            (2,296
            )
            
            
            
            
            
            
            
            (1,631
            )Cash
                and Due from Banks
            
            
            5,242
            
            
            
            
            
            
            
            
            4,858
            
            
            
            
            
            
            
            
            4,096Premises
                and Equipment
            
            
            2,101
            
            
            
            
            
            
            
            
            1,914
            
            
            
            
            
            
            
            
            2,103Other
                Assets
            
            
            4,888
            
            
            
            
            
            
            
            
            1,756
            
            
            
            
            
            
            
            
            660Total
                Assets
            
            $
            267,538
            
            
            
            
            
            
            
            $
            220,375
            
            
            
            
            
            
            
            $
            171,175INTEREST
                BEARING LIABILITIESSavings,
                NOW and Money Market Deposits
            
            
            46,645
            
            
            811
            
            
            1.74
            %
            
            56,321
            
            
            965
            
            
            1.71
            %
            
            52,577
            
            
            680
            
            
            1.29
            %Time
                Deposits
            
            
            121,081
            
            
            5,235
            
            
            4.32
            %
            
            93,961
            
            
            2,888
            
            
            3.07
            %
            
            65,791
            
            
            1,679
            
            
            2.55
            %Borrowed
                Funds
            
            
            45,515
            
            
            2,001
            
            
            4.40
            %
            
            30,180
            
            
            1,003
            
            
            3.33
            %
            
            18,614
            
            
            510
            
            
            2.74
            %Trust
                Preferred
            
            
            7,500
            
            
            525
            
            
            6.90
            %
            
            329
            
            
            21
            
            
            6.26
            %
            
            -
            
            
            -
            
            
            -Total
                Interest Bearing Liabilities
            
            
            220,741
            
            
            8,572
            
            
            3.88
            %
            
            180,791
            
            
            4,877
            
            
            2.70
            %
            
            136,982
            
            
            2,869
            
            
            2.10
            %Demand
                Deposits
            
            
            26,415
            
            
            
            
            
            
            
            
            22,968
            
            
            
            
            
            
            
            
            18,785Total
                Deposits and Borrowed Funds
            
            
            247,156
            
            
            8,572
            
            
            3.47
            %
            
            203,759
            
            
            4,877
            
            
            2.39
            %
            
            155,767
            
            
            2,869
            
            
            1.84
            %Other
                Liabilities
            
            
            2,104
            
            
            
            
            
            
            
            
            557
            
            
            
            
            
            
            
            
            548Stockholders’
                Equity
            
            
            18,278
            
            
            
            
            
            
            
            
            16,059
            
            
            
            
            
            
            
            
            14,860Total
                Liabilities and Stockholders’ Equity
            
            $
            267,538
            
            
            
            
            
            
            
            $
            220,375
            
            
            
            
            
            
            
            $
            171,175Net
                Interest Income
            
            
            
            
            $
            8,440
            
            
            
            
            
            
            
            $
            7,705
            
            
            
            
            
            
            
            $
            5,709Interest
                Rate Spread
            
            
            
            
            
            
            
            
            3.12
            %
            
            
            
            
            
            
            
            3.48
            %
            
            
            
            
            
            
            
            3.33
            %Net
                Yield on Interest Earning Assets (Net
              Interest
                Margin)
            
            
            
            
            
            
            
            
            3.27
            %
            
            
            
            
            
            
            
            3.60
            %
            
            
            
            
            
            
            
            3.44
            %




(1)
      Non-accrual loans are included in average amounts outstanding.


15


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**
            **2006**
            **2005**As
                a percentage of average earning assetsLoans
            73.7%
            76.4%Other
                earning assets
            26.3%
            23.6%Average
                earning assets
            100.0%
            100.0%Savings
                and NOW
            18.1%
            26.3%Certificates
                of deposit
            46.9%
            43.9%Borrowed
                funds
            20.6%
            14.3%Average
                interest bearing liabilities
            85.6%
            84.5%Earning
                asset ratio
            96.5%
            97.2%





***Rate/Volume
      Analysis*** **.** The
      following tables set forth the effects of changing rates and volumes on our
      net
      interest income for 2006 compared to 2005 and for 2005 compared to 2004. 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.





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








2005
                Compared to 2004(Dollars
                in thousands)
            
            **Volume**
            
            **Rate**
            
            **Net**Interest
                income:Total
                Loans
            
            $
            2,242
            
            $
            990
            
            $
            3,232Investments,
                fed funds and other interest-earning assets
            
            
            444
            
            
            328
            
            
            772Total
            
            
            2,686
            
            
            1,318
            
            
            4,004Interest
                expense:Deposits
            
            
            872
            
            
            622
            
            
            1,494FHLB
                advances and other borrowed funds
            
            
            366
            
            
            127
            
            
            493Subordinated
                Debentures
            
            
            21
            
            
            0
            
            
            21Total
            
            
            1,259
            
            
            749
            
            
            2,008Increase
                in net interest income
            
            $
            1,427
            
            $
            569
            
            $
            1,996




16


**Provision
      for Loan Losses**





The
      Company provided for a $216,000 addition to the allowance for loan losses
      through charges to operations during the full year 2006, compared to a provision
      of $590,000 during 2005. The decrease in the provision for loan losses was
      due
      to a $1.2 million decrease in nonaccrual loans at December 31, 2006 compared
      to
      December 31, 2005 and a lower rate of loan growth in 2006 (11%) compared to
      2005
      (21%). The 2006 provision caused the allowance for loan losses to equal
      $2,807,000 or 1.40% of total loans at December 31, 2006. Management, based
      upon
      known circumstances and conditions, determines the level of allowance for loan
      losses. In addition to assessing risk on individual loans, the Company considers
      industry trends, regional and national economic conditions, and past estimates
      of losses as compared to actual losses. During 2006 loans in the net amount
      of
      $24,000 were charged off. At December 31, 2006, one loan, in the amount of
      $67,000, was in non-accrual status. Loans accruing interest in the amount of
      $1,026,000 were past due 30 days or more; no loans accruing interest were past
      due 90 days or more. It is the Company’s policy to 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.





**Total
      Other Income**





Total
      other income amounted to $548,000 for 2006 compared to $461,000 for 2005, a
      19%
      increase. The source of this income is primarily fees and service charges on
      deposit accounts, loan document preparation fees and mortgage loan referral
      fees. The increase was caused by a significant increase in the number of the
      Company’s deposit account holders and loan customers, as well as, the initiation
      of mortgage loan referrals to a third party originator.





**Operating
      Expenses**





Total
      operating expenses amounted to $7,622,000 for 2006 compared to $6,500,000 during
      2005, a 17% increase. The 17% year over year increase in total operating expense
      was caused by the growth of the Company which included growth in asset and
      deposit size, growth in the number of deposit and loan accounts, the cost of
      the
      two branches opened in 2006 (one in July and one in November), the resulting
      information processing costs related to the increased size of the Company,
      as
      well as, increased audit, legal and compliance costs. The increase was comprised
      of several components. Compensation and employee benefit costs increased by
      $779,000 or 23% over 2005. The increase was caused by additions to staff for
      the
      two branches opened in 2006, additional staff additions in the lending, credit
      and operations areas, staff merit increases and the implementation of SFAS
      No.
      123R Share-Based Payments. This new accounting pronouncement for 2006 resulted
      in an expense of $140,000 during 2006. During prior periods, the Company was
      not
      required to recognize expense for share-based payments and the impact was
      reflected in the financial statement footnotes on a pro-forma basis. Occupancy
      and equipment cost increases of $127,000 or 12% over the year earlier period
      was
      the result of the expenses relating to the new branches and increases in lease
      costs, real estate taxes, utilities and service contracts. Marketing and public
      relations expense increased by $77,000 or 19% compared to the prior year as
      the
      Company instituted marketing campaigns for the newly opened branches and
      promoted retail deposit accounts in local newspaper, outdoor and radio
      advertisements. Data processing costs increased by $74,000 or 24%, 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, consulting and
      appraisal expenses) declined by $12,000 or 2% on a year to year basis as the
      2005 expense included the costs related to the formation of the holding company.
      Other factors affecting this category include the increased cost of complying
      with Sarbanes-Oxley Section 404 and increased expenditures for legal services.
      Other general and administrative costs increased by $77,000, or 11%, versus
      the
      year-earlier due to increased costs of postage, delivery, insurance, OCC
      assessments, FDIC deposit insurance and office supplies.





**Provision
      for Income Taxes**





Income
      tax expenses of $472,000 were recorded during 2006 compared to an income tax
      benefit of $1,491,000 that was recorded in 2005. During the prior year, the
      Company recognized the benefit of the deferred tax assets including the net
      operating loss carry-forwards for GAAP purposes. The tax benefit recorded was
      the result of reversing the previously established valuation allowance for
      deferred taxes. This action was taken after completing an analysis of the
      Company’s current operating income and future earnings potential. The analysis
      revealed that the potential for continued profitability will more likely than
      not generate sufficient operating income to realize the deferred tax asset
      created during the early years of the Bank’s existence. Projections for
      continued levels of profitability are reviewed quarterly and any necessary
      adjustments to the deferred tax assets are recognized in the provision or
      benefit for income taxes. At December 31, 2006, the Company had approximately
      $1.0 million in net operating loss carry forwards available to offset future
      taxable earnings, if any, under current Federal tax laws. Net operating loss
      carry forwards are available for a period of up to 20 years to offset taxable
      income in those years. As the Company continues to generate taxable income
      in
      the future this utilization of carry-forwards will continue to reduce income
      taxes paid until the $1.0 million is exhausted.





17


**FINANCIAL
      CONDITION**




**Overview**





Total
      assets at December 31, 2006, amounted to $281.4 million compared to $249.4
      at
      December 31, 2005, a $32.0 million or 13% increase. Approximately 97% of the
      total assets at year-end 2006 were held in earning assets, with total loans
      equaling $200.7 million (an 11% increase) and investment securities equaling
      $70.9 million (a 39% increase). At December 31, 2005, earning assets equaled
      approximately 97% of total assets, with total loans equaling $180.8 million,
      investment securities totaling $51.1 million and interest bearing cash
      equivalents totaling $9.7 million. The aggregate of deposits and borrowed funds
      equaled $258.2 million at December 31, 2006, a 12% increase since the $230.7
      million level at December 31, 2005.





**Loans**





The
      loan
      portfolio included approximately $110.7 million in commercial real estate,
      $15.1
      million in residential real estate, $62.2 million in commercial and industrial
      loans and $12.7 million in consumer loans as of December 31, 2006. On December
      31, 2005, the loan portfolio was comprised of $91.5 million in commercial real
      estate, $15.3 million in residential real estate, $59.0 million in commercial
      and industrial loans and $15.0 million in consumer loans. The 11% increase
      in
      loan balances from year to year is 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,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(Dollars
                in thousands)
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**Real
                estate loans:Residential
            
            $
            15,048
            
            
            7.51
            %
            $
            15,278
            
            
            8.46
            %
            $
            17,392
            
            
            11.65
            %
            $
            21,273
            
            
            20.03
            %
            $
            5,546
            
            
            11.18
            %Commercial
            
            
            110,693
            
            
            55.25
            
            
            91,497
            
            
            50.69
            
            
            78,571
            
            
            52.61
            
            
            47,986
            
            
            45.18
            
            
            21,332
            
            
            42.99Total
                real estate loans
            
            
            125,741
            
            
            62.75
            
            
            106,775
            
            
            59.16
            
            
            95,963
            
            
            64.26
            
            
            69,259
            
            
            65.21
            
            
            26,878
            
            
            54.17Commercial
                loans
            
            
            61,931
            
            
            30.91
            
            
            58,681
            
            
            32.51
            
            
            41,180
            
            
            27.57
            
            
            31,758
            
            
            29.90
            
            
            20,712
            
            
            41.74Consumer
                loans
            
            
            12,710
            
            
            6.34
            
            
            15,030
            
            
            8.33
            
            
            12,197
            
            
            8.17
            
            
            5,199
            
            
            4.89
            
            
            2,026
            
            
            4.08Total
                loans
            
            
            200,382
            
            
            100.00
            %
            
            180,486
            
            
            100.00
            %
            
            149,340
            
            
            100.00
            %
            
            106,216
            
            
            100.00
            %
            
            49,616
            
            
            100.00
            %Net
                deferred loan fees
            
            
            286
            
            
            
            
            
            362
            
            
            
            
            
            353
            
            
            
            
            
            420
            
            
            
            
            
            199Allowance
                for losses
            
            
            (2,807
            )
            
            
            
            
            (2,615
            )
            
            
            
            
            (2,025
            )
            
            
            
            
            (1,413
            )
            
            
            
            
            (756
            )Loans,
                net
            
            $
            197,861
            
            
            
            
            $
            178,233
            
            
            
            
            $
            147,668
            
            
            
            
            $
            105,223
            
            
            
            
            $
            49,059





The
      table
      on the next page sets forth certain information at December 31, 2006 regarding
      the dollar amount of loan principal repayments becoming due during the periods
      indicated. The table does not include any estimate of prepayments which
      significantly shorten the average life of all loans and may cause our actual
      repayment experience to differ from that shown below. Demand loans, having
      no
      stated schedule of repayments and no stated maturity, are reported as due in
      one
      year or less.  The
      amounts shown below exclude applicable loans in process, unearned interest
      in
      consumer loans and net deferred loan costs. **** Our
      adjustable-rate mortgage loans generally do not provide for downward adjustments
      below the initial discounted contract rate. When market interest rates rise,
      as
      has occurred in recent periods, the interest rates on these loans may increase
      based on the contract rate (the index plus the margin) exceeding the initial
      interest rate floor.




18


December
                31, 2006 (Dollars in thousands)
            
            **Real
                Estate**
              **Loans**
            
            **Commercial
                Loans**
            
            **Consumer**
              **Loans**
            
            **Total**
              **Loans**Amounts
                due in:One
                year or less
            
            $
            23,236
            
            $
            6,247
            
            $
            427
            
            $
            29,910More
                than one to five years
            
            
            32,791
            
            
            10,694
            
            
            310
            
            
            43,795More
                than five years
            
            
            69,714
            
            
            44,990
            
            
            11,973
            
            
            126,677Total
            
            $
            125,741
            
            $
            61,931
            
            $
            12,710
            
            $
            200,382Interest
                rate terms on amounts due after one year:Fixed-rate
                loans
            
            $
            32,602
            
            $
            18,103
            
            $
            3,909
            
            $
            54,614Adjustable-rate
                loans
            
            
            69,903
            
            
            37,581
            
            
            8,374
            
            
            115,858Total
            
            $
            102,505
            
            $
            55,684
            
            $
            12,283
            
            $
            170,472





**Investment
      Securities**





The
      Company views the investment portfolio both as a means of generating earnings
      and as a source of liquidity. The portfolio at year-end was comprised primarily
      of government and agency securities and mortgage backed securities. At December
      31, 2006, approximately $8.0 million of the portfolio was scheduled to mature
      within one year and $59.3 million after one year. Approximately $13.0 million
      of
      the portfolio securities are subject to calls prior to final maturity. During
      2006, the company purchased $11.0 million of mortgage-backed securities. The
      average years-to-maturity of the mortgage-backed securities portfolio at
      December 31, 2006 was 16.5 years.





**December
                31,****2006**
            
            **2005**
            
            **2004**(Dollars
                in thousands)
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**Securities
                available-for-sale:U.S.
                Government agencies
            
            $
            19,956
            
            $
            19,807
            
            $
            21,159
            
            $
            20,766
            
            $
            17,152
            
            $
            17,052Mortgage-backed
                securities
            
            
            34,852
            
            
            34,775
            
            
            19,135
            
            
            18,827
            
            
            16,816
            
            
            16,797Total
                available-for-sale
            
            
            54,808
            
            
            54,582
            
            
            40,294
            
            
            39,593
            
            
            33,968
            
            
            33,849Securities
                held-to-maturity:U.S.
                Government agencies
            
            
            3,997
            
            
            3,970
            
            
            4,982
            
            
            4,944
            
            
            4,002
            
            
            4,048Mortgage-backed
                securities
            
            
            5,114
            
            
            5,046
            
            
            4,103
            
            
            4,036
            
            
            -
            
            
            -Municipals
            
            
            3,352
            
            
            3,384
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                bonds
            
            
            50
            
            
            50
            
            
            25
            
            
            25
            
            
            -
            
            
            -Total
                held-to-maturity
            
            
            12,513
            
            
            12,450
            
            
            9,110
            
            
            9,005
            
            
            4,002
            
            
            4,048Total
            
            $
            67,321
            
            $
            67,032
            
            $
            49,404
            
            $
            48,598
            
            $
            37,970
            
            $
            37,897





19


The
      following table sets forth the stated maturities and weighted average yields
      of
      our investment securities at December 31, 2006. 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**
            
            **Total**December
                31, 2006
              (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**
              **Yield**Securities
                available-for-sale:U.S.
                Government agencies
            
            $
            5,958
            
            
            5.20
            %
            $
            10,976
            
            
            5.23
            %
            $
            954
            
            
            5.22
            %
            $
            1,919
            
            
            5.72
            %
            $
            19,807
            
            
            5.27
            %Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            34,774
            
            
            5.58
            
            
            34,774
            
            
            5.58Total
                available-for-sale
            
            
            5,958
            
            
            5.20
            
            
            10,976
            
            
            5.23
            
            
            954
            
            
            5.22
            
            
            36,694
            
            
            5.59
            
            
            54,582
            
            
            5.47Securities
                held-to-maturity:U.S.
                Government agencies
            
            $
            1,997
            
            
            5.11
            %
            $
            2,000
            
            
            5.19
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            3,997
            
            
            5.15
            %Mortgage-backed
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,702
            
            
            5.35
            
            
            1,412
            
            
            5.38
            
            
            5,114
            
            
            5.36Municipals
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,352
            
            
            4.20
            
            
            3,352
            
            
            4.20Other
                bonds
            
            
            -
            
            
            -
            
            
            50
            
            
            4.95
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            50
            
            
            4.95Total
                held-to-maturity
            
            
            1,997
            
            
            5.11
            
            
            2,050
            
            
            5.18
            
            
            3,702
            
            
            5.35
            
            
            4,764
            
            
            4.58
            
            
            12,513
            
            
            4.99Total
            
            $
            7,955
            
            
            5.18
            %
            $
            13,026
            
            
            5.22
            %
            $
            4,656
            
            
            5.33
            %
            $
            41,458
            
            
            5.47
            %
            $
            67,095
            
            
            5.38
            %





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents amounted to $6.7 million at December 31, 2006 compared to
      $15.0
      million at December 31, 2005.





**Liabilities**





**Deposits**





At
      December 31, 2006, total deposits amounted to $191.8 million compared to $189.5
      million at December 31, 2005, a $2.3 million or 1% increase. Competitive pricing
      pressures and the float or inverted yield curve interest rate environment caused
      a migration from deposits to higher cost categories. During 2006, management
      instituted strategies designed to lessen the Company’s reliance on high cost
      deposit products. The maturity structure of the certificate of deposit portfolio
      was shortened whenever possible by altering product pricing and offerings.
      Short-term borrowed funds have been increased to fund the growth of total
      assets. This strategy will remain in place until such time as the yield curve
      returns to a more traditional slope. Certificates of deposits increased $21.3
      million (up by 21%) and equaled $124.1 million at December 31, 2006; personal
      and commercial savings, money market and NOW accounts shrank by $19.0 million
      to
      equal $43.2 million (a significant portion of this volume decline stayed within
      the Company but moved to the certificate of deposit portfolio), demand deposits
      accounts increased slightly (by $68,000) and equaled $24.5 million or 12.8%
      of
      total deposits. Of the total certificates of deposit, 97% or approximately
      $120.0 million are scheduled to mature in 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. These programs, in conjunction with the opening of two new branches
      in 2006, are expected to generate significant increases in customer
      relationships. Management believes that the new relationships that result from
      these marketing efforts provide valuable opportunities to cross-sell other
      deposit and loan products and services, as well as build a solid base of core
      deposits.





December
                31, 2006 (Dollars in thousands)
            
            **Certificates**
              **of
                Deposit****Maturity
                Period**Three
                months or less
            
            $
            48,090Over
                three through six months
            
            
            51,065Over
                six through twelve months
            
            
            20,888Over
                twelve months
            
            
            4,075Total
            
            
            124,118





20


**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 current interest rate is 7.21% and the next repricing date is June 15,
      2007.
      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. At December 31, 2006, $5,946,000 in
      overnight securities under agreement to repurchase issued through a customer
      deposit sweep product were outstanding. The interest rate was 4.88% per
      annum.





**Year
                Ended December 31,**(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**Maximum
                amount outstanding at any month-end during the period:FHLB
                advances
            
            $
            59,500
            
            $
            34,500
            
            $
            27,000Average
                amount outstanding during the period (1):FHLB
                advances
            
            $
            43,687
            
            $
            30,107
            
            $
            18,602Weighted
                average interest rate during the period (1):FHLB
                advances
            
            
            4.37
            %
            
            3.32
            %
            
            2.74
            %Balance
                outstanding at end of period:FHLB
                advances
            
            $
            52,250
            
            $
            33,500
            
            $
            27,000Weighted
                average interest rate at end of period:FHLB
                advances
            
            
            4.62
            %
            
            3.61
            %
            
            2.99
            %




(1)  Averages
      are based on daily balances.





**Capital
      Resources**





The
      FRB,
      the FDIC and other regulatory agencies have established capital guidelines
      for
      banks and bank holding companies. Risk-based capital guidelines issued by the
      federal regulatory agencies require banks to meet a minimum Tier 1
      risk-based capital ratio of 4.0% and a total risk-based capital ratio of 8.0%.
      At December 31, 2006, the Company and the Bank exceeded the minimum
      requirements for Tier 1 risk-based and total risk-based capital. A minimum
      requirement of 4.0% of Tier 1 leverage capital is also mandated. On
      December 31, 2006, the Tier 1 leverage capital ratio for the Company and
      the Bank was 9.36% and 8.53%, respectively. At
      December 31, 2006, the Bank is categorized as “Well capitalized” as defined by
      federal regulators.




**CREDIT
      QUALITY AND ALLOWANCE FOR LOAN LOSSES**





**Policies
      Related to the Accrual of Interest Income**





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





21


**December
                31,**(Dollars
                in thousands)
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Nonaccrual
                loans:
            
            $
            
            
            $
            
            
            $
            
            
            $
            
            
            $Residential
                real estate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                real estate
            
            
            -
            
            
            151
            
            
            -
            
            
            -
            
            
            -Construction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
            
            
            67
            
            
            1,136
            
            
            -
            
            
            47
            
            
            -Consumer
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            
            67
            
            
            1,287
            
            
            -
            
            
            47
            
            
            -Accruing
                loans past due 90 days or more:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                of nonaccrual and 90 days or more past due loans
            
            
            67
            
            
            1,287
            
            
            -
            
            
            47
            
            
            -Other
                nonperforming assets
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming assets
            
            
            67
            
            
            1,287
            
            
            -
            
            
            47
            
            
            -Troubled
                debt restructurings
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Troubled
                debt restructurings and total nonperforming assets
            
            $
            67
            
            $
            1,287
            
            $
            -
            
            $
            47
            
            $
            -Total
                nonperforming loans to total loans
            
            
            0.03
            %
            
            0.71
            %
            
            -
            
            
            0.04
            %
            
            -Total
                nonperforming loans to total assets
            
            
            0.02
            %
            
            0.52
            %
            
            -
            
            
            0.03
            %
            
            -Total
                nonperforming assets and troubled debt restructurings to total
                assets
            
            
            0.02
            %
            
            0.52
            %
            
            -
            
            
            0.03
            %
            
            -





Interest
      income that would have been recorded for the year ended December 31, 2006,
      had
      nonaccruing loans been current according to their original terms amounted to
      $9,000. No interest related to nonaccrual loans was included in interest income
      for the year ended December 31, 2006.





**Loan
      Portfolio Monitoring**





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





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
      portfolio as a whole, as well as individual loans, is reviewed for payment
      performance, creditworthiness and strength of documentation. The Bank uses
      an
      external loan review firm to assist in monitoring the commercial loan portfolio.
      Credit risk ratings are assigned to commercial loans and are regularly reviewed.





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





**Allowance
      for Loan Losses**





The
      Allowance for Loan Losses (the “ALL”) is based on management’s estimate of the
      amount required to reflect the risks in the loan portfolio, based on
      circumstances and conditions known at each reporting date. The Bank reviews
      the
      adequacy of the ALL at least quarterly. The methodology is a comprehensive
      analytical process of assessing the credit risk inherent in the loan portfolio.
      This assessment incorporates a broad range of factors including previous loss
      experience, if any, asset quality trends, current economic conditions and their
      effect on borrowers, the performance of individual loans in relation to contract
      terms and the estimated fair value of collateral. Losses are charged against
      the
      ALL when management believes that the collectibility of principal is doubtful.
      To the extent management determines the level of anticipated losses in the
      portfolio has significantly increased or diminished, the ALL is adjusted through
      a provision or credit to earnings. As part of the Bank’s analysis of specific
      credit risk, extensive reviews are done on problematic credits when identified
      on the watch and non-performing assets lists. At December 31, 2006, $1,026,000
      of loans accruing interest were past due more than 30 days and no loans accruing
      interest were past due 90 days or more. One loan in the amount of $67,000 was
      on
      non-accrual status, yet the entire amount is guaranteed for repayment by the
      Small Business Administration.





22




The
      ALL
      consists of three components:





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





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





*Unallocated
      Allowances* -
      represents the expected but as yet unidentified specific losses associated
      with
      various loan types within the loan portfolio; the methodology employed to
      calculate this portion of the ALL assumes that loans within loan type possess
      common characteristics and therefore may be treated similarly for purposes
      of
      determining loss factors. This portion also provides for expected losses due
      to
      changes in various conditions such as general economic conditions, trends in
      delinquency and asset quality, loan volumes and concentrations of credit.




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





**December
                31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(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**
              **Loans**Residential
                real estate
            
            $
            27
            
            
            7.5
            %
            $
            34
            
            
            8.4
            %
            $
            52
            
            
            11.6
            %
            $
            57
            
            
            19.9
            %
            $
            15
            
            
            11.1
            %Commercial
                real estate
            
            
            1,624
            
            
            55.2
            
            
            1,352
            
            
            50.7
            
            
            1,073
            
            
            52.6
            
            
            792
            
            
            45.0
            
            
            334
            
            
            42.8Commercial
            
            
            1,107
            
            
            31.0
            
            
            1,174
            
            
            32.6
            
            
            826
            
            
            27.7
            
            
            538
            
            
            30.2
            
            
            390
            
            
            42.0Consumer
            
            
            49
            
            
            6.3
            
            
            55
            
            
            8.3
            
            
            74
            
            
            8.1
            
            
            26
            
            
            4.9
            
            
            17
            
            
            4.1Total
                allowance for loanlosses
            
            $
            2,807
            
            
            100.0
            %
            $
            2,615
            
            
            100.0
            %
            $
            2,025
            
            
            100.0
            %
            $
            1,413
            
            
            100.0
            %
            $
            756
            
            
            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.




23


**December
                31,**(Dollars
                in thousands
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Allowance
                at beginning of period
            
            $
            2,615
            
            $
            2,025
            
            $
            1,413
            
            $
            756
            
            $
            42Provision
                for loan losses
            
            
            216
            
            
            590
            
            
            612
            
            
            659
            
            
            714Charge
                offs:Residential
                real estate loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                real estate loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                loans
            
            
            (13
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
                loans
            
            
            (12
            )
            
            -
            
            
            -
            
            
            (2
            )
            
            -Total
                charge-offs
            
            
            (25
            )
            
            -
            
            
            -
            
            
            (2
            )
            
            -Recoveries
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                charge-offs
            
            
            (24
            )
            
            -
            
            
            -
            
            
            (2
            )
            
            -Allowance
                at end of period
            
            $
            2,807
            
            $
            2,615
            
            $
            2,025
            
            $
            1,413
            
            $
            756Allowance
                to nonperforming loans
            
            
            41.9
                X
            
            
            2.0
                X
            
            
            (*
            )
            
            30.1
                X
            
            
            (*
            )Allowance
                to total loans outstanding at the end of the period
            
            
            1.40
            %
            
            1.45
            %
            
            1.35
            %
            
            1.33
            %
            
            1.52
            %Net
                charge-offs (recoveries) to average loans outstandingduring
                the period
            
            
            0.01
            %
            
            -
            
            
            -
            
            
            0.00
            %
            
            -


(*)
      The
      Company had no nonaccrual loans at the end of 2004 and 2002





**RISK
      MANAGEMENT**





Management
      and the Boards of Directors of the Company and the Bank are committed to sound
      risk management practices throughout the organization. A third party internal
      audit firm performs periodic audits of the Company’s policies and procedures.
      Risks associated with the Company’s business activities and products are
      identified and measured as to probability of occurrence and impact on the
      Company (low, moderate, or high), and the control of other activities in place
      to manage those risks are identified and assessed. The firm reports its findings
      to the Audit Committee of the Company’s Board of Directors. Department-level and
      senior managers of the Company and the Bank are responsible to implement 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 chaired
      by
      the Chief Financial Officer and composed of members of the board of directors
      and senior management, meets at least quarterly to review and develop
      asset/liability management strategies and tactics. The ALCO is responsible
      for
      ensuring that the Board of Directors receives timely, accurate information
      regarding the Company’s interest rate risk position. Techniques used by the ALCO
      take into consideration the cash flow and repricing attributes of balance sheet
      and off-balance sheet items and their relation to possible changes in interest
      rates. The ALCO manages its interest rate exposure primarily by using on-balance
      sheet strategies, generally accomplished through the management of the duration,
      rate sensitivity and average lives of the Company’s various investments, and by
      extending or shortening maturities of borrowed funds, as well as carefully
      managing and monitoring the pricing of deposits.


24





Changes
                in Net Interest Income and Return on Assets(over
                a two-year period)
            as
                of November 30, 2006Change
                in Interest Rates During Year One
            Net
                Interest Income
            Percent
                Change
            Change
                in Return on Assets200
                basis point rise
            8,050
            (8.45%)
            (0.12%)Flat-rate
                scenario
            8,793100
                basis point decline
            8,995
            2.31%
            0.04%200
                basis point decline
            9,710
            10.44%
            0.26%Change
                in Interest Rates During Year Two
            Net
                Interest Income
            Percent
                Change
            Change
                in Return on Assets200
                basis point rise
            8,467
            (13.62%)
            (0.17%)Flat-rate
                scenario
            9,802100
                basis point decline
            10,590
            8.04%
            0.15%200
                basis point decline
            10,969
            11.91%
            0.31%





Changes
                in Net Interest Income and Return on Assets(over
                a two-year period)
            as
                of November 30, 2005Change
                in Interest Rates During Year One
            Net
                Interest Income
            Percent
                Change
            Change
                in Return on Assets300
                basis point rise
            9,049
            1.30%
            (0.02%)100
                basis point rise
            9,142
            2.34%
            0.05%Flat-rate
                scenario
            8,933200
                basis point decline
            8,742
            (2.14%)
            0.00%Change
                in Interest Rates During Year Two
            Net
                Interest Income
            Percent
                Change
            Change
                in Return on Assets300
                basis point rise
            9,858
            (3.78%)
            (0.11%)100
                basis point rise
            10,489
            2.38%
            0.04%Flat-rate
                scenario
            10,245200
                basis point decline
            10,288
            0.42%
            0.04%





Through
      the use of a computerized modeling system maintained by outside consultants,
      the
      potential effect on the Company’s net interest income (“NII”) of possible
      changes in interest rates, in rising and declining scenarios is determined
      and
      evaluated by ALCO. This evaluation is performed each quarter based upon the
      Company’s financial data as of February, May, August and November. ALCO has
      established a maximum limit for the change in net interest income over a
      twelve-month period. This limit requires that NII for the projected next
      twelve-month period will not be reduced by more than 5% for every 100 basis
      point (given a gradual ramp) change in interest rates. In addition, the limits
      require that the projected Return on Assets (“ROA”) for the next twelve months
      will not be reduced by more than 10 basis points for every 100 basis point
      (given a gradual ramp) change in interest rates. Exceptions to the tolerance
      limits will be considered “significant” when measurements for both NII and ROA
      are beyond the tolerance limits. The Company’s most recent model simulation
      reflects a 2.31% improvement in NII and a 4 basis point increase in ROA if
      market rates decline by 100 basis points, a 10.44% improvement in NII and a
      26
      basis point increase in ROA if market rates decline by 200 basis points and
      a
      8.45% reduction in NII and a 12 basis point reduction in ROA if market rates
      increase by 200 basis points over a one year period. These magnitudes of change
      fall with the ALCO established limits for NII and ROA for the projected next
      twelve months. The following table depicts the potential effect on the Company’s
      net interest income of various possible changes in interest rates, in both
      rising and declining scenarios, over a two-year period.





25


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 Company’s expectations for potential changes in the interest
      rate environment have changed and the company’s balance sheet structure has also
      changed in reaction to market conditions, as well as the implementation of
      management’s balance sheet growth strategies. Accordingly, a year ago the
      simulation of the Company’s net interest income was based upon different
      interest rate assumptions (rates were more likely to increase than now) and
      a
      different balance sheet structure (maturities of liabilities were longer term).
      Accordingly, comparisons between most recent simulation and that of a year
      ago
      reveal that the current balance sheet is more favorably positioned to benefit
      from a decline in market interest rates than it was one year ago, yet the
      results of both simulations were within the risk tolerance limits established
      by
      the Board of Directors.





The
      following table depicts the potential effect on the company’s net interest
      income of various possible changes in interest rates, both in rising and
      declining scenarios, for a two-year period forecast as of November 30, 2005.
      At
      that time, the Company’s simulation reflected a 2.1% reduction in NII and zero
      change in ROA if market rates decline by 200 basis points and a 2.3% improvement
      in NII and a five basis point increase in ROA if market rates increased by
      100
      basis points.








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





The
      Company could enter into interest rate swap, cap or floor contracts, from time
      to time, to mitigate the effects on net interest income in the event interest
      rates on variable deposits rise or rates on variable rate loans decline. No
      interest rate swap, cap or floor contracts were entered into during the years
      ended December 31, 2006 or 2005.





**Credit
      Risk**





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





**LIQUIDITY
      AND CAPITAL RESOURCES MANAGEMENT**





Liquidity,
      as it pertains to banking, can be defined as the ability to generate cash in
      the
      most economical way to satisfy loan demand and/or deposit withdrawal demand,
      and
      to meet other business opportunities that require cash. Sources of liquidity
      for
      banks include short-term liquid assets, cash generated from loan repayments
      and
      amortization, borrowings, deposit generation and earnings. Additionally, the
      Company’s investment portfolio is actively managed by the ALCO and is a strong
      source of cash flow for the Company. The portfolio is fairly liquid, with a
      weighted average life of 4.6 years, and is available to be used as a source
      of
      funds, if needed. Eighty-one percent of the portfolio is held as
      available-for-sale. Including the effect of potential calls on specific
      investments, the weighted average life of the portfolio is 3.6
      years.





26


Approximately
      $13.9 million in capital was generated during the Bank’s initial stock offering.
      At December 31, 2001, capital had reduced to $12.3 million due to the effects
      of
      organizational costs and operating losses. The net loss recorded during 2002
      further reduced the capital to $9.5 million as of December 31, 2002. During
      2003, the Bank recorded losses during the first three calendar quarters and
      recorded a small net profit during the calendar quarter ending December
      31 st .
      For the
      full year 2003 a net loss of $1,156,000 was recorded however the Bank became
      profitable during the fourth calendar quarter. The Bank recorded a profit of
      $286,000 for the year 2004. Additionally, during 2003, the Bank conducted a
      subscription rights and community offering to raise additional capital to
      support further growth as was planned in the original business plan. This
      offering resulted in the issuance of 721,581 additional shares of common stock
      and provided net proceeds of $6.5 million. The offering also resulted in the
      issuance of warrants to purchase 180,395 shares of common stock at a price
      of
      $11.00 per share at any time on or before September 30, 2006. As of the warrant
      expiration date, 170,566 shares had been issued as a result of warrant exercises
      providing additional capital of $1.9 million. Net Income during 2005 and 2006
      amounted to $2,565,000 and $636,000 respectively. The resulting stockholders’
equity at December 31, 2006 equaled $20.2 million. This level of capital does
      not include the $7.5 million of trust preferred securities issued by the Company
      in 2005, of which approximately $6.7 million may be treated as capital for
      bank
      regulatory purposes. Under application provisions of federal banking law, the
      Company must meet specific quantitative capital requirements. See Item I,
“Description of Business” and “Notes to Consolidated Financial Statements, Note
      12.”





**OFF-BALANCE
      SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**





The
      Bank
      issues financial instruments with off-balance sheet risk in the normal course
      of
      business to meet the financing needs of its customers. At December 31, 2006,
      these financial instruments included commitments to originate loans, unused
      lines of credit and secured lines of credit totaling $72.8 million; $11.1
      million of which involved original maturities in excess of one year. In
      addition, the Company had issued letters of credit totaling $3.1 million at
      December 31, 2006. For further information see “Notes to Financial Statements,
      Note 10 (a) Financial Instruments with Off-Balance Sheet Risk.”





For
      the
      year ended December 31, 2006, the Company did not engage in any off-balance
      sheet transactions reasonably likely to have a material effect on its financial
      condition, results of operations or cash flows.





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





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





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      February 2006, the FASB issued Statement No. 155, *Accounting
      for Certain Hybrid Financial Instruments and Hedging Activities* .
      (“FAS
      155”). FAS 155 amends FASB Statement No. 133, *Accounting
      for Derivatives Instruments and Hedging Activities* and FASB
      Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ,
      and
      allows an entity to remeasure at fair value a hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation from
      the host, if the holder irrevocably elects to account for the whole instrument
      on a fair value basis. FAS 155 is effective for all financial instruments
      acquired of issued in fiscal years beginning after September 15, 2006. The
      Company is currently evaluating the impact the statement will have on the
      financial statements and believes that, when adopted, will not have a material
      impact on the Company’s financial condition or results of
      operations.





In
      September 2006, the FASB issued Statement No. 157, *Fair
      Value Measurements* (“FAS
      157”). This statement defines fair value, establishes a framework for measuring
      fair value under accounting principles generally accepted in the United States
      and requires certain disclosures about fair value measurements. FAS 157 provides
      guidance on how to measure fair value when required under existing accounting
      standards. The statement establishes a fair value hierarchy of three levels
      based on the inputs to valuation techniques used to measure fair value. Required
      disclosures will focus on the inputs used to measure fair value, fair value
      measurements, and the effects of the measurements in the financial statements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007, with
      earlier application allowed. Management is currently evaluating the impact
      of
      adopting this statement on the Company’s financial position and results of
      operations.





27


In
      February 2007, the FASB issued Statement No. 159, *The*  *Fair
      Value Option for Financial Assets and Financial Liabilities* (“FAS
      159”). FAS 159 permits entities to measure certain financial assets and
      financial liabilities at fair value and amended FASB Statement No. 115, *Accounting
      for Investments in Debt and Equity Securities* .
      Unrealized gains and losses on items for which the fair value option is elected
      will be reported in earnings. FAS 159 is effective for fiscal years beginning
      after November 15, 2007. Management is currently evaluating the impact of
      adopting this statement on the Company’s financial position and results of
      operations.





In
      July
      2006, the FASB issued Financial Accounting Standards Interpretation No. 48
      (“FIN
      48”), *“Accounting
      for Uncertainty in Income Taxes”.* FIN
      48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company’s financial statements in accordance with SFAS 109, *“Accounting
      for Income Taxes”.* FIN
      48
      prescribes a recognitions threshold and measurement attributable for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosures and transitions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company does not anticipate the adoption
      of FIN 48 will materially impact its financial statements upon adoption on
      January 1, 2007.





**ITEM
      7 - FINANCIAL STATEMENTS**





The
      information required by this item 7 is contained on pages F-1 to F-25 of this
      Form 10-KSB.





**ITEM
      8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE**





There
      has
      been no change of the Company’s principal accountants during the Company’s two
      most recent fiscal years.




**ITEM
      8A - 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 officer 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 (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 officer and principal financial officer,
      as
      appropriate to allow timely decisions regarding required disclosure.





**ITEM
      8B - OTHER INFORMATION**





None.





**PART
      III**





**ITEM
      9** **-
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16(** **a** **)
      OF THE EXCHANGE ACT**





**Directors**





For
      information relating to the directors of the Company, the section captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.





**Executive
      Officers**





For
      information relating to the executive officers of the Company, the section
      captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.




28


**Compliance
      with Section 16(a) of the Exchange Act**





For
      information regarding compliance with Section 16(a) of the Exchange Act, the
      cover page to this Annual Report on Form 10-KSB and the section captioned *“Section
      16(a) Beneficial Ownership Compliance”* in
      the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders are
      incorporated by reference.





**Disclosure
      of Code of Ethics**





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





**Corporate
      Governance**





For
      information regarding the audit committee and its composition and the audit
      committee financial expert, the section captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.





**ITEM
      10 - EXECUTIVE AND DIRECTOR
      COMPENSATION**





For
      information regarding executive compensation the
      section entitled *“Executive
      Compensation”* and *“Directors’
      Compensation”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders are
      incorporated by reference.




**ITEM
      11 - 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.




29


**(d)**
            **Equity
                Compensation Plan
                Information**




The
      following schedule provides information with respect to compensation plans
      (including individual compensation arrangements) under which equity securities
      of the Company are authorized for issuance as of December 31, 2006.




Plan
                category
            Number
                of securities to
              be
                issued upon
              exercise
                of outstanding
              options,
                warrants and
              rights
              (a)
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
              
              (b)
            Number
                of securities remaining
              available
                for future issuance under
              equity
                compensation plans
              (excluding
                securities reflected in
              column
                (a))
              (c)Equity
                compensation
              plans
                approved by
              security
                holders
            252,305
            $
                11.77
            146,095Equity
                compensation
              plans
                not approved by
              security
                holders
            -
            -
            -Total
            252,305
            $
                11.77
            146,095




**ITEM
      12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE**





**Certain
      Relationships and Related Transactions**




For
      information regarding certain relationships and related transactions, the
      section captioned *“Transactions
      with Related Persons”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.





**Corporate
      Governance**





For
      information regarding director independence, the section captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.





30


**ITEM
      13 - EXHIBITS**





Exhibit
                No.
            Description3.1
            Articles
                of Association(1)3.2
            Bylaws(1)4.1
            Common
                Stock Certificate(2)10.1
            Lease
                for 33 Waldo Street, Worcester,
                Massachusetts10.2*
            Amended
                and Restated Stock Option Plan(3)10.3
            Lease
                for 67 Millbrook Street, Worcester, Massachusetts(4)10.4*
            Change
                in Control Severance Agreement, dated as of May 18, 2006, between
                the Bank
                and Charles R. Valade(5)10.5*
            Change
                in Control Severance Agreement, dated as of May 18, 2006, between
                the Bank
                and Martha A. Dean(5)10.6*
            Change
                in Control Severance Agreement, dated as of May 18, 2006, between
                the Bank
                and William M Mahoney(5)10.7*
            Change
                in Control Severance Agreement, dated as of May 18, 2006, between
                the Bank
                and Christine Trifari(5)10.8*
            Change
                in Control Severance Agreement, dated as of May 18, 2006, between
                the Bank
                and Andrea J. White(5)21.0
            Subsidiaries
                of Small Business
                Issuer23.0
            Consent
                of KPMG LLP31.1
            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-K filed with the Securities
                and Exchange Commission on December 19,
                2006.


(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 Registration Statement on Form
                S-8
                filed with the Securities and Exchange Commission on March 27,
                2007.


(4)
            Incorporated
                by reference in this document to the Quarterly Report on Form 10-QSB
                for
                the quarter ended June 30, 2006.


(5)
            Incorporated
                herein by reference in this document to the Form 8-K filed with the
                Securities and Exchange Commission on May 22,
                2006.





**ITEM
      14 - PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**





For
      information regarding the principal accountant fees and expenses the section
      captioned *“Independent
      Registered Public Accounting Firm”* in the
      Company’s Proxy Statement for the 2007 Annual Meeting of Stockholders is
      incorporated by reference.




31





**Index
      to Consolidated Financial Statements**











Report
                of Independent Registered Public Accounting
                Firm
            F-2Consolidated
                Balance Sheets at December 31, 2006 and
                2005
            F-3Consolidated
                Statements of Operations for the
                YearsEnded
                December 31, 2006 and 2005
            F-4Consolidated
                Statements of Stockholders’ Equity for
                theYears
                Ended December 31, 2006 and 2005
            F-5Consolidated
                Statements of Cash Flows for the
                YearsEnded
                December 31, 2006 and 2005
            F-6Notes
                to Consolidated Financial Statements
            F-7








F-1


**Report
      of Independent Registered Public Accounting
      Firm**








The
      Board
      of Directors and Shareholders


CNB
      Financial Corp.:





We
      have
      audited the accompanying consolidated balance sheets of CNB Financial Corp.
      (the
      Company) and its and subsidiary as of December 31, 2006 and 2005, 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, 2006 and 2005, and the results of their operations
      and their cash flows for the years  then
      ended in conformity with U.S. generally accepted accounting
      principles.





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








/s/
      KPMG
      LLP








Boston,
      Massachusetts


March
      22,
      2007





F-2




**CNB
      FINANCIAL CORP.**




Consolidated
      Balance Sheets


As
      Of
      December 31, 2006 and 2005


**2006**
            
            **2005****ASSETS**Cash
                and Cash Equivalents
            
            $
            6,736,000
            
            $
            14,971,000Investment
                Securities Available-for-Sale, (AmortizedCost
                of $54,808,000 as of December 31, 2006 and$40,294,000
                as of December 31, 2005) (Note 3)
            
            
            54,582,000
            
            
            39,593,000Investment
                Securities Held To Maturity, (Fair Value of$12,450,000
                as of December 31, 2006 and $9,005,000as
                of December 31, 2005) (Note 3)
            
            
            12,513,000
            
            
            9,110,000Federal
                Reserve Bank Stock (Note 3)
            
            
            700,000
            
            
            508,000Federal
                Home Loan Bank Stock (Note 3)
            
            
            3,070,000
            
            
            1,870,000Loans
                (Note 4)
            
            
            200,668,000
            
            
            180,848,000Less-Allowance
                for Loan Losses (Note 4)
            
            
            (2,807,000
            )
            
            (2,615,000
            )Loans,
                Net
            
            
            197,861,000
            
            
            178,233,000Premises
                and Equipment, Net (Note 5)
            
            
            2,521,000
            
            
            1,774,000Accrued
                Interest Receivable
            
            
            1,297,000
            
            
            971,000Deferred
                Tax Asset (Note 8)
            
            
            1,553,000
            
            
            2,056,000Prepaid
                Expenses and Other Assets
            
            
            531,000
            
            
            325,000$
            281,364,000
            
            $
            249,411,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Deposits
                (Note 6)
            
            $
            191,807,000
            
            $
            189,452,000Federal
                Home Loan Bank Advances (Note 7)
            
            
            52,250,000
            
            
            33,500,000Federal
                Funds Purchased
            
            
            500,000
            
            
            -Subordinated
                Debentures (Note 7)
            
            
            7,732,000
            
            
            7,732,000Securities
                Under Agreement to Repurchase
            
            
            5,946,000
            
            
            -Accrued
                Expenses and Other Liabilities
            
            
            2,958,000
            
            
            1,501,000Total
                Liabilities
            
            
            261,193,000
            
            
            232,185,000Commitments
                and Contingencies (Note 10)Stockholders’
                Equity:Common
                stock
              Par
                Value: $1.00 per share as of December 31, 2006 and 2005Shares
                Authorized: 10,000,000 as of December 31, 2006 and 2005Issued
                and Outstanding: 2,283,000 and 2,113,000 as of December 31, 2006
                and 2005,
                respectively
            
            
            2,283,000
            
            
            2,113,000Additional
                Paid-in Capital
            
            
            20,154,000
            
            
            18,314,000Accumulated
                Deficit
            
            
            (2,151,000
            )
            
            (2,787,000
            )Accumulated
                Other Comprehensive Loss
            
            
            (115,000
            )
            
            (414,000
            )Total
                Stockholders’ Equity
            
            
            20,171,000
            
            
            17,226,000$
            281,364,000
            
            $
            249,411,000


*See
        accompanying notes to consolidated financial statements.*


F-3
 
 **CNB
          FINANCIAL CORP.**
  Consolidated
          Statements of Operations
 For
          the
          Years December 31, 2006 and 2005


**2006**
            
            **2005**Interest
                and Divided Income:Interest
                and Fees on Loans
            
            $
            13,863,000
            
            $
            10,636,000Interest
                and Dividends on Investments
            
            
            3,107,000
            
            
            1,944,000Total
                Interest and Dividend Income
            
            
            16,970,000
            
            
            12,580,000Interest
                Expense:Interest
                Expense on Deposits
            
            
            6,046,000
            
            
            3,853,000Interest
                Expense on Borrowings
            
            
            2,526,000
            
            
            1,024,000Total
                Interest Expense
            
            
            8,572,000
            
            
            4,877,000Net
                Interest Income
            
            
            8,398,000
            
            
            7,703,000Provision
                for Loan Losses (Note 4)
            
            
            216,000
            
            
            590,000Net
                Interest Income, After Provisionfor
                Loan Losses
            
            
            8,182,000
            
            
            7,113,000Other
                Income:Fees
                on Deposit Accounts
            
            
            215,000
            
            
            249,000Loan
                Related Fees
            
            
            214,000
            
            
            173,000Other
            
            
            114,000
            
            
            39,000Security
                Gains
            
            
            5,000
            
            
            -Total
                Other Income
            
            
            548,000
            
            
            461,000Operating
                Expenses:Employee
                Compensation and Benefits
            
            
            4,160,000
            
            
            3,381,000Occupancy
                and Equipment
            
            
            1,160,000
            
            
            1,033,000Professional
                Fees
            
            
            628,000
            
            
            640,000Marketing
                and Public Relations
            
            
            480,000
            
            
            403,000Data
                Processing Expenses
            
            
            387,000
            
            
            313,000Other
                General and Administrative Expenses
            
            
            807,000
            
            
            730,000Total
                Operating Expenses
            
            
            7,622,000
            
            
            6,500,000Income
                Before Income Taxes
            
            
            1,108,000
            
            
            1,074,000Income
                Taxes Expense (Benefit) (Note 8)
            
            
            472,000
            
            
            (1,491,000
            )Net
                Income
            
            $
            636,000
            
            $
            2,565,000Net
                Income per Basic Share
            
            $
            0.29
            
            $
            1.21Net
                Income per Diluted Share
            
            $
            0.29
            
            $
            1.19Weighted
                Average Shares - Basic
            
            
            2,173,000
            
            
            2,112,000Weighted
                Average Shares - Diluted
            
            
            2,221,000
            
            
            2,152,000





*See
      accompanying notes to consolidated financial statements.*





F-4


**CNB
        FINANCIAL CORP.**
  Consolidated
        Statements of Stockholders' Equity
 For the
        Years Ended December 31, 2006 and 2005


**Common
                Stock****Number
                of Shares**
            
            **Par
                Value**
            
            **Additional
                Paid-in Capital**
            
            **Accumulated
                Deficit**
            
            **Accumulated
                Other Comprehensive Loss**
            
            **Total**Balance,
                December 31, 2004
            
            
            2,111,000
            
            $
            10,556,000
            
            $
            9,851,000
            
            $
            (5,352,000
            )
            $
            (71,000
            )
            $
            14,984,000Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            2,565,000
            
            
            -
            
            
            2,565,000Other
                Comprehensive LossUnrealized
                Losses on Securities Available-for-Sale,net
                of Deferred Taxes of $238,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (343,000
            )
            
            (343,000
            )Total
                Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,222,000Exercise
                of Employee Stock Options
            
            
            2,000
            
            
            8,000
            
            
            8,000
            
            
            
            
            
            
            
            
            16,000Exercise
                of Warrants
            
            
            -
            
            
            2,000
            
            
            2,000
            
            
            
            
            
            
            
            
            4,000Exchange
                of Shares upon formation of holding company (Note 1)
            
            
            
            
            
            (8,453,000
            )
            
            8,453,000
            
            
            
            
            
            
            
            
            -Balance,
                December 31, 2005
            
            
            2,113,000
            
            
            2,113,000
            
            
            18,314,000
            
            
            (2,787,000
            )
            
            (414,000
            )
            
            17,226,000Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            636,000
            
            
            -
            
            
            636,000Other
                Comprehensive LossUnrealized
                Gains on Securities Available-for-Sale,net
                of Deferred Taxes of $176,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            299,000
            
            
            299,000Total
                Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            935,000Share-based
                Compensation
            
            
            
            
            
            
            
            
            140,000
            
            
            
            
            
            
            
            
            140,000Exercise
                of Warrants
            
            
            170,000
            
            
            170,000
            
            
            1,700,000
            
            
            
            
            
            
            
            
            1,870,000Balance,
                December 31, 2006
            
            
            2,283,000
            
            $
            2,283,000
            
            $
            20,154,000
            
            $
            (2,151,000
            )
            $
            (115,000
            )
            $
            20,171,000





*See
        accompanying notes to consolidated financial
        statements.*





F-5




**CNB
        FINANCIAL CORP.**
  Consolidated
        Statements of Cash Flows
 For
        the
        Years Ended December 31, 2006 and 2005


Cash
                Flows from Operating Activities:
            
            
            **2006**
            
            
            **2005**Net
                Income
            
            $
            636,000
            
            $
            2,565,000Adjustments
                to reconcile Net Income to Net Cash Used in Operating
                Activities-Share-Based
                Compensation
            
            
            140,000Provision
                for Loan Losses
            
            
            216,000
            
            
            590,000Increase
                in net Deferred Loan Costs
            
            
            (64,000
            )
            
            (19,000
            )Depreciation,
                Amortization of Premiums and Accretion of Discounts on
                Securities
            
            
            309,000
            
            
            336,000Deferred
                Tax Expense (Benefit)
            
            
            329,000
            
            
            (1,644,000
            )Gain
                on Sale of Securities
            
            
            (5,000
            )
            
            -Changes
                in Assets and Liabilities-Increase
                in Accrued Interest Receivable
            
            
            (326,000
            )
            
            (262,000
            )Increase
                in Other Assets
            
            
            (206,000
            )
            
            (101,000
            )Increase
                in Accrued Expenses and Other Liabilities
            
            
            1,457,000
            
            
            696,000Net
                Cash Provided by Operating Activities
            
            
            2,486,000
            
            
            2,161,000Cash
                Flows from Investing Activities:Purchases
                of Investment Securities Held-to-Maturity
            
            
            (3,377,000
            )
            
            (8,445,000
            )Purchases
                of Investment Securities Available-for-Sale
            
            
            (27,276,000
            )
            
            (10,002,000
            )Principal
                Payments on Mortgage Backed Securities (CMOs)
            
            
            4,944,000
            
            
            3,998,000Proceeds
                from Maturity (Call) of Investment Securities
                Held-to-Maturity
            
            
            1,000,000
            
            
            3,000,000Proceeds
                from Maturity (Call) of Investment Securities
                Available-for-Sale
            
            
            2,000,000
            
            
            -Purchase
                of Federal Reserve Stock and FHLBB Stock
            
            
            (1,393,000
            )
            
            (502,000
            )Sale
                of Securities Available-for-Sale
            
            
            4,860,000
            
            
            -Loan
                Originations, net of Principal Repayments
            
            
            (19,780,000
            )
            
            (31,136,000
            )Purchases
                of Premises and Equipment
            
            
            (1,120,000
            )
            
            (98,000
            )Net
                Cash Used in Investing Activities
            
            
            (40,142,000
            )
            
            (43,185,000
            )Cash
                Flows from Financing Activities:Advances
                from FHLBB
            
            
            88,100,000
            
            
            17,000,000Repayment
                of FHLBB Advances
            
            
            (69,350,000
            )
            
            (10,500,000
            )Federal
                Funds Purchased
            
            
            500,000
            
            
            -Securities
                Under Agreement to Repurchase
            
            
            5,946,000
            
            
            -Net
                Increase in Deposits
            
            
            2,355,000
            
            
            32,427,000Issuance
                of Subordinated Debentures
            
            
            -
            
            
            7,732,000Common
                Stock Issuance
            
            
            1,870,000
            
            
            20,000Net
                Cash Provided by Financing Activities
            
            
            29,421,000
            
            
            46,679,000Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (8,235,000
            )
            
            5,655,000Cash
                and Cash Equivalents, Beginning of the Period
            
            
            14,971,000
            
            
            9,316,000Cash
                and Cash Equivalents, End of the Period
            
            $
            6,736,000
            
            $
            14,971,000Supplemental
                Disclosure of Cash Flow InformationInterest
                Paid
            
            $
            6,923,000
            
            $
            4,482,000Taxes
                Paid
            
            $
            222,000
            
            $
            141,000




*See
      accompanying notes to consolidated financial statements.*





F-6


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006





**(1)**
            **ORGANIZATION**





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




**Company
      Formation**





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





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




**(2)**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





**Consolidated
      Financial Statements**





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiary, the Bank. All material inter-company
      transactions have been eliminated in consolidation. The
      Company (only), as a separately incorporated bank holding company, has no
      significant operations other than serving as the sole stockholder of the Bank.
      Its commitments and debt service requirement, at December 31, 2006, consist
      of
      subordinated debentures, including accrued interest amounting to $7.8 million
      issued to its unconsolidated subsidiary, Commonwealth National Bank Statutory
      Trust I. Commonwealth National Bank Statutory Trust I is an unconsolidated
      special purpose subsidiary of the Company that was formed to facilitate the
      issuance of trust preferred securities to the public. The Company has one
      reportable operating segment.





**Use
      of Estimates**




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




**Cash
      and Cash Equivalents**




For
      purpose of the statement of cash flows, cash and cash equivalents consist of
      cash on hand and amounts due from banks, federal funds sold and securities
      purchased under the agreement to resell, all of which mature within ninety
      days.
      At December 31, 2006, cash and cash equivalents consisted of cash on hand,
      amounts due from banks and overnight federal funds sold.





F-7


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006


**Investment
      Securities**




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




Any
      security that management believes has experienced a decline in value, which
      is
      deemed other than temporary, is reduced to its estimated fair value by a charge
      to operations. Realized gains and losses on security transactions are computed
      using the specific identification method. Dividend and interest income,
      including amortization of premiums and discounts, is included in interest
      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, 2006 and 2005.




**Loans**





The
      Company grants commercial and residential mortgages, commercial and consumer
      loans to customers. A substantial portion of the loan portfolio is represented
      by commercial loans and commercial mortgages throughout Worcester County,
      Massachusetts. The ability of the Company’s debtors to honor their contracts is
      dependant upon the real estate values and general economic conditions in this
      area.





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





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




**Allowance
      for Loan Losses**





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





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





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, which are evaluated in the aggregate, according
      to the Company’s normal loan review process, including overall credit
      evaluation, non-accrual status and payment experience. Loans identified as
      impaired are further evaluated to determine the estimated extent of
      impairment.





F-8


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




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




**Credit
      Related Financial Instruments**





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




**Premises
      and Equipment**




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




**Impairment
      of Long-Lived Assets**




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




**Income
      Taxes**




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





**Stock
      Option Plan**





Prior
      to
      January 1, 2006, the Company accounted for share-based employee compensation
      arrangements in accordance with the provisions and related interpretations
      of
      Accounting Principles Board Opinion No. 25 (“APB 25”) “Accounting for Stock
      Issued to Employees”. No compensation cost was recognized for stock options for
      the periods ended on or prior to December 31, 2005, as options granted during
      those periods had an exercise price equal to or greater than the market value
      of
      the underlying common stock on the date of grant.





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standard
      (SFAS) No. 123R “Share-Based Payment” recognizing the grant-date fair value of
      share-based compensation using the modified prospective transition method. The
      impact of the Company adopting such accounting can be seen in Note 9, Stock
      Based Plans of these
      Notes to Consolidated Financial Statements.





**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.




F-9
 
 **CNB
          FINANCIAL CORP.**
  Notes
          to
          Consolidated Financial Statements
 December
          31, 2006


**2006**
            
            **2005**Net
                Income
            
            $
            636,000
            
            $
            2,565,000**Weighted
                Average Shares**Basic
                Shares
            
            
            2,173,000
            
            
            2,112,000Effect
                of Dilution
            
            
            48,000
            
            
            40,000Diluted
                Shares
            
            
            2,221,000
            
            
            2,152,000**Net
                Income Per Share**Basic
                EPS
            
            $
            0.29
            
            $
            1.21Effect
                of Dilution
            
            
            (0.00
            )
            
            (0.02
            )Diluted
                Shares
            
            $
            0.29
            
            $
            1.19





**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.





**(3)**
            **INVESTMENT
                SECURITIES**





The
      amortized cost and fair value of investment securities available-for-sale and
      held-to-maturity by contractual maturity, with gross unrealized gains and
      losses, at December 31, 2006 and 2005 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.




**2006**Amortized
                cost
            
            Unrealized
            
            Fair
                Value**Available-for-sale:**
            
            
            
            Gains
            
            LossesUS
                Government agencies
              Due
                within one year
            
            $
            6,000,000
            
            $
            -
            
            $
            (42,000
            )
            $
            5,958,000Due
                after one year through five years
            
            
            11,162,000
            
            
            -
            
            
            (186,000
            )
            
            10,976,000Due
                after five years through ten years
            
            
            930,000
            
            
            24,000
            
            
            -
            
            
            954,000Due
                after ten years
            
            
            1,864,000
            
            
            55,000
            
            
            -
            
            
            1,919,000Mortgage-backed
                Securities (including CMOs)Due
                after ten years
            
            
            34,852,000
            
            
            250,000
            
            
            (327,000
            )
            
            34,775,000$
            54,808,000
            
            $
            329,000
            
            $
            (555,000
            )
            $
            54,582,000**Held-to-maturity:**US
                Government agenciesDue
                within one year
            
            $
            1,997,000
            
            $
            -
            
            $
            (4,000
            )
            $
            1,993,000Due
                after one year through five years
            
            
            2,000,000
            
            
            -
            
            
            (23,000
            )
            
            1,977,000Mortgage-backed
                Securities(including CMOs)Due
                after five years through ten years
            
            
            3,702,000
            
            
            3,000
            
            
            (38,000
            )
            
            3,667,000Due
                after ten years
            
            
            1,412,000
            
            
            -
            
            
            (33,000
            )
            
            1,379,000MunicipalsDue
                after ten years
            
            
            3,352,000
            
            
            34,000
            
            
            (2,000
            )
            
            3,384,000Other
                Bonds
              Due
                after one year through five years
            
            
            50,000
            
            
            -
            
            
            -
            
            
            50,000$
            12,513,000
            
            $
            37,000
            
            
            (100,000
            )
            $
            12,450,000**Total
                Investment Securities**
            
            $
            67,321,000
            
            $
            366,000
            
            $
            (655,000
            )
            $
            67,032,000





F-10
 
 **CNB
          FINANCIAL CORP.**
  Notes
          to
          Consolidated Financial Statements
 December
          31, 2006


**2005**Amortized
                cost
            
            Unrealized
            
            Fair
                Value**Available-for-sale:**
            
            
            
            Gains
            
            LossesUS
                Government agenciesDue
                within one year
            
            $
            1,999,000
            
            $
            -
            
            $
            (30,000
            )
            $
            1,969,000Due
                after one year through five years
            
            
            19,160,000
            
            
            -
            
            
            (363,000
            )
            
            18,797,000Mortgage-backed
                Securities (including CMOs)Due
                after ten years
            
            
            19,135,000
            
            
            26,000
            
            
            (334,000
            )
            
            18,827,000$
            40,294,000
            
            $
            26,000
            
            $
            (727,000
            )
            $
            39,593,000**Held-to-maturity:**US
                Government agenciesDue
                within one year
            
            $
            1,001,000
            
            $
            2,000
            
            $
            -
            
            $
            1,003,000Due
                after one year through five years
            
            
            3,981,000
            
            
            -
            
            
            (40,000
            )
            
            3,941,000Mortgage-backed
                Securities (including CMOs)Due
                after ten years
            
            
            4,103,000
            
            
            -
            
            
            (67,000
            )
            
            4,036,000Other
                Bonds
              Due
                after one year through five years
            
            
            25,000
            
            
            -
            
            
            -
            
            
            25,000$
            9,110,000
            
            $
            2,000
            
            
            (107,000
            )
            $
            9,005,000**Total
                Investment Securities**
            
            $
            49,404,000
            
            $
            28,000
            
            $
            (834,000
            )
            $
            45,598,000




At
      December 31, 2006 and 2005, the Bank had callable investment securities of
      $11,091,000 and $14,161,000, respectively, in the available-for-sale category
      and $1,997,000 and $3,981,000, respectively, in the held-to-maturity
      category.





At
      December 31, 2006 and 2005, investment securities carried at amortized cost
      of
      $47,700,000 and $26,006,000, respectively, (fair value of $47,343,000 and
      $25,496,000, respectively), were pledged to secure public deposits and for
      other
      purposes required or permitted by law.





The
      Bank
      is a member of the Federal Home Loan Bank of Boston (the “FHLBB”) and is
      required to invest in $100 par value stock of the FHLBB. The Bank must invest
      in
      FHLBB stock in an amount equal to 0.35% of certain assets of the Bank (a minimum
      of $500) plus 4.5% of the Bank’s outstanding FHLBB advances and other activity
      with the FHLBB. As and when such stock is redeemed, the Bank will receive an
      amount equal to the par value of the stock. At December 31, 2006, $52,250,000
      of
      advances from the FHLBB were outstanding (See Note 7) and the Bank held
      $3,070,000 in FHLBB stock.





The
      Bank
      is a member of the Federal Reserve Bank of Boston (the “FRBB”) and is required
      to invest in $100 par value stock of the FRBB in an amount equal to six percent
      of the Bank’s capital and surplus (one-half of the amount of the Bank’s
      subscription is paid to the FRBB and the remaining half is subject to call
      by
      the FRBB). As and when such stock is redeemed, the Bank will receive an amount
      equal to the amount paid in. At December 31, 2006, the Bank held $700,000 in
      FRBB stock.




**Other
      Than Temporarily Impaired Securities**




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, 2006 and 2005.




F-11


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006




**2006**Less
                than 12 Months
            
            12
                Months or Longer
            
            TotalDescription
                of Securities
            
            Fair
                Value
            
            Unrealized
                Loss
            
            Fair
                Value
            
            Unrealized
                Loss
            
            Fair
                Value
            
            Unrealized
                Loss(in
                thousands)US
                Government Agencies
            
            $
            994
            
            $
            (6
            )
            $
            19,911
            
            $
            (248
            )
            $
            20,905
            
            $
            (254
            )Mortgage
                Backed Securities
            
            
            3,942
            
            
            (10
            )
            
            14,962
            
            
            (389
            )
            
            18,904
            
            
            (399
            )Municipals
            
            
            622
            
            
            (2
            )
            
            -
            
            
            -
            
            
            622
            
            
            (2
            )Total
                Temporarily Impaired Securities
            
            $
            5,558
            
            $
            (18
            )
            $
            34,873
            
            $
            (637
            )
            $
            40,431
            
            $
            (655
            )**2005**Less
                than 12 Months
            12
                Months or Longer
            TotalDescription
                of Securities
            
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                Loss
            
            
            Fair
                Value
            
            
            Unrealized
                Loss(in
                thousands)US
                Government Agencies
            
            $
            12,981
            
            $
            (145
            )
            $
            12,158
            
            $
            (288
            )
            $
            25,139
            
            $
            (433
            )Mortgage
                Backed Securities
            
            
            15,697
            
            
            (327
            )
            
            3,050
            
            
            (74
            )
            
            18,747
            
            
            (401
            )Total
                Temporarily Impaired Securities
            
            $
            28,678
            
            $
            (472
            )
            $
            15,208
            
            $
            (362
            )
            $
            43,886
            
            $
            (834
            )







The
      Company had investment securities with an aggregate book value of $35,510,000
      and $15,208,000 that have been in a continuous loss position for twelve months
      or more at December 31, 2006 and 2005, respectively. The aggregate unrealized
      loss for these securities equaled $637,000 and $362,000 at December 31, 2006
      and
      2005, respectively. The unrealized loss on investments is caused by changes
      in
      the interest rate environment. The Company has the ability and intent to hold
      these investment securities until a price recovery, which could be until
      maturity, and therefore considers them to be other-than-temporarily impaired
      at
      December 31, 2006.




During
      2006, the Company sold investment securities that had been held in the
      available-for-sale category. Proceeds from the sale transactions amounted to
      $4,860,000. Included in the transaction were $37,000 in gross realized gains
      and
      $32,000 in gross realized losses.








**(4)**
            **LOANS**





Major
      classifications of loans at December 31 follow:




**2006**
              
              **2005**Commercial
                  and Industrial
              
              $
              62,217,000
              
              $
              59,043,000Commercial
                  Real Estate
              
              
              110,693,000
              
              
              91,497,000Residential
                  Real Estate
              
              
              15,048,000
              
              
              15,278,000Consumer
              
              
              12,710,000
              
              
              15,030,000Total
                  loans
              
              
              200,668,000
              
              
              180,848,000Less-Allowance
                  for Loan Losses
              
              
              (2,807,000
              )
              
              (2,615,000
              )Total
                  Loans, net
              
              $
              197,861,000
              
              $
              178,233,000





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, 2006, no loans accruing
      interest were past due 90 days or more and $67,000 of loans were on non-accrual
      status. At December 31, 2005, no loans accruing interest were past due 90 days
      or more and $1,287,000 of loans were on non-accrual status. Net deferred costs
      totaled $297,000 and $367,000 at December 31, 2006 and 2005,
      respectively.





F-12


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




As
      of
      December 31, 2006 and 2005, the Company’s recorded investment in impaired
      loans and the related valuation allowance was as follows:


**2006**
              
              **2005****Recorded
                  Investment**
              
              **Valuation
                  Allowance**
              
              **Recorded
                  Investment**
              
              **Valuation
                  Allowance**Impaired
                  LoansValuation
                  Allowance Required
              
              $
              67,000
              
              $
              3,000
              
              $
              1,287,000
              
              $
              91,000No
                  Valuation Allowance Required
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              67,000
              
              $
              3,000
              
              $
              1,287,000
              
              $
              91,000




The
      valuation allowance is included in the allowance for loan losses on the
      consolidated balance sheet. The average recorded investment in impaired loans
      for the years ended December 31, 2006 and 2005 was $207,000 and $261,000
      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.





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 year ended December 31, 2006
      is
      as follows:





Balance,
                Beginning of Year
            
            $
            9,734,000New
                Loans Granted During the Year
            
            
            3,130,000Less-Repayments
            
            
            (6,717,000
            )Balance,
                End of Year
            
            $
            6,147,000





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





**2006**
            
            **2005**Balance,
                Beginning of Year
            
            $
            2,615,000
            
            $
            2,025,000Provision
                for Loan Losses
            
            
            216,000
            
            
            590,000Less:
                Loans Charged-off
            
            
            (24,000
            )
            
            -Balance,
                End of Year
            
            $
            2,807,000
            
            $
            2,615,000




**(5)**
            **PREMISES
                AND EQUIPMENT**





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





**2006**
            
            **2005**
            
            **Estimated
                Useful Lives**Buildings
            
            $
            639,000
            
            $
            639,000
            
            
            40
                yearsLeasehold
                Improvements
            
            
            1,196,000
            
            
            591,000
            
            
            Lesser
                of useful life or remaining term of the leaseSoftware
                and Equipment
            
            
            1,228,000
            
            
            941,000
            
            
            5
                yearsComputers
            
            
            344,000
            
            
            235,000
            
            
            3
                yearsFurniture
                and Fixtures
            
            
            225,000
            
            
            192,000
            
            
            10
                yearsProjects
                in Process
            
            
            164,000
            
            
            79,000
            
            
            N/ATotal
            
            
            3,796,000
            
            
            2,677,000Less-Accumulated
                Depreciation and Amortization
            
            
            (1,275,000
            )
            
            (903,000
            )Net
                Premises and Equipment
            
            $
            2,521,000
            
            $
            1,774,000






F-13


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




Depreciation
      expense for the year ended December 31, 2006 and 2005 was $380,000 and $337,000,
      respectively and is classified as occupancy and equipment expense in the
      accompanying Consolidated Statement of Operations.




**(6)**
            **DEPOSITS**





A
      summary
      of deposits at December 31 follows:




**2006**
            
            **2005**Demand
                Deposits
            
            $
            24,478,000
            
            $
            24,410,000Savings
                and NOW Accounts
            
            
            43,211,000
            
            
            62,244,000Certificates
                of Deposit
            
            
            124,118,000
            
            
            102,798,000Total
                Deposits
            
            $
            191,807,000
            
            $
            189,452,000





Certificates
      of deposit of $100,000 and over totaled $48,524,000 and $37,608,000 at December
      31, 2006 and 2005, respectively. Certificates of deposit of under $100,000
      totaled $75,594,000 and $65,190,000 at December 31, 2006 and 2005,
      respectively.





The
      following is a summary of original maturities of certificates of deposits at
      December 31, 2006:


2007
            
            $
            120,043,0002008
            
            
            1,479,0002009
            
            
            2,353,0002010
            
            
            44,0002011
                and beyond
            
            
            199,000Total
            
            $
            124,118,000




**(7)**
            **Borrowings**





Advances
      from the FHLBB at December 31, 2006 and 2005, have the following
      maturities:




($
                thousands)
            
            **2006**
            
            **2005**Year
                ending December 31:
            
            Amount
            
            Weighted
                Average Rate
            
            Amount
            
            Weighted
                Average Rate2006
            
            
            $
            13,750
            
            
            3.42
            %2007
            
            $
            35,000
            
            
            4.88
            %
            
            8,500
            
            
            3.662008
            
            
            4,500
            
            
            3.89
            
            
            4,500
            
            
            3.892009
            
            
            5,250
            
            
            4.37
            
            
            3,250
            
            
            3.702010
            
            
            500
            
            
            3.97
            
            
            500
            
            
            3.972011
                and beyond
            
            
            7,000
            
            
            4.04
            
            
            3,000
            
            
            3.70Total
            
            $
            52,250
            
            
            4.62
            %
            $
            33,500
            
            
            3.61
            %




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





Subordinated
      debt at December 31, 2006 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 current interest rate is 7.20% and the next repricing
      date is June 15, 2007. 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.





At
      December 31, 2006 the Company had borrowed $500,000 of overnight federal funds
      purchased at a rate of 5.50%. No federal funds purchased were outstanding at
      December 31, 2005.





Securities
      under agreement to repurchase at December 31, 2006 equaled $5,946,000 and were
      generated by the customer deposit overnight sweep product. The overnight rate
      paid on December 31, 2006 was 4.88%. Since this product was introduced during
      2006 there were zero securities under agreement to repurchase at December 31,
      2005.





F-14


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006


**(8)**
            **INCOME
                TAXES**





The
      components of federal and state income tax expense for the years ended December
      31, 2006 and 2005 are as follows:


**2006**
              
              **2005**Current
                  Expense:Federal
                  Expense
              
              $
              26,000
              
              $
              -State
                  Expense
              
              
              119,000
              
              
              153,000Total
                  Current Expense
              
              
              145,000
              
              
              153,000Deferred
                  Expense:Federal
                  Expense
              
              
              353,000
              
              
              367,000State
                  Benefit
              
              
              (26,000
              )
              
              (211,000
              )Change
                  in Valuation Allowance
              
              
              -
              
              
              (1,800,000
              )Total
                  Deferred Expense (Benefit)
              
              
              327,000
              
              
              (1,644,000
              )Income
                  Tax Expense (Benefit)
              
              $
              472,000
              
              $
              (1,491,000
              )




A
      reconciliation of federal income tax expense to the amount computed by applying
      the statutory federal income tax rate to loss before federal income tax for
      the
      years ended December 31, 2006 and 2005 follows:




**2006**
            
            **2005**Pre-Tax
                Income
            
            $
            1,108,000
            
            $
            1,074,000Expected
                Federal Tax at 34%
            
            
            377,000
            
            
            365,000State
                Tax, net of Federal
            
            
            61,000
            
            
            (39,000
            )Change
                in Valuation Allowance
            
            
            -
            
            
            (1,800,000
            )Other
            
            
            34,000
            
            
            (17,000
            )Total
                Income Tax Expense (Benefit)
            
            $
            472,000
            
            $
            (1,491,000
            )





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005
      follow:


**2006**
              
              **2005********Deferred
                  Income Tax Assets******Allowance
                  for Loan Loss
              
              $
              1,149,000
              
              $
              1,070,000Start-Up
                  Costs
              
              
              -
              
              
              65,000Net
                  Operating Loss
              
              
              340,000
              
              
              783,000Unrealized
                  Loss on Investment Securities
              
              
              111,000
              
              
              287,000Other
              
              
              94,000
              
              
              88,000Gross
                  Deferred Tax Asset
              
              
              1,694,000
              
              
              2,293,000Valuation
                  Allowance
              
              
              -
              
              
              -Net
                  Deferred Tax Asset
              
              
              1,694,000
              
              
              2,293,000**Deferred
                  Income Tax Liabilities**Depreciation
              
              
              141,000
              
              
              237,000Gross
                  Deferred Liabilities
              
              
              141,000
              
              
              237,000**Net
                  Deferred Taxes**
              
              $
              1,553,000
              
              $
              2,056,000


F-15


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




During
      2005, the Company recognized the benefit of the deferred tax assets including
      the net operating loss carry-forwards for GAAP purposes. An income tax benefit
      of $1.5 million was recorded as a result of reversing the previously established
      valuation allowance for deferred taxes. This action was taken after completing
      an analysis of the Bank’s current operating income and future earnings
      potential. The analysis revealed that the potential and expectations for
      continued profitability will more likely than not generate sufficient operating
      income to realize the deferred tax asset created during the early years of
      the
      Bank’s existence.





Initial
      operating losses, coupled with recent periods of profitable operations, have
      resulted in available tax loss carry-forwards of approximately $1.0 million.
      These carry-forwards expire in 2025 and are subject to review and possible
      adjustment by the Internal Revenue Service. The United States Tax Reform Act
      of
      1986 contains provisions that may limit the net operating loss carry-forwards
      available to be used in any given year under certain circumstances, including
      significant changes in ownership interests. Projections for continued levels
      of
      profitability will be reviewed quarterly and any necessary adjustments to the
      deferred tax assets will be recognized in the provision or benefit for income
      taxes. A deferred tax asset valuation allowance is required to reduce the
      potential tax benefit when it is more likely than not 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, 2006 or 2005. It should be noted, however, that factors beyond
      management’s control, such as the general state of the economy and real estate
      values, can affect future levels of taxable income and that no assurance can
      be
      given that sufficient taxable income will be generated to fully absorb gross
      deductible temporary differences.




**(9)**
            **STOCK-BASED
                PLANS**





**Stock
      Option Plan**





On
      November 6, 2001, the shareholders’ voted to approve the Bank’s 2001 Stock
      Option Plan (the Plan) for employees and directors of the Bank. The Compensation
      Committee of the Board of Directors administers the Plan, which has authorized
      400,000 shares for grant (as amended on May 19, 2005). Both incentive stock
      options and non-qualified stock options may be granted under the Plan. The
      authorization of grants, the determination of number of shares to be granted,
      the exercise date and the option price of each award will be determined by
      the
      Compensation Committee of the Board of Directors on the date of grant. The
      options vest annually at a rate of 25% over a four-year period and will expire
      on the tenth anniversary of the grant date. On June 6, 2006, the Board of
      Directors authorized the granting of the 59,250 shares at the then fair market
      value of $13.00 per share to the employees of the Bank under the provisions
      of
      this Plan.





Upon
      the
      reorganization of the Bank into a holding company structure the Plan was assumed
      and restated by the Company on the same terms and conditions as the Bank’s Plan.
      All shares of common stock of the Bank under the Plan which remained available
      on the date of reorganization for issuance of options were converted into the
      same number of shares of common stock of the Company and are available for
      future option grants made by the Company. Any options thereafter granted
      pursuant to the Plan shall be options granted by the Company and shall relate
      to
      the common stock of the Company.




A
      summary
      of the status of the Company’s stock option plan as of December 31, 2006 and
      changes during the years ended on December 31, 2006 and 2005 appears on the
      following page:


F-16


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006




**2006**
            
            **2005****Fixed
                Options**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at Beginning of Year
            
            
            196,055
            
            $
            11.41
            
            
            151,100
            
            $
            9.78Granted
            
            
            59,250
            
            
            13.00
            
            
            49,350
            
            
            12.75Forfeited
            
            
            (3,000
            )
            
            12.05
            
            
            (2,795
            )
            
            13.14Exercised
            
            
            -
            
            
            -
            
            
            (1,600
            )
            
            9.63Outstanding
                at End of Year
            
            
            252,305
            
            $
            11.77
            
            
            196,055
            
            $
            11.41Issued
                in 2002 (Expire April 30, 2012)
            
            
            62,150
            
            $
            10.00
            
            
            62,650
            
            $
            10.00Issued
                in 2003 (Expire April 17, 2013)
            
            
            34,175
            
            
            9.00
            
            
            34,525
            
            
            9.00Issued
                in 2004 (Expire April 15, 2014)
            
            
            50,425
            
            
            13.50
            
            
            50,875
            
            
            13.50Issued
                in 2005 (Expire April 21, 2015)
            
            
            47,290
            
            
            12.75
            
            
            48,005
            
            
            12.75Issued
                in 2006 (Expire June 6, 2016)
            
            
            58,265
            
            
            13.00Total
                Shares and Average Exercise Price
            
            
            252,305
            
            
            11.77
            
            
            196,055
            
            
            11.41Weighted
                Average Remaining Life
            
            
            7.4
                years
            
            
            
            
            
            7.7
                yearsOptions
                Exercisable at Year End
            
            
            124,815
            
            $
            10.76
            
            
            76,967
            
            $
            10.35Fair
                Value of Options Granted During the Year
            
            $
            3.74
            
            
            
            
            $
            3.21







The
      following table summarizes the Company’s activities with respect to its stock
      option plan for the year 2006:


**Options**
              
              **Number of**
                **Shares**
              
              **Weighted-**
                **Average**
                **Exercise Price**
                **Per
                  Share**
              
              **Weighted-Average
                  Remaining Contractual Term**
              
              **Weighted-****Average
                  Grant Date****Fair
                  Value**Outstanding
                  at January 1, 2006
              
              
              196,055
              
              $
              11.41Granted
              
              
              59,250
              
              
              13.00
              
              
              
              
              $
              3.74Exercised
              
              
              -Forfeited
              
              
              3,000
              
              
              12.05Outstanding
                  at December 31, 2006
              
              
              252,305
              
              $
              11.77
              
              
              7.35
                  years
              
              $
              2.96Exercisable
                  at December 31, 2006
              
              
              124,815
              
              $
              10.76
              
              
              6.19
                  years
              
              $
              2.47




The
      aggregate intrinsic value of the options exercisable and outstanding at
      December 31, 2006 equals $308,000 and $747,000, respectively. Total compensation
      costs associated with the unvested options outstanding at December 31, 2006
      equals $326,000 and will be recognized over an average of 1.8
      years.





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”).
      SFAS No. 123R replaces SFAS No. 123 “Accounting for
      Stock-Based Compensation” and supersedes Accounting Principles Board Opinion
      No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”
SFAS No. 123R requires the
      measurement and recognition of compensation expense for all share-based payment
      awards to employees and directors based on estimated fair values ,
      eliminating pro forma disclosure as an alternative. The cost is measured based
      on the grant-date fair value of the equity or liability instruments issued.




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




F-17


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




The
      Company adopted SFAS 123R using the modified prospective transition method.
      Under this method, compensation expense recognized during the twelve months
      ended December 31, 2006 equaled $140,000 and reflected (a) compensation expense
      for all share-based awards granted prior to December 31, 2005 but not yet
      vested, based on the grant date fair value estimated in accordance with the
      original provisions of SFAS 123, and (b) compensation expense for all
      share-based awards granted subsequent to December 31, 2005 but not yet
      vested, based on the grant date fair value estimated in accordance with the
      provisions of SFAS 123R. Share-based awards involving 59,250 options were
      granted by the Company during 2006. In accordance with the modified prospective
      transition method, the Company’s Consolidated Financial Statements for prior
      periods have not been restated to reflect the impact of SFAS 123R.




The
      Company records compensation expense for employee stock options based on the
      estimated fair value of the options on the date of grant using the National
      Economic Research Associates, Inc. employee stock option pricing model with
      the
      assumptions included in the table below. The Company uses historical data among
      other factors to estimate the expected price volatility, the expected option
      life and the expected forfeiture rate. The risk-free rate is based on the U.S.
      Treasury yield curve in effect at the time of grant for the estimated life
      of
      the option. The following table depicts the average of the assumptions that
      were
      used to estimate the fair value of options that remain outstanding at December
      31, 2006.




Dividend
                yield
            2.7%Expected
                volatility
            35.0%Risk
                free interest rate
            3.6%Expected
                lives
            6.0
                years




Prior
      to
      January 1, 2006, the Company accounted for share-based employee compensation
      arrangements in accordance with the provisions and related interpretations
      of
      APB 25. Had compensation cost for share-based awards been determined consistent
      with SFAS No. 123R, the net income and earnings per share would have been
      adjusted to the following pro forma amounts for the twelve-month period ended
      December 31, 2005:


**2005**Net
                  Income, as reported
              
              $
              2,565,000Pro
                  forma total share-based compensation as if Statement 123 had been
                  applied
                  (zero tax rate)
              
              
              (72,000
              )Pro-forma
                  Net Income for the 2005 period
              
              $
              2,493,000Earnings
                  per share:Basic-as
                  reported
              
              $
              1.21Basic-pro
                  forma
              
              $
              1.18Diluted-as
                  reported
              
              $
              1.19Diluted-pro
                  forma
              
              $
              1.16Weighted
                  Average Shares Outstanding
              
              
              2,112,000Weighted
                  Average Diluted Shares Outstanding
              
              
              2,152,000





**Warrants**





On
      November 19, 2001, certain of the initial investors in the Bank were issued
      92,500 warrants, each of which was able to purchase one share of common stock
      of
      the Bank for each share of the Corporation that was originally purchased. These
      warrants become 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, 2006, none of the organizers’ warrants
      had been exercised.





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




F-18
 
 **CNB
          FINANCIAL CORP.**
  Notes
          to
          Consolidated Financial Statements
 December
          31, 2006


**(10)**
            **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, 2006 and 2005
      follow:





**2006**
            **2005**Commitments
                to Originate Loans
            $
                36,252,000
            $
                27,914,000Unused
                Lines of Credit
            9,997,000
            7,107,000Secured
                Commercial Lines of Credit
            26,504,000
            20,619,000Letters
                of Credit
            3,122,000
            3,457,000





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





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





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





**(b)**
            **Lease
                Commitments**





The
      following is a schedule of future minimum lease payments for non-cancelable
      lease obligations as of December 31, 2006:





Year
                Ending December 31,2007
            $
                519,0002008
            533,0002009
            536,0002010
            540,0002011
            536,000Thereafter
            3,944,000Total
                Future Minimum Lease Payments
            $
                6,608,000




F-19


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006


**(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 the five Executive Officers which would provide
      for severance pay in the event a change in control occurred.





**(d)**
            **Legal
                Proceedings**





Various
      legal claims may arise from time to time in the ordinary course of business.
      At
      December 31, 2006, 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, 2006 and 2005 were $3,000 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 agreement originally was schedule to expire on
      November 19, 2006; however, it was amended on October 1, 2005 and extended
      for a
      period ending on October 1, 2010. The Bank has the right to terminate the
      agreement with 60 days notice to Fiserv Solutions, Inc. Annual minimum charges
      per the Fiserv agreement for the entire remaining term are $100,000. Total
      fees
      to be paid may be the same as or exceed the minimum fee depending on transaction
      volume during the remaining term of the contract.





**(11)**
            **FAIR
                VALUE OF FINANCIAL
                INSTRUMENTS**





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





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





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


**Investment
      Securities**




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





**Loans,
      Net**





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





**Deposits**





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





F-20


**CNB
        FINANCIAL CORP.**
  Notes
        to
        Consolidated Financial Statements
 December
        31, 2006




**FHLBB
      Advances**





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





**Federal
      Funds Purchased**





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





**Securities
      Under Agreement to Repurchase**





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





**Subordinated
      Debentures**





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





**Commitments
      to Extend Credit and Commercial and Standby Letters of
      Credit**





The
      fair
      value of commitments to extend credit is estimated using the fees currently
      charged to enter into similar agreements, taking into account the remaining
      terms of the agreements and the present creditworthiness of the counterparties.
      The fair value of financial commercial and standby letters of credit is based
      on
      fees currently charged for similar agreements or on the estimated cost to
      terminate them or otherwise settle the obligation with the counterparties.
      The
      fair value of these fees at December 31, 2006 and 2005 was immaterial to the
      consolidated financial statements as a whole.





The
      carrying amount and estimated fair values of the Company’s financial instruments
      are as follows at December 31, 2006 and 2005:





**2006**
            
            **2005**(Dollars
                in thousands)
            
            
            
            Carrying
                Amount
            
            Fair
                Value
            
            Carrying
                Amount
            
            Fair
                Value**Financial
                Assets**Cash
                and Cash Equivalents
            
            
            
            
            $
            6,736
            
            $
            6,736
            
            $
            14,971
            
            $
            14,971Securities
                Available-for-Sale
            
            
            
            
            
            54,582
            
            
            54,582
            
            
            39,593
            
            
            39,593Securities
                Held-to-Maturity
            
            
            
            
            
            12,513
            
            
            12,450
            
            
            9,110
            
            
            9,005Federal
                Reserve Bank Stock
            
            
            
            
            
            700
            
            
            700
            
            
            508
            
            
            508Federal
                Home Loan Bank Stock
            
            
            
            
            
            3,070
            
            
            3,070
            
            
            1,870
            
            
            1,870Loans,
                Net
            
            
            
            
            
            197,861
            
            
            195,481
            
            
            178,233
            
            
            177,289Accrued
                Interest Receivable
            
            
            
            
            
            1,297
            
            
            1,297
            
            
            971
            
            
            971**Financial
                Liabilities**DepositsDemand
                Deposits
            
            
            
            
            
            24,478
            
            
            24,483
            
            
            24,410
            
            
            24,410Savings
                and NOW Accounts
            
            
            
            
            
            43,211
            
            
            43,211
            
            
            62,244
            
            
            62,244Certificates
                of Deposit
            
            
            
            
            
            124,118
            
            
            123,889
            
            
            102,798
            
            
            102,169FHLBB
                Advances
            
            
            
            
            
            52,250
            
            
            51,570
            
            
            33,500
            
            
            32,778Federal
                Funds Purchased
            
            
            
            
            
            500
            
            
            500
            
            
            -
            
            
            -Securities
                Under Agreements to Repurchase
            
            
            
            
            
            5,946
            
            
            5,946
            
            
            -
            
            
            -Subordinated
                Debentures
            
            
            
            
            
            7,732
            
            
            7,732
            
            
            7,732
            
            
            7,732Accrued
                Interest Payable
            
            
            
            
            
            2,258
            
            
            2,258
            
            
            609
            
            
            609





**(12)**
            **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, 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 qualitative judgments by the regulators about components, risk
      weightings and other factors. Management
      believes, as of December 31, 2006 that the Company and the Bank met all
      capital adequacy requirements to which they are subject






F-21
 **CNB
        FINANCIAL CORP.**


Notes
        to
        Consolidated Financial Statements
 December
        31, 2006


Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table on the next
      page)
      of Total and Tier I Capital (as defined in the regulations) to risk-weighted
      assets (as defined), and of Tier I capital (as defined) to average assets (as
      defined).  The
      minimum amounts and ratios necessary for the Bank to be categorized as “Well
      Capitalized” are also reflected in the table below. At December 31, 2006, the
      Bank is categorized as “Well Capitalized” as defined by federal regulations. There
      are
      no conditions or events since the last filing with the FDIC that management
      believes have changed the Bank’s category.





**The
                Company**
            **Actual**
            **For
              Capital Adequacy Purposes****December
                31, 2006**
            **Amount**
            
            **Ratio**
            **Amount**
            **Ratio**Total
                Capital (to Risk Weighted Assets)
            $28,805,000
            
            13.43%
            >$17,159,000
            >8.00%Tier
                1 Capital (to Risk Weighted Assets)
            26,125,000
            
            12.18
            8,579,000
            4.00Tier
                1 Leverage Capital (to Average Assets)
            26,125,000
            
            9.36
            11,158,000
            4.00




**The
                Bank**
            
            **Actual**
            
            **For
                Capital Adequacy**
              **Purposes**
            
            **To
                be “Well Capitalized” Under Prompt Corrective Action
                Provisions****December
                31, 2006**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**Total
                Capital (to Risk Weighted Assets)
            
            $
            26,477,000
            
            
            12.36
            %
            
            >$17,138,000
            
            
            >8.00
            %
            
            >$21,423,000
            
            
            >10.00
            %Tier
                1 Capital (to Risk Weighted Assets)
            
            
            23,797,000
            
            
            11.11
            
            
            8,569,000
            
            
            4.00
            
            
            12,854,000
            
            
            6.00Tier
                1 Leverage Capital (to Average Assets)
            
            
            23,797,000
            
            
            8.53
            
            
            11,158,000
            
            
            4.00
            
            
            13,948,000
            
            
            5.00





F-22


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006


**The
                Company**
            
            **Actual**
            
            **For
                Capital Adequacy Purposes****December
                31, 2005**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**Total
                Capital (to Risk Weighted Assets)
            
            $
            $24,331,000
            
            
            12.97
            %
            
            >$15,004,000
            
            
            >8.00
            %Tier
                1 Capital (to Risk Weighted Assets)
            
            
            21,987,000
            
            
            11.72
            
            
            7,502,000
            
            
            4.00Tier
                1 Leverage Capital (to Average Assets)
            
            
            21,987,000
            
            
            9.46
            
            
            9,297,000
            
            
            4.00




**The
                  Bank**
              
              **Actual**
              
              **For
                Capital Adequacy Purposes**
              
              **To
                  be “Well Capitalized” Under Prompt Corrective Action
                  Provisions****December
                  31, 2005**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**Total
                  Capital (to Risk Weighted Assets)
              
              
              $24,042,000
              
              
              12.84
              %
              
              >$14,983,000
              
              
              >8.00
              %
              
              >$18,729,000
              
              
              >10.00
              %Tier
                  1 Capital (to Risk Weighted Assets)
              
              
              21,698,000
              
              
              11.59
              
              
              7,492,000
              
              
              4.00
              
              
              11,238,000
              
              
              6.00Tier
                  1 Leverage Capital (to Average Assets)
              
              
              21,698,000
              
              
              9.35
              
              
              9,286,000
              
              
              4.00
              
              
              11,608,000
              
              
              5.00










F-23


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006





**(13)**
            **CNB
                FINANCIAL CORP. ONLY FINANCIAL
                STATEMENTS**




**Balance
                Sheet**
            
            **2006**
            
            **2005****ASSETS**Total
                Cash and Due From Banks
            
            $
            3,078,000
            
            $
            1,969,000Total
                Investment in Subsidiary
            
            
            24,825,000
            
            
            23,049,000Prepaid
                Taxes
            
            
            26,000
            
            
            -$
            27,929,000
            
            $
            25,018,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Accounts
                Payable
            
            $
            -
            
            $
            35,000Accrued
                Interest Payable on Subordinated Debentures
            
            
            26,000
            
            
            21,000Due
                to Subsidiary
            
            
            -
            
            
            4,000Subordinated
                Debentures
            
            
            7,732,000
            
            
            7,732,000Total
                Liabilities
            
            $
            7,758,000
            
            $
            7,792,000Stockholders’
                Equity:Total
                Stockholders’ Equity
            
            
            20,171,000
            
            
            17,226,000$
            27,929,000
            
            $
            25,018,000**Statement
                of Operations**Total
                Income
            
            $
            -
            
            $
            -Operating
                Expenses:Interest
                Expense
            
            
            525,000
            
            
            21,000Legal
            
            
            61,000
            
            
            54,000Other
                General and Administrative Expenses
            
            
            115,000
            
            
            14,000Total
                Operating Expenses
            
            
            701,000
            
            
            89,000




Loss
                Before Equity in Undistributed Income of Subsidiary
            
            
            (701,000
            )
            
            (89,000
            )Equity
                in Undistributed Income of Subsidiary
            
            
            1,337,000
            
            
            2,654,000Net
                Income
            
            $
            636,000
            
            $
            2,565,000




CNB
      Financial Corp. was formed December 16, 2005.


F-24


**CNB
      FINANCIAL CORP.**




Notes
      to
      Consolidated Financial Statements


December
      31, 2006




**Statement
      of Cash Flows**




Cash
                Flows from Operating Activities:
            
            **2006**
            
            **2005**Net
                Income
            
            $
            636,000
            
            $
            2,565,000Adjustments
                to Reconcile Net Income to Net Cash Used in Operating
                Activities-(Increase)
                decrease in Other Assets
            
            
            (26,000
            )
            
            -Increase
                (decrease) in Accrued Expenses and Other Liabilities
            
            
            (34,000
            )
            
            60,000Equity
                in Undistributed Income of Subsidiary
            
            
            (1,337,000
            )
            
            (2,654,000
            )Net
                Cash Used in Operating Activities
            
            
            (761,000
            )
            
            (29,000
            )Cash
                Flows from Investing Activities:Capital
                Investment in Bank Preferred Stock
            
            
            -
            
            
            (5,500,000
            )Investment
                in CNB Interim Bank
            
            
            -
            
            
            (2,000
            )Net
                Cash Used in Investing Activities
            
            
            -
            
            
            (5,502,000
            )Cash
                Flows from Financing Activities:Issuance
                of Subordinated Debentures
            
            
            -
            
            
            7,500,000Exercise
                of Warrants
            
            
            1,870,000
            
            
            -Net
                Cash Provided by Financing Activities
            
            
            1,870,000
            
            
            7,500,000Net
                Increase in Cash and Cash Equivalents
            
            
            1,109,000
            
            
            1,969,000Cash
                and Cash Equivalents, Beginning of the Period
            
            
            1,969,000
            
            
            -Cash
                and Cash Equivalents, End of the Period
            
            $
            3,078,000
            
            $
            1,969,000CNB
                Financial Corp. was formed December 16, 2005.
              
              The
                Statement of Stockholders’ Equity for the parent company is identical to
                the Consolidated Statement of Stockholders’ Equity which appears on page
                F-5







F-25


**Signatures**








In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its


behalf
      by
      the undersigned, thereunto duly authorized.








CNB
                FINANCIAL CORP.By:/s/
                Charles R. ValadeDated:
                March 22, 2007
            Charles
                R. Valade, President








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







**Signature**
            **Title**
            **Date**/s/
                Charles R. Valade
            
            March
                22, 2007Charles
                R. Valade
            President/s/
                William M. Mahoney
            
            March
                  22, 2007William
                M. Mahoney
            Treasurer
                and CFORobert
                D. Ansin
            Director/s/
                Gerald D. Cohen
            
            March
                  22, 2007Gerald
                D. Cohen
            Director/s/
                Cary J. Corkin
            
            March
                  22, 2007Cary
                J. Corkin
            Director/s/
                Lawrence J. Glick
            
            March
                  22, 2007Lawrence
                J. Glick
            Director/s/
                Stephen J. Granger
            
            March
                  22, 2007Stephen
                J. Granger
            Director/s/
                George L. Kaplan
            
            March
                  22, 2007George
                L. Kaplan
            Director/s/
                John P. Lauring
            
            March
                  22, 2007John
                P. Lauring
            Director





S-1





**Signature**
            **Title**
            **Date**/s/
                Ralph D. Marois
            
            March
                  22, 2007Ralph
                D. Marois
            Director/s/
                Henry T. Michie
            
            March
                  22, 2007Henry
                T. Michie
            Director/s/
                Harris L. MacNeill
            
            March
                  22, 2007Harris
                L. MacNeill
            Director/s/
                Richard J. Noonan
            
            March
                  22, 2007Richard
                J. Noonan
            Director/s/
                Claire A. O’Connor
            
            March
                  22, 2007Claire
                A. O’Connor
            Director/s/
                Bryan T. Rich
            
            March
                  22, 2007Bryan
                T. Rich
            Director/s/
                J. Robert Seder
            
            March
                  22, 2007J.
                Robert Seder
            Director








S-2