CNB CORP /MI/
CNB Corporation (the Company) was incorporated in June, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Board of Directors of the Citizens National Bank of Cheboygan (the Bank).  The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act with the Bank as its wholly-owned subsidiary. The Bank was acquired by the Company effective December 31, 1985. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve Board. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking.  During 2001, the Company, through its subsidiary, the Bank, formed the CNB Mortgage Corporation. Residential mortgages were transferred to the new subsidiary in October, 2001. The change had no impact on our customers who continue to have their loans serviced locally by our Bank.                                         2   The Bank offers a full range of banking services to individuals, partnerships, corporations, and other entities. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers.  The Bank's lending function provides a full range of loan products. These include real estate mortgages, secured and unsecured commercial and consumer loans, lines of credit, home equity loans and construction financing. The Bank also participates in specialty loan programs through the Michigan State Housing Development Authority, Federal Home Loan Mortgage Corporation, Mortgage Guaranty Insurance Corporation, Farm Service Agency and Small Business Administration. Through correspondent relationships, the Bank also makes available credit cards and student loans.  The Bank's loan portfolio consists of over 53% residential real estate mortgages on both primary and secondary homes. The residential borrower base is very diverse and loan to value ratios are generally 80% or less. Commercial loans accounts for approximately 40% of total loans. Commercial real estate lending, a part of commercial loans, has grown to represent 34% of total loans. These loans are generally for owner occupied properties with loan to value ratios of 80% or less. Personal guarantees are required on most commercial loans. Unsecured lending is very limited.  The Bank makes first and second mortgage loans to its customers for the purchase of residential and commercial properties. Historically, the Bank has sold its long term fixed rate residential mortgage loans qualifying for the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC). The mortgage loan portfolio serviced by the Bank for the FHLMC totaled approximately $73 million at December 31, 2005.  Banking services are delivered through six full-service banking offices and two drive-in branches plus ten automated teller machines in Cheboygan, Emmet and Presque Isle Counties, Michigan. The business base of the counties is primarily tourism with light manufacturing. The Bank maintains correspondent bank relationships with several larger banks, which involve check clearing operations, transfer of funds, loan participations, and the purchase and sale of federal funds and other similar services.  Our new branch in Inverness Township opened in December 2005. Unlike the drive-in branch it replaced, the new branch has full lobby service, easily accessible drive-thru lanes and a drive up ATM. In 2005 we entered into an agreement to sell the closed drive-in branch which is presently subject to a due diligence period of inspection by the expected purchaser. In January 2006 we signed an agreement to purchase property just south of Alanson in Littlefield Township, Emmet County. We anticipate closing on the property this summer and constructing a full-service branch facility later this year or in 2007. This will be the bank's first expansion location since the Indian River branch opened in 1981.  Under various agency relationships, the Bank provides trust and discount brokerage services and mutual fund, annuity and life insurance products to its customers.  In its primary market, which includes Cheboygan County and parts of Emmet, Mackinac and Presque Isle Counties, the Bank is one of three principal banking institutions. One is a member of a multi-bank holding company with substantially more assets than the Company, while the other is an independent community bank. There are also two credit unions, one savings and loan association and a brokerage firm.  As of December 31, 2005, the Bank employed 74 full-time and 14 part-time employees. This compares to 69 full-time and 16 part-time employees as of December 31, 2004. Neither the Company nor CNB Mortgage Corporation has any full-time employees. Their operation and business are carried out by officers and employees of the Bank who are not compensated by the Company.  Disclosure relating to the Distribution of Assets, Liabilities and Stockholders'Equity; Interest rates and Interest differential is presented on pages 39-40 of Registrant's 2005 Annual Report which is incorporated herein by reference.                                         3   SECURITIES  The year end fair values and related gross unrealized gains and losses for securities available for sale, were as follows:  AVAILABLE FOR SALE                                                     Gross        Gross                                       Fair     Unrealized   Unrealized Available for Sale                   Value       Gains        Losses                                              (In thousands)        2005         U.S. Government agency      $ 49,099    $     -       $ (717)         Mortgage-backed                8,140          -         (180)         State and municipal           12,076         38          (52)                                     --------    -------       ------                                     $ 69,315    $    38       $ (949)                                     ========    =======       ======     2004         U.S. Government agency      $ 56,786    $    20       $ (431)         Mortgage-backed                3,149          8            -         State and municipal           18,345        255          (17)                                     --------    -------      -------                                     $ 78,280    $   283       $ (448)                                     ========    =======       ======     2003         U.S. Government agency      $ 48,802    $   363       $  (28)         State and municipal           26,915        638           (8)                                     --------    -------      -------                                     $ 75,717    $ 1,001       $  (36)                                     ========    =======       ======   The year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:                                                  Gross         Gross                                Carrying    Unrecognized   Unrecognized    Fair Held to Maturity                Amount        Gains         Losses        Value                                --------    ------------   ------------   -------                                                      (In thousands)    2005         State and municipal    $  4,117       $   37         $  (26)     $ 4,128                                ========       ======         ======      =======     2004         State and municipal    $  4,621       $   55         $  (13)     $ 4,663                                ========       ======         ======      =======     2003         State and municipal    $  4,892       $  117         $    -      $ 5,009                                ========       ======         ======      =======                                          4  Scheduled maturities of the fair value of securities available for sale and the carrying amount of held to maturity securities at December 31, 2005, were as follows:                            Due in      Due from    Due from       Due                        One year      One to      Five to    After ten                        Or less     Five years   Ten years     Years      Total                        --------    ----------   ---------     -----     -------                                               (In thousands)        U.S. Government and         agencies       $ 31,308      $17,791     $     -     $     -    $49,099  Mortgage-backed              -        8,140           -           -      8,140  State and municpial      6,221        6,713       1,298       1,961     16,193                        --------      -------     -------     -------    -------                        $ 37,529      $32,644     $ 1,298     $ 1,961    $73,432                        ========      =======     =======     =======    =======   Yield                     3.05%        3.74%       6.19%       7.35%      3.53%                        ========      =======     =======     =======    =======   The Company held securities exceeding 10% of shareholders' equity for the following states (including its political subdivisions) at December 31, 2005:                 Book               Fair              Value              Value                 (In thousands)    Michigan    $ 8,713            $ 8,725   LOANS  The following is a summary of loans at December 31:                                            2005          2004        2003         2002         2001                                       ---------    ---------    ---------    ---------    ---------                                                              (In thousands)       Residential real estate               $  83,234    $  83,364    $  89,042    $  92,653    $  84,588 Consumer                                  9,922        8,699        9,660       11,270       11,767 Commercial real estate                   53,133       43,336       35,258       31,581       26,536 Commercial                               10,037        9,220        9,540       10,824       11,912                                       ---------    ---------    ---------    ---------    ---------                                         156,326      144,619      143,500      146,328      134,803 Deferred loan origination fees, net          (8)         (11)         (15)         (22)         (30) Allowance for loan losses                (1,456)      (1,350)      (1,575)      (1,669)      (1,667)                                       ---------    ---------    ---------    ---------    ---------                                       $ 154,862    $ 143,258    $ 141,910    $ 144,637    $ 133,106                                       =========    =========    =========    =========    =========                                          5   Maturity and Rate Sensitivity of Selected Loans  The following table presents the remaining maturity of total loans outstanding excluding residential real estate and consumer loans at December 31, 2005, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity of changes in interest rates.                                                                           Total                                                                    (In thousands)   In one year or less                                                    $ 29,516  After one year but within five years:        Interest rates are floating or adjustable                             60        Interest rates are fixed or predetermined                         29,785 After five years:        Interest rates are floating or adjustable                              -        Interest rates are fixed or predetermined                          3,809                                                                       ---------                                                                       $  63,170                                                                       =========   Summary of loan loss experience is as follows:  Additional information relative to the allowance for loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense.                                       2005     2004       2003      2002      2001                                  -------   -------   -------   -------    -------                                                (Dollars in thousands)       Balance at beginning of period   $ 1,350   $ 1,575   $ 1,669   $ 1,667    $ 1,652  Less charge-offs:    Residential real estate             -        33         8         -          -    Consumer                           28        43        98        49         84    Commercial real estate              -         -         -         -          -    Commercial                          -       166         -         1          3                                  -------   -------   -------   -------    ------- Total charge-offs:                    28       242       106        50         87  Recoveries:    Residential real estate             7         1         1         -          3    Consumer                            7         8        11        52         15    Commercial real estate              -         -         -         -          -    Commercial                          -         8         -         -          1                                  -------   -------   -------   -------    ------- Total recoveries                      14        17        12        52         19                                  -------   -------   -------   -------    ------- Net charge-offs                       14       225        94        (2)        68                                  -------   -------   -------   -------    ------- Provision charged to expense         120         -         -         -         83  Allowance for loan losses,       -------   -------   -------   -------    -------   end of period                  $ 1,456   $ 1,350   $ 1,575   $ 1,669    $ 1,667                                  =======   =======   =======   =======    =======                                           6                                           2005          2004            2003          2002           2001                                     ----------    -----------    -----------    -----------    -----------                                                            (Dollars in thousands)       Total loans outstanding at end   of period                         $  156,326    $   144,619    $   143,500    $   146,328    $   134,803  Average loans outstanding for   the year                          $  149,681    $   143,800    $   146,330    $   143,840    $   128,913  Ratio of net charge-offs to daily   average loans outstanding               0.01%          0.16%          0.06%          0.00%          0.05%  Ratio of net charge-offs to total         0.01%          0.16%          0.07%          0.00%          0.05%    loans outstanding   The allocation of the allowance for loan losses for the years ended December 31 is:                            Residential              Commercial                         Real Estate   Consumer   Real Estate    Commercial    Unallocated    Total                                                  (Dollars in thousands)        2005 Allowance amount     $  299       $   35      $   829         $ 163       $    130     $ 1,456   % of Total loans          53.2%         6.4%        34.0%          6.4%                     100.0% 2004 Allowance amount     $  223       $   39      $   118         $  74       $    896     $ 1,350   % of Total loans          57.6%         6.0%        30.0%          6.4%                     100.0% 2003 Allowance amount     $  258       $   48      $    88         $  49       $  1,132     $ 1,575   % of Total loans          62.1%         6.7%        24.6%          6.6%                     100.0% 2002 Allowance amount     $  244       $   32      $    79         $  45       $  1,269     $ 1,669   % of Total loans          63.3%         7.7%        21.6%          7.4%                     100.0% 2001 Allowance amount     $  219       $   44      $    65         $  30       $  1,309     $ 1,667   % of Total loans          62.8%         8.7%        19.7%          8.8%                     100.0%   The amount of the unallocated allowance decreased significantly from $896,000 in 2004 to $130,000 in 2005. This was primarily due to a revision of the allowance for loan losses methodology during 2005. During 2005 management enhanced their assessment of inherent risks in the loan portfolio which resulted in increased allowance allocations in the commercial real estate and commercial loan categories during 2005. Management feels the new methodology better allocates the allowance into the appropriate loan categories.  The review of the loan portfolio revealed no undue concentrations of credit, however, the portfolio continues to be concentrated in residential real estate mortgages and highly dependent upon the tourist industry for the source of repayment. Because the reliance on tourism is both primary, (i.e. loans to motels, hotels, and restaurants, etc.) and secondary (i.e. loans to employees of tourist related businesses), it is difficult to assess a specific dollar amount of inherent loss potential. Likewise, the residential real estate market has been stable or increasing, so inherent loss potential in this concentration is also difficult to reasonably assess. Therefore, the tourism industry and residential real estate mortgage concentrations are considered in establishing the allowance for loan loss.                                         7   The following is a summary of nonaccrual, past due and restructured loans as of December 31:                                             2005             2004             2003            2002             2001                                                                            (In thousands)       Nonaccrual loans                      $        -       $        -       $        -      $        -       $        - Loans past due 90 days or more               255              674              408             114              647 Troubled debt restructurings                   -                -                -               -                -                                       ----------       ----------       ----------      ----------       ----------                                       $      255       $      674       $      408      $      114       $      647                                       ==========       ==========       ==========      ==========       ==========   DEPOSITS  The following table presents the remaining maturity of time deposits individually exceeding $100,000 at December 31, 2005. Dollars are reported in thousands.     3 Months or less                         $ 3,414 Over 3 Months to 6 Months                  2,813 Over 7 Months through 12 Months            5,416 Over 12 Months                             7,918                                          -------                                          $19,561                                          =======   Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included in page 1 of Registrant's 2005 Annual Report, which is incorporated herein by reference.  SUPERVISION AND REGULATION  As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required to file quarterly and annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiary, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company.  The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto.  Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business as consumer finance, equipment leasing, computer service bureau and software operations, data processing, discount securities brokerage, mortgage banking and brokerage, sale and leaseback, and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies.                                         8   In addition, Federal legislation prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock.  The Company's cash revenues are derived primarily from dividends paid by the Bank. Without prior approval, a national bank may not declare a dividend if the total amount of all dividends declared by the bank in any calendar year exceeds the total bank's retained net income for the current year and retained net income for the preceding two years. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be "undercapitalized."  The Bank is a national banking association and as such is subject to the regulations of, and supervision and regular examination by, the Office of the Comptroller of the Currency ("OCC"). Deposit accounts of the bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). Requirements and restrictions under the laws of the State of Michigan and Title 12 of the United States Code include the requirements that banks maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by a bank, and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits, and restrictions relating to investments and other activities of a bank. The Federal Reserve Board has established guidelines for risk based capital by bank holding companies. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance sheet items in the calculation of capital requirements.  An analysis of the Company's regulatory capital requirements at December 31, 2005 is presented on page 26 of the Registrant's 2005 Annual Report in Note 14 Regulatory Capital to the Company's consolidated financial statements, which is incorporated herein by reference.
In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors:  WE FACE INTENSE COMPETITION IN ALL PHASES OF OUR BUSINESS FROM OTHER BANKS AND FINANCIAL INSTITUTIONS.  We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other financial services with numerous Michigan-based and out-of-state banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of these competitors are not subject to the same regulatory restrictions, have advantages of scale due to their size, or have cost advantages due to their tax status.  INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS.  Our profitability is in part a function of the spread between the interest rates earned on loans and investments and the interest rates paid on deposits. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influences market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities (deposits) will be such that they are affected differently by a given change in interest rates. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates, changes in the U.S. Treasury yield curve and other similar factors may have an adverse effect our business, financial condition and results of operations.                                         9   OUR LOCAL ECONOMY MAY AFFECT OUR FUTURE GROWTH POSSIBILITIES.  Our current market area is principally located in Northern Michigan. Our future growth opportunities depend on the growth and stability of our regional economy and our ability to expand our market area and market share. A downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers' ability to repay their loans on a timely basis, both of which could have an impact on our profitability.  WE MUST EFFECTIVELY MANAGE OUR CREDIT RISK.  These are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risk of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures. We have a formal lending policy that is approved by the Board of Directors of the Bank. However prudent these procedures may be they do not eliminate credit risk.  OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES.  The risk of nonpayment of loans is inherent in all lending activities and nonpayment, if it occurs, may have a material adverse affect on our earnings and overall financial condition as well as the value of our common stock. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions were wrong, our allowance for loan losses may not be sufficient to cover our losses, thereby having an adverse affect on our operating results, and may cause us to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for credit losses. These regulatory agencies may require us to increase our provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for credit losses could have a negative effect on our net income, financial condition and results of operations.  WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE, AND WE MAY HAVE FEWER RESOURCES THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.  The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In additional to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.  WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT, AND CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.  We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, and the Comptroller of the Currency. Regulations adopted by these agencies govern a comprehensive range of matters relating to our permissible activities for us to engage in, maintenance of adequate capital levels, matters of internal control over financial reporting and other aspects of our operations. The regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law or regulation. The laws and regulations applicable to the Company could change at any time and we cannot predict the effects of these changes on our business and profitability. Increased regulation could increase our cost of compliance and adversely affect                                         10   profitability. For example, new legislation or regulation or regulation may limit the manner in which we many conduct our business, including our ability to offer new products, attract deposits, make loans and achieve satisfactory spreads.  THERE IS A LIMITED TRADING MARKET FOR OUR COMMON SHARES, AND THUS YOUR ABILITY TO SELL OR PURCHASE OUR COMMON SHARES MAY BE LIMITED.  Your ability to sell our common shares or purchase additional common shares largely depends upon the existence or an active market for our common shares. Although our common shares are quoted on the OTC Bulletin Board, they are not listed on any securities exchange and the volume of trading has been historically limited. As a result, you may not be able to sell or purchase our common shares at the volume, time and price that you desire. In addition, a fair valuation of the purchases or sales price of our common shares also depends upon an active trading market, and thus the price you receive for a thinly traded stock, such as our common shares, may not reflect its true value.  WE MAY NOT BE ABLE TO PAY DIVIDENDS IN THE FUTURE IN ACCORDANCE WITH PAST PRACTICE.  We pay a quarterly dividend to shareholders. However, we are dependent primarily upon the Bank for our earnings and funds to pay dividends on our common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank's earnings, capital requirements, financial condition and other factors considered by our Board of Directors.
Not applicable.
The Company and the Bank have their primary office at 303 North Main Street, Cheboygan, Michigan. In addition, the Bank owns and operates the following facilities: Onaway Office, 20581 W. State Street, Onaway; Mackinaw City Office, 580 S. Nicolet Street, Mackinaw City; Pellston Office, 200 Stimpson, Pellston; Indian River Office, 3990 Straits Highway, Indian River; Downtown drive-in, 414 Division Street, Cheboygan; and East Side drive-in, 816 East State Street, Cheboygan. All properties are owned by the Bank free of any mortgages or encumbrances. During 2005 the Bank constructed a new facility to replace its South Side drive-in. The new facility is located at 10854 North Straits Highway, Cheboygan and is now a full service branch. As previously mentioned, the Bank signed an agreement to purchase property just south of Alanson in Littlefield Township, Emmet County with the anticipation of constructing a full-service branch facility in late 2006 or in 2007.
Neither the Company nor the Bank is a party to any pending legal proceedings other than the routine litigation that is incidental to the business of banking.
There have been no matters submitted to a vote of security holders during the fourth quarter of 2005.                                         11   PART II
The common stock of the Company has no public trading market. All trades are handled on a direct basis between buyer and seller. The Bank acts as the Company's transfer agent. The principal market for the Company's stock consists of existing shareholders, family members of existing shareholders and individuals in the service area.  The information detailing the range of high and low selling prices of known transactions for the Company's common stock and cash dividends declared for each full quarterly period within the two most recent fiscal years can be found under the caption "Financial Highlights" on page 1 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.  The information which indicates the amount of common stock that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant can be found in Note 8 on page 20 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.  There are approximately 1,009 shareholders of record of common stock of the Company as of January 31, 2006.  During 2005 and 2004, the Company declared regular dividends of $1.60 per share plus a special dividend of $0.60 per share. These per share statistics have been restated to reflect the 5% stock dividend paid March 12, 2004. The information detailing the cash dividends declared within the two most recent fiscal years can be found under the caption "Financial Highlights" on page 1 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference. These have resulted in a dividend payout ratio averaging 80.7% for the past three years.  The Federal Reserve Board's policy of Cash Dividends by Bank Holding Companies restricts the payment of cash dividends based on the following criteria: (1) the Company's net income from operations over the past year must be sufficient to fully fund the dividend and (2) the prospective rate of earnings retention must be consistent with the Company's capital needs, asset quality and overall financial condition.  ISSUER PURCHASES OF EQUITY SECURITIES  The Company adopted a Stock Redemption Program on November 14, 2002 with the provision that it would remain in effect for six months or until $1 million had been expended on the purchase of common stock, whichever shall occur first. The Company extended the program in May 2003 until November 2003. The Company reinstated the program on December 24, 2003 and it was to remain in effect until the $1 million originally allocated for common stock purchases was met. As of September 30, 2005, the Company has $5 remaining to purchase stock under the program, but due to the average price per share the Company considers the program to have come to an end as of July 31, 2005.
The information required by this item is included on Page 1 under the caption "Financial Highlights" of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.
The information required by this item is included on pages 31 through 42 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.                                         12
The information required by this item is included on pages 36 through 37 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.
This information is included on pages 2 through 30 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2005, which is hereby incorporated by reference.
None.
As of the end of the period covered by this report (the "Evaluation Date") an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Treasurer who serves as our Chief Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that material information relating to the Company known to others within the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.  There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2005 that materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.
None.  PART III
Certain information required by this item is included under the captions "Information about Director Nominees," "Committees and Meetings of the Board of Directors," "Code of Ethics," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.  Information about the executive officers of the Corporation is set forth below.    Name and Age          Position - ------------          --------   John P. Ward, 69      Chairman of the Corporation and Citizens National Bank of                       Cheboygan. Mr. Ward retired as an officer from the Bank                       during 1998.                                          13    Name and Age                  Position - ------------                  --------   James C. Conboy, Jr., 58      Chief Executive Officer and President of the                               Corporation and Citizens National Bank of                               Cheboygan.  Mr. Conboy joined the  Corporation                               and the Bank during 1998. Mr. Conboy held the                               position as President and Chief Operating Officer                               for more than 5 years.  He has been in his                               current position since May, 2004.  Susan A. Eno, 51              Executive Vice President and Secretary of the                               Corporation; Executive Vice President and Cashier                               of Citizens National Bank of Cheboygan.  Ms. Eno                               has been an officer of the Corporation since 1996                               and an employee of the Bank since 1971.  She has                               been in her current position for more than 9                               years.  Douglas W. Damm, 52           Senior Vice President of the Corporation and                               Citizens National Bank of Cheboygan.  Mr. Damm has                               been an officer of the Corporation since 2003 and                               an employee of the Bank since 1987.  He has been                               in his current position for more than 18 years and                               has 27 years experience in the banking business.  Jeffrey L. Schmidt, 46        Senior Vice President of the Corporation and                               Citizens National Bank of Cheboygan.  Mr. Schmidt                               joined the Bank during 2004.  He has been in the                               banking business for more than 22 years.  Shanna L. Hanley, 28          Treasurer of the Corporation; Vice President and                               Senior Controller  of Citizens National Bank of                               Cheboygan.  Ms. Hanley joined the Bank during                               2005.
The information required by this item is included under the caption "Compensation of Executive Officers" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.
The information required by this item is included under the caption "Ownership of Common Stock" of the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.  The information required by this item is included under the caption "Securities Authorized for Issuance Under Equity Compensation Plan Information" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.
The information required by this item is included under the caption "Certain Relationships and Related Transactions" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.                                         14
The information required by this item is included under the caption "Independent Auditors" in the Company's proxy statement for the annual meeting of shareholders scheduled for May 16, 2006, which is hereby incorporated by reference.  PART IV
(a)   (1)Financial Statements. The following financial statements, notes to       financial statements and independent report of CNB Corporation and its       subsidiary are referenced in Item 8 of this report are hereby incorporated       by reference:        Consolidated Balance Sheets-December 31, 2005 and 2004.        Consolidated Statements of Income and Comprehensive Income for the years       ended December 31, 2005, 2004 and 2003.        Consolidated Statement of Changes in Shareholders' Equity for the years       ended December 31, 2005, 2004 and 2003.        Consolidated Statements of Cash Flows for the years ended December 31,       2005, 2004 and 2003.        Notes to Consolidated Financial Statements.        Report of Independent Registered Public Accounting Firm dated March 10,       2006.        (2)Financial Statement Schedules. Not applicable        (3) Exhibits.              (3a)Articles of Incorporation. Previously filed as exhibit to the             registrant's Form 10-KSB filed April 26, 1996, and hereby             incorporated by reference.              (3b)By-Laws as amended through March 25, 2004. Previously filed as             Exhibit 3b to the Company's Form 10-K for the fiscal year ended             December 31, 2003 filed December 27, 2004, and hereby incorporated             by reference.              (10) 1996 Stock Potion Plan. Previously filed as Exhibit 10 to the             Company's Form 10-Q for the quarter ended September 30, 1996 and             hereby incorporated by reference.              (11)Statement regarding computation of per share earnings. This             information is disclosed in Note 10 to the Company's Financial             Statements for the year ended December 31, 2005, which are included             in the annual report to shareholders for the year ended December 31,             2005 which is filed as Exhibit 13 to the Company's Form 10-K for the             fiscal year ended December 31, 2005, and hereby incorporated by             reference.              (13)Annual report to shareholders for the year ended December 31,             2005. (filed herewith).              (21)Subsidiaries of the Company. (filed herewith).                                         15               (23)Consent of Independent Registered Public Accounting Firm. (filed             herewith).              (31.1)Certification of Chief Executive Officer.              (31.2)Certification of Chief Financial Officer.              (32.1)Certification pursuant to Section 906 of the Sarbanes-Oxley             Act of 2002.  (b)See Item 15(a) (3) above.  (c)Financial Statement Schedules. Not applicable.                                         16   SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                   CNB CORPORATION                                   (Registrant)  Date: March 23, 2006   /s/ James C. Conboy, Jr. - ------------------------------ James C. Conboy, Jr. President and Chief Executive Officer  Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 23, 2006.      /s/ Steven J. Baker        /s/ John L. Ormsbee             /s/ Jeffrey L. Schmidt  - -------------------------  ------------------------------  --------------------- Steven J. Baker            John L. Ormsbee                 Jeffrey L. Schmidt Director                   Director                        Senior Vice President  /s/ James C. Conboy, Jr.   /s/ Francis J. VanAntwerp, Jr.  /s/ Shanna L. Hanley - -------------------------  ------------------------------  --------------------- James C. Conboy, Jr.       Francis J. VanAntwerp, Jr.      Shanna L. Hanley Director                   Director                        Treasurer (Principal President and Chief                                        Financial Officer and Executive Officer                                          Principal Accounting                                                            Officer)  /s/ Kathleen M. Darrow     /s/ John P. Ward - -------------------------  ------------------------------ Kathleen M. Darrow         John P. Ward Director                   Director                            Chairman  /s/ Thomas J. Ellenberger  /s/ Susan A. Eno - -------------------------  ------------------------------ Thomas J. Ellenberger      Susan A. Eno Director                   Executive Vice president                            Secretary  /s/ Vincent J. Hillesheim  /s/ Douglas W. Damm - -------------------------  ------------------------------ Vincent J. Hillesheim      Douglas W. Damm Director                   Senior Vice President                                          17                                     EXHIBIT INDEX  (3a)Articles of Incorporation. Previously filed as an exhibit to the registrant's Form 10-KSB filed April 26, 1996 and hereby incorporated by reference.  (3b)By-Laws as amended through March 25, 2004. Previously filed as Exhibit 3b to the Company's Form 10-K for the fiscal year ended December 31, 2003 filed December 27, 2004, and hereby incorporated by reference.  (10) 1996 Stock Option Plan. Previously filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended September 30, 1996 and hereby incorporated by reference.  (11) Statement regarding computation per share earnings. This information is disclosed in Note 10 to the Company's Financial Statements for the year ended December 31, 2005 contained in is annual report to shareholders for the year ended December 31, 2005. (filed herewith)  (13) Annual report to shareholders for the year ended December 31, 2005. (filed herewith)  (21) Subsidiaries of the Company. (filed herewith)  (23) Consent of Independent Registered Public Accounting firm. (filed herewith)  (31.1) Certification of Chief Executive Officer. (filed herewith)  (31.2) Certification of Chief Financial Officer. (filed herewith)  (32.1) Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (filed herewith)                                         18    EX-13 2 k03701exv13.txt ANNUAL REPORT TO SHAREHOLDERS                                       EXHIBIT 13                                   CNB CORPORATION                                    ANNUAL REPORT                         December 31, 2005, 2004 and 2003                                                                                  .                                                                                .                                                                                .                                   CNB CORPORATION                                   ANNUAL REPORT                         December 31, 2005, 2004 and 2003                                      CONTENTS    FINANCIAL HIGHLIGHTS .........................................        1  CONSOLIDATED BALANCE SHEETS ..................................        2  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME....        3  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ...        4  CONSOLIDATED STATEMENTS OF CASH FLOWS ........................        5  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................        6  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.......       30  MANAGEMENT'S DISCUSSION AND ANALYSIS..........................       31  OFFICERS, COMMUNITY ADVISORS AND STAFF........................       43  DIRECTORS AND DIRECTORS EMERITI...............................       45                                    CNB CORPORATION                               FINANCIAL HIGHLIGHTS                                       2005       2004       2003       2002       2001                                  --------   --------   --------   --------   --------                                         (In thousands, except per share data)       OPERATING STATISTICS  Interest income                 $ 13,356   $ 12,466   $ 13,282   $ 14,820   $ 15,788  Interest expense                   3,132      2,764      3,380      5,300      6,900  Net interest income               10,224      9,702      9,902      9,520      8,888  Income before income taxes         4,528      4,131      5,385      5,703      4,910  Net income                         3,288      2,955      3,885      4,094      3,501  Basic earnings per share (1)        2.66       2.38       3.12       3.27       2.80  Diluted earnings per share (1)      2.65       2.37       3.11       3.26       2.78  Return on average assets (ROA)      1.28%      1.14%      1.53%      1.71%      1.56%  Return on average    shareholders' equity (ROE)       13.23%     11.68%     15.14%     16.65%     15.24%  BALANCE SHEET STATISTICS  Securities                      $ 74,485   $ 88,951   $ 86,921   $ 69,400   $ 73,096  Total loans                      156,326    144,619    143,500    146,328    134,803  Deposits                         223,437    225,411    224,914    216,444    204,589  Total assets                     252,731    254,094    254,406    244,439    231,031  CAPITAL STATISTICS  Shareholders' equity            $ 24,499   $ 24,156   $ 25,138   $ 24,737   $ 23,377  Book value per share (1)           19.80      19.51      20.21      19.83      18.66  Cash dividends per share (1)        2.20       2.20       2.10       2.04       1.88  Dividend payout ratio              82.79%     92.32%     67.16%     62.25%     67.15%  Average equity to average    total assets                      9.66%      9.79%     10.13%     10.25%     10.23%  CREDIT STATISTICS  Net charge-offs to total loans      0.01%      0.16%      0.07%      0.00%      0.05%  Nonperforming loans    to total loans                    0.16%      0.47%      0.28%      0.08%      0.48%  Allowance for loan losses    to total loans                    0.93%      0.93%      1.10%      1.14%      1.24%  Allowance for loan losses    to nonperforming loans            5.72x      2.00x      3.86x     14.64x      2.58x   PRICE RANGE FOR COMMON STOCK  The following table shows the high and low selling prices of known transactions in common stock of the Company for each quarter of 2005 and 2004. There is no established public trading market for the Company's common stock. The Company had 1,009 shareholders as of December 31, 2005.                            2005                                    2004           ---------------------------------   -----------------------------------                                     Cash                                  Cash               Market Price        Dividends       Market Price          Dividends Quarter     High         Low       Declared      High        Low        Declared - -------   --------    ---------   ---------   ---------    --------     ---------        1st       $  50.00    $   48.00   $   0.40    $   52.00    $  49.24     $  0.40 2nd          50.00        49.50       0.40        52.00       48.00        0.40 3rd          50.00        46.50       0.40        51.00       49.50        0.40 4th          50.00        45.00       1.00        51.00       48.00        1.00   (1) All share and per share data have been restated to reflect the 5% stock dividend declared in 2003.            See accompanying notes to consolidated financial statements.                                                                                1.                                   CNB CORPORATION                            CONSOLIDATED BALANCE SHEETS                            December 31, 2005 and 2004                                                                          2005         2004                                                                     ---------   ----------                                                                (In thousands, except share data)    ASSETS Cash and due from banks                                             $   6,586    $   5,795 Interest-bearing deposits with other financial institutions                --        2,000 Federal funds sold                                                      5,357        4,900                                                                     ---------   ----------   Total cash and cash equivalents                                      11,943       12,695  Securities available for sale                                          69,315       78,280 Securities held to maturity (fair value of $4,128   in 2005 and $4,663 in 2004)                                           4,117        4,621 Other securities                                                        1,053        6,050 Loans, net of allowance for loan losses of $1,456   in 2005 and $1,350 in 2004                                          154,862      143,258 Premises and equipment, net                                             5,443        4,600 Other assets                                                            5,998        4,590                                                                     ---------   ----------    Total assets                                                      $ 252,731    $ 254,094                                                                     =========   ==========  LIABILITIES Deposits  Noninterest-bearing                                                $  38,943    $  37,289  Interest-bearing                                                     184,494      188,122                                                                     ---------   ----------    Total deposits                                                     223,437      225,411 Other liabilities                                                       4,795        4,527                                                                     ---------   ----------   Total liabilities                                                   228,232      229,938  SHAREHOLDERS' EQUITY Common stock - $2.50 par value; 2,000,000 shares   authorized; 1,237,418 and 1,237,994 shares   issued and outstanding in 2005 and 2004                               3,094        3,095 Additional paid-in capital                                             20,430       20,475 Retained earnings                                                       1,576        1,010 Accumulated other comprehensive loss, net of tax                         (601)        (424)                                                                     ---------   ----------   Total shareholders' equity                                           24,499       24,156                                                                     ---------   ----------     Total liabilities and shareholders' equity                       $ 252,731    $ 254,094                                                                     =========   ==========             See accompanying notes to consolidated financial statements.                                                                               2.                                     CNB CORPORATION            CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME                   Years ended December 31, 2005, 2004 and 2003                                                   2005        2004        2003                                             ---------   ---------   ---------                                             (In thousands, except per share data)     INTEREST INCOME   Loans, including fees                      $ 10,460    $  9,705    $ 10,483   Securities     Taxable                                     2,073       1,925       1,734     Tax exempt                                    571         691         862   Other interest income                           252         145         203                                              --------    --------    --------        Total interest income                   13,356      12,466      13,282  INTEREST EXPENSE ON DEPOSITS                    3,132       2,764       3,380                                              --------    --------    --------  NET INTEREST INCOME                            10,224       9,702       9,902  Provision for loan losses                         120           -           -                                              --------    --------    --------  NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                10,104       9,702       9,902                                              --------    --------    --------  NONINTEREST INCOME   Service charges and fees                        942         976         947   Net realized gains from sales of loans          256         342         777   Loan servicing fees, net of amortization        113         135         (43)   Other income                                    505         165         297                                              --------    --------    --------        Total noninterest income                 1,816       1,618       1,978  NONINTEREST EXPENSES   Salaries and employee benefits                3,303       3,400       3,180   Deferred compensation                           690         315         436   Pension                                         260         768         370   Hospitalization                                 545         490         394   Occupancy                                       913         814         762   Supplies                                        168         168         170   Legal and professional                          457         312         222   Other expenses                                1,056         922         961                                              --------    --------    --------        Total noninterest expense                7,392       7,189       6,495                                              --------    --------    --------  INCOME BEFORE INCOME TAXES                      4,528       4,131       5,385  Income tax expense                              1,240       1,176       1,500                                              --------    --------    -------- NET INCOME                                      3,288       2,955       3,885                                              ========    ========    ========  Other comprehensive income (loss)   Net change in unrealized gains (losses)    on securities available for sale              (746)     (1,130)       (547)   Change in minimum pension liability             477          12        (489)   Tax effects                                      92         381         352                                              --------    --------    --------    Total other comprehensive income (loss)       (177)       (737)       (684)                                              --------    --------    --------  COMPREHENSIVE INCOME                         $  3,111    $  2,218    $  3,201                                              ========    ========    ========  Basic earnings per share                     $   2.66    $   2.38    $   3.12 Diluted earnings per share                       2.65        2.37        3.11             See accompanying notes to consolidated financial statements.                                                                                3.                                   CNB CORPORATION            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                   Years ended December 31, 2005, 2004 and 2003                                                                                                        Accumulated                                                                                                        Other                                                                                                     Comprehensive                                                                          Additional                 Income (Loss),      Total                                              Outstanding     Common       Paid-In       Retained          Net       Shareholders'                                                Shares        Stock        Capital       Earnings        of Tax         Equity                                              -----------   ----------    ----------    ----------   --------------  -------------                                                                 (Dollars in thousands, except per share data)        Balance January 1, 2003                       1,188,372    $    2,971    $   18,240    $    2,529     $      997     $   24,737  Net income                                                                                  3,885                         3,885 Cash dividends - $2.10 per share                                                           (2,609)                       (2,609) 5% stock dividend                                58,852           147         2,854        (3,022)                          (21) Shares issued under stock option plan               264             1             7                                           8 Purchase and retirement of common stock          (3,549)           (9)         (169)                                       (178) Net change in accumulated other   comprehensive income (loss)                                                                               (684)          (684)                                               ---------    ----------    ----------    ----------     ----------     ----------  Balance December 31, 2003                     1,243,939         3,110        20,932           783            313         25,138  Net income                                                                                  2,955                         2,955 Cash dividends - $2.20 per share                                                           (2,728)                       (2,728) Shares issued under stock option plan, net of 4,543 shares surrendered                   4,324            11            37                                          48 Purchase and retirement of common stock         (10,269)          (26)         (494)                                       (520) Net change in accumulated other   comprehensive income (loss)                                                                               (737)          (737)                                               ---------    ----------    ----------    ----------     ----------     ----------  Balance December 31, 2004                     1,237,994         3,095        20,475         1,010           (424)        24,156  Net income                                                                                  3,288                         3,288 Cash dividends - $2.20 per share                                                           (2,722)                       (2,722) Shares issued under stock option plan             1,382             4            48                                          52 Purchase and retirement of common stock          (1,958)           (5)          (93)                                        (98) Net change in accumulated other   comprehensive income (loss)                                                                               (177)          (177)                                               ---------    ----------    ----------    ----------     ----------     ----------  Balance December 31, 2005                     1,237,418    $    3,094    $   20,430    $    1,576     $     (601)    $   24,499                                               =========    ==========    ==========    ==========     ==========     ==========             See accompanying notes to consolidated financial statements.                                                                                4.                                    CNB CORPORATION                       CONSOLIDATED STATEMENTS OF CASH FLOWS                   Years ended December 31, 2005, 2004 and 2003                                                                                     2005        2004        2003                                                                                --------    --------    --------                                                                                          (In thousands)     CASH FLOWS FROM OPERATING ACTIVITIES    Net Income                                                                  $  3,288    $  2,955    $  3,885    Adjustments to reconcile net income to net cash      from operating activities       Depreciation, amortization and accretion, net                                 458       1,138       1,022       Provision for loan losses                                                     120          --          --       Loans originated for sale                                                 (11,613)    (18,590)    (40,356)       Proceeds from sales of loans originated for sale                           11,739      18,793      40,830       Gain on sales of loans                                                       (256)       (342)       (777)       (Increase) decrease in other assets                                          (596)        594         456       Increase in other liabilities                                                 732          20         589                                                                                --------    --------    --------           Total adjustments                                                         584       1,613       1,764                                                                                --------    --------    --------                 Net cash provided by operating activities                         3,872       4,568       5,649  CASH FLOWS FROM INVESTING ACTIVITIES       Proceeds from maturities of securities         available for sale                                                       22,706      30,690      29,587       Purchase of securities available for sale                                 (14,458)    (35,073)    (48,944)       Proceeds from maturities of securities held         to maturity                                                               2,154       2,056       2,186       Purchase of securities held to maturity                                    (1,650)     (1,785)     (1,463)       Proceeds from maturities of other securities                                5,055         600       1,285       Purchase of other securities                                                  (58)       (338)     (1,345)       Net change in portfolio loans                                             (12,314)     (1,474)      2,727       Premises and equipment expenditures                                        (1,330)       (964)     (1,038)                                                                                --------    --------    --------                 Net cash (used in) provided by investing activities                 105      (6,288)    (17,005)  CASH FLOWS FROM FINANCING ACTIVITIES        Net increase (decrease) in deposits                                        (1,974)        497       8,470       Dividends paid                                                             (2,709)     (2,675)     (2,612)       Net proceeds from exercise of stock options                                    52          48           8       Purchases of common stock                                                     (98)       (520)       (178)                                                                                --------    --------    --------                 Net cash (used in) provided by financing activities              (4,729)     (2,650)      5,688                                                                                --------    --------    --------  Net change in cash and cash equivalents                                            (752)     (4,370)     (5,668)  Cash and cash equivalents at beginning of year                                   12,695      17,065      22,733                                                                                --------    --------    --------  CASH AND CASH EQUIVALENTS AT END OF YEAR                                       $ 11,943    $ 12,695    $ 17,065                                                                                ========    ========    ========  Supplemental disclosure of cash flow information    Cash paid during the period for:       Interest                                                                 $  3,069    $  2,784    $  3,399       Income taxes                                                                1,214       1,364       1,442 Non-cash transactions:    Transfer from loans to other real estate owned                                   590         126           -             See accompanying notes to consolidated financial statements.                                                                                5.                                   CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Principles of Consolidation: The consolidated financial statements include CNB Corporation (the Company) and its wholly-owned subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned subsidiary CNB Mortgage Corporation (the Bank and the Mortgage Corporation are hereafter collectively referred to as the Bank). All significant intercompany accounts and transactions are eliminated in consolidation.  Nature of Operations and Concentrations of Credit Risk: The Company is a one-bank holding company which conducts no direct business activities. All business activities are performed by the Bank.  The Bank provides a full range of banking services to individuals, agricultural businesses, commercial businesses and light industries located in its service area. It maintains a diversified loan portfolio, including loans to individuals for home mortgages, automobiles, personal expenditures and loans to business enterprises for current operations and expansion. The Bank offers a variety of deposit accounts, including checking, savings, money market, individual retirement accounts and certificates of deposit.  The principal markets for the Bank's financial services are the Michigan communities in which the Bank is located and the area immediately surrounding these communities. The Bank serves these markets through eight offices located in Cheboygan, Presque Isle and Emmet Counties in northern lower Michigan.  Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, value of mortgage servicing rights, and fair values of financial instruments are particularly subject to change in the near term.  Cash Flow Reporting: Cash and cash equivalents include cash and due from banks and federal funds sold. Net cash flows are reported for customer loan and deposit transactions.  Securities: Securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in shareholders' equity, net of tax. Securities are written down to fair value when a decline in fair value is not temporary. Interest income includes amortization of purchase premium and discount. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and                                    (Continued)                                                                                 6                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  near term prospects of the issuer, and (3) the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.  Other securities, which include Federal Reserve Bank stock, Federal Home Loan Bank stock and other taxable securities that are not readily marketable, are carried at cost.  Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.  Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market on an aggregate basis.  Loan Income: Interest income is earned on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages).  All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.  A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is                                    (Continued)                                                                                 7                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the assets useful lives. For furniture and fixtures the useful life ranges from three to five years while the useful life for buildings is thirty-nine years. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are charged to expense and improvements are capitalized.  Other Real Estate Owned: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of the loan carrying amount and fair value at acquisition. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in other expenses. As of December 31, 2005 other assets on the consolidated balance sheet includes $562,000 of other real estate owned. As of December 31, 2004 the balance was $126,000.  Servicing Rights: Servicing rights represent the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.  Company Owned Life Insurance: The Company has purchased life insurance policies on those directors who participate in the 1985 Directors Deferred Compensation plan. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.  Employee Benefits: A defined benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. Contributions to the plan are based on the maximum amount deductible for income tax purposes. A 401(k) savings and retirement plan has also been established and covers substantially all employees. Contributions to the 401(k) plan are expensed as made.  Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. Options granted vest over one year and have a maximum term of ten years. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.                                    (Continued)                                                                                 8                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  The following table illustrates the effect on 2004 net income and earnings per share if option expense for options granted at year-end 2003 and vesting in 2004 were measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. (Dollars in thousands, except per share data)                                                                           2004                                                                    -----------   Net income as reported                                             $     2,955 Deduct:  Stock-based compensation expense   determined under fair value based method                                 (44) Pro forma net income                                               $     2,911  Basic earnings per share as reported                               $      2.38 Pro forma basic earnings per share                                        2.34  Diluted earnings per share as reported                                    2.37 Pro forma diluted earnings per share                                      2.34   The effect of net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, was less than $.01 per share for 2003. The fair value of options granted during 2003 and pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.                                                                            2003                                                                       --------   Risk-free interest rate                                                   4.21% Expected option life                                                  10 years Expected stock price volatility                                          13.36% Dividend yield                                                            4.15%  Weighted average fair value of   options granted during year                                           $ 5.45   There were no stock options granted during 2005 and 2004.  Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.                                    (Continued)                                                                                 9                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Earnings Per Share: Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional potential shares issuable under stock options.  Stock Splits and Stock Dividends: Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits are recorded by adjusting par value. Fractional shares are paid in cash for all stock splits and dividends. Basic earnings per share, diluted earnings per share and dividends per share have been restated for all stock splits and stock dividends, including the five percent stock dividend declared in 2003.  Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal course of business, makes commitments to extend credit which are not reflected in the consolidated financial statements. A summary of these commitments is disclosed in Note 12.  Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in unrealized gains (losses) on securities available for sale, net of tax, and the change in the Company's minimum pension liability, net of tax, which are also recognized as a separate component of shareholders' equity.  Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance-sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.  Reclassification: Some items in prior financial statements have been reclassified to conform with the current presentation.  Newly Issued But Not Yet Effective Accounting Policies: FAS123R requires all public companies to record compensation for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost historically has been expensed over the vesting period of the options, which is one year. This applies to awards granted or modified after the first quarter or year that began after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. For the Company, this policy applies to all options granted or vested after December 31, 2005. All of the Company's options that it granted in prior periods were vested as of December 31, 2005. Unless additional options are granted, this new accounting standard will have no effect on the Company.                                    (Continued)                                                                                10                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 2 - SECURITIES  The year end fair values and related gross unrealized gains and losses recognized in accumulated other comprehensive income/(loss) for securities available for sale, were as follows:                                                                               Gross              Gross                                                         Fair             Unrealized        Unrealized Available for Sale                                     Value               Gains             Losses                                                      ---------           ----------        -----------                                                                            (In thousands)    2005         U.S. Government agency                       $  49,099           $        -        $     (717)         Mortgage-backed                                  8,140                    -              (180)         State and municipal                             12,076                   38               (52)                                                      ---------           ----------        ----------                                                      $  69,315           $       38        $     (949)                                                      =========           ==========        ==========     2004         U.S. Government agency                       $  56,786           $       20        $     (431)         Mortgage-backed                                  3,149                    8                 -         State and municipal                             18,345                  255               (17)                                                      ---------           ----------        ----------                                                      $  78,280           $      283        $     (448)                                                      =========           ==========        ==========   The year end carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:                                                                    Gross               Gross                                            Carrying        Unrecognized          Unrecognized          Fair Held to Maturity                            Amount             Gains               Losses             Value                                           ----------       ------------          ------------        ----------                                                                      (In thousands)         2005               State and municipal         $    4,117             $   37                 $ (26)          $ 4,128                                           ==========       ============          ============        ==========     2004               State and municipal         $    4,621             $   55                 $ (13)          $ 4,663                                           ==========       ============          ============        ==========                                      (Continued)                                                                               11                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 2 - SECURITIES (Continued)  Securities with unrealized losses at year end 2005 and 2004, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):                                              Less Than 12 Months              12 Months or More                    Total                                        -------------------------       -------------------------        ------------------------                                           Fair        Unrealized          Fair        Unrealized           Fair        Unrealized          2005                            Value           Loss            Value           Loss             Value           Loss - -----------------------                ---------      ----------       ---------      ----------        ---------     -----------           U.S. Government      and agency                        $   8,842       $    (100)      $  40,257      $     (617)       $  49,099      $     (717)    Mortgage-backed                         8,140            (180)             -                -            8,140            (180)    State and municipal                     4,658             (39)          3,153             (39)           7,811             (78)                                        ---------      ----------       ---------      ----------        ---------      ----------    Total temporarily      impaired                          $  21,640       $    (319)      $  43,410      $     (656)       $  65,050      $     (975)                                        =========      ==========       =========      ==========        =========      ==========                                              Less Than 12 Months               12 Months or More                    Total                                        -------------------------       -------------------------        -------------------------                                          Fair         Unrealized         Fair         Unrealized          Fair         Unrealized          2004                           Value             Loss          Value             Loss           Value            Loss - -----------------------                ---------      ----------       ---------      ----------        ---------      ----------           U.S. Government      and agency                        $  48,780      $     (431)      $       -      $        -        $  48,780      $     (431)    State and municipal                     4,849             (22)            492              (8)           5,341             (30)                                        ---------      ----------       ---------      ----------        ---------      ----------     Total temporarily      impaired                            $53,629      $     (453)      $     492      $       (8)       $  54,121      $     (461)                                        =========      ==========       =========      ==========        =========      ==========   Unrealized losses at year end 2005 and 2004 have not been recognized into income because they are not considered to be other-than-temporary. Management considers the unrealized losses to be market driven, resulting from changes in interest rates, and the Company has the intent and ability to hold the securities until their value recovers.                                    (Continued)                                                                                12                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 2 - SECURITIES (Continued)  Contractual maturities of debt securities at year end 2005 are shown below. Expected maturities may differ from contractual maturity because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.                                             Available for sale             Held to Maturity                                                  Fair             Carrying            Fair                                                 Value              Amount             Value                                               ----------          ----------         ---------                                                               (In thousands)        Due in one year or less                    $   35,914          $    1,615         $   1,616    Due from one to five years                     23,752                 752               766    Due from five to ten years                        705                 593               589    Due after ten years                               804               1,157             1,157    Mortgage Backed                                 8,140                   -                 -                                               ----------          ----------         ---------                                                $   69,315          $    4,117         $   4,128                                               ==========          ==========         =========   Securities with a carrying value of $691,000 and $1,031,000 were pledged at December 31, 2005 and 2004, to secure public deposits and for other purposes.  The Company held securities exceeding 10% of shareholders' equity from the following states (including its political subdivisions) at December 31:                                                                     2005               2004                                                               ----------        -----------                                                                       (In thousands)       Michigan                                                   $    8,713        $    10,443   NOTE 3 - LOANS  Year end loans were as follows:                                                                                           2005               2004                                                                                      ----------        ----------                                                                                             (In thousands)    Residential real estate                                                              $   83,234        $   83,364 Consumer                                                                                  9,922             8,699 Commercial real estate                                                                   53,133            43,336 Commercial                                                                               10,037             9,220                                                                                      ----------        ----------                                                                                         156,326           144,619 Deferred loan origination fees, net                                                          (8)              (11) Allowance for loan loses                                                                 (1,456)           (1,350)                                                                                      ----------        ----------                                                                                       $  154,862        $  143,258                                                                                      ==========        ==========                                     (Continued)                                                                                13                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 3 - LOANS (Continued)  Activity in the allowance for loan losses is summarized as follows:                                                                   2005                2004              2003                                                             ---------             --------          -------                                                                                (In thousands)      Beginning balance                                           $   1,350             $  1,575          $ 1,669 Provision for loan losses                                         120                    -                - Charge-offs                                                       (28)                (242)            (106) Recoveries                                                         14                   17               12                                                             ---------             --------          -------  Ending Balance                                              $   1,456             $  1,350          $ 1,575                                                             =========             ========          =======   There was one impaired loan during 2004 with an average balance of approximately $100,000. The balance of this loan was zero at year-end. Information relating to income received on this loan during impairment is not considered material to this presentation. There were no impaired loans during 2005.  Nonperforming loans were as follows:                                                                                        2005                 2004                                                                                   -------               ------                                                                                           (In thousands)     Loans past due over 90 days still on accrual                                      $  255                $ 674 Nonaccrual loans                                                                       -                    -   NOTE 4 - LOAN SERVICING  Mortgage loans serviced for others are not reported as assets. These loans totaled $73,201,000 and $69,760,000 at year end 2005 and 2004. Related escrow deposit balances were $100,000 and $71,000. Capitalized mortgage servicing rights balances were $586,000 and $518,000 at year end 2005 and 2004. There was no valuation allowance at year end 2005 or 2004. The related additions recognized were $130,000, $139,000 and $303,000 and the amortization was $62,000, $71,000 and $215,000 in 2005, 2004 and 2003.                                    (Continued)                                                                                14                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 5 - PREMISES AND EQUIPMENT  Year end premises and equipment were as follows:                                                                      2005               2004                                                                ----------         ----------                                                                       (In thousands)       Real estate and buildings                                   $    5,876         $    5,312    Furniture and fixtures                                           4,825              4,070                                                                ----------         ----------                                                                    10,701              9,382    Less accumulated depreciation                                   (5,258)            (4,782)                                                                ----------         ----------                                                                 $    5,443         $    4,600                                                                ==========         ==========   Depreciation expense amounted to $487,000, $448,000 and $396,000 in 2005, 2004 and 2003.  NOTE 6 - DEPOSITS  Time deposit accounts individually exceeding $100,000 total $19,561,000 and $14,751,000 at year end 2005 and 2004.  At year end 2005, the scheduled maturities of time deposits are as follows:                                                              (In thousands)   2006                                                         $  40,008 2007                                                            24,145 2008                                                             2,884 2009                                                             1,689 2010                                                             1,452                                                              ---------                                                              $  70,178                                                              =========                                      (Continued)                                                                                15                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 7 - EMPLOYEE BENEFITS  Defined Benefit Retirement Plan: The Company has a defined benefit, noncontributory pension plan which provides retirement benefits for essentially all employees. The Company uses a December 31 measurement date for its plan. The following sets forth the plan's funded status and amounts recognized in the financial statements:                                                                                2005            2004                                                                           --------        ----------                                                                                (In thousands)    Change in benefit obligation:   Beginning benefit obligation                                            $ (4,591)       $   (5,035)   Service cost                                                                (189)             (218)   Interest cost                                                               (290)             (336)   Actuarial loss (gain)                                                        236              (174)   Benefits paid                                                                283                79   Plan settlement                                                                -             1,093                                                                           --------        ----------   Ending benefit obligation                                                 (4,551)           (4,591)  Change in plan assets, at fair value:   Beginning plan assets                                                      2,984             3,638   Actual return                                                                194               284   Employer contribution                                                      1,290               362   Benefits paid                                                               (283)              (79)   Plan settlement                                                                -            (1,221)                                                                           --------        ----------   Ending plan assets                                                         4,185             2,984    Funded status                                                               (366)           (1,607)   Unrecognized net actuarial loss                                            1,413             1,632   Unrecognized transition amount                                               (23)              (32)   Unrcognized prior service amount                                              35                36                                                                           --------        ----------   Prepaid pension cost                                                    $  1,059        $       29                                                                           ========        ==========   Amounts recognized in the balance sheet consist of:                                                                                   2005            2004                                                                              -------           -----                                                                                   (In thousands)       Prepaid pension cost                                                     $  1,059          $     29    Accrued pension liability                                                       -              (513)    Intangible assets                                                               -                36    Accumulated other comprehensive income                                          -               477                                                                             --------          --------            Net amount recognized                                            $  1,059          $     29                                                                             ========          ========                                     (Continued)                                                                                16                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 7 - EMPLOYEE BENEFITS (Continued)  The accumulated benefit obligation for the defined benefit pension plan was $3,207,000 and $3,242,000 at year end 2005 and 2004, respectively.  Components of net periodic benefit cost are as follows:                                                                   2005             2004           2003                                                             --------           ------         --------                                                                         (In thousands)      Service cost                                                $    189           $  218         $    207 Interest cost on benefit obligation                              290              336              297 Expected return on plan assets                                  (279)            (288)            (231) Net amortization and deferral                                     (9)              (9)              (9) Recognized net actuarial loss                                     69               85              105 Plan settlement                                                    -              426                -                                                             --------           ------         --------          Pension expense                                    $    260           $  768         $    369                                                             ========           ======         ========   Additional information about the defined benefit pension plan:                                                                   2005             2004           2003                                                             --------           ------         --------     Increase (decrease) in minimum liability included     in other comprehensive income                            $  (477)           $ (12)       $    489    The following weighted-average assumptions were used to determine benefit obligations at year end and net cost:                                                                  2005             2004           2003                                                               ----             ----           ----        Weighted Average disount rate                                6.50%            6.50%            6.50%    Rate of increase in future compensation                      4.00%            4.00%            4.00%    Expected long term return on plan assets                     8.00%            8.00%            8.00%                                     (Continued)                                                                                17                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 7 - EMPLOYEE BENEFITS (Continued)  The Company's pension plan asset allocation at year end 2005 and 2004, target allocation for 2006, and expected long-term rate of return by asset category are as follows:                                                                    Percentage of Plan           Weighted-                                               Target                  Assets              Average Expected                                             Allocation              at Year end            Long-Term Rate    Asset Category                              2006             2005            2004      of Return - 2005 - --------------------------                  ----------        -----             -----     ----------------         Equity securities                           70.0%            66.5%            69.5%           9.60%    Fixed Income securities                     30.0             25.4             27.3            5.40    Other                                          -              8.1              3.2            2.35                                             ----------        ------            -----     ----------------            Total                              100.0%           100.0%           100.0%           8.00%                                             ==========        ======            =====     ================   Plan assets are administered by Huntington National Bank as trustee of the plan. Plan assets are invested in diversified mutual funds.  The estimates of weighted average expected long-term rate of return is an estimate based on past performance and actual returns in the future are likely to vary over time.  The overall expected long-term rate of return and risk expectations of the investments in the plan are based on Standard and Poor's 500 and 5-year Treasury bonds from 1950-2005.  The asset mix of the portfolio will be maintained by periodically re-balancing this account back to the stock and fixed income target allocations stated above.  The investments in the plan are managed for the benefits of the participants. They are structured to meet the cash flow necessary to pay retiring employees. ERISA guidelines for diversification of the investments are followed.  During 2004, the Company distributed a lump sum distribution to a highly compensated employee which triggered a plan settlement in the amount of $426,000 in addition to the Company's expense of $342,000, bringing the total expense to $768,000 for the year.  During 2005, the Company made a voluntary contribution into the plan of $1,290,000. The Company expects to contribute approximately $310,000 to this pension plan in 2006.                                    (Continued)                                                                                18                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 7 - EMPLOYEE BENEFITS  Estimated Future Payments  The following benefit payments, which reflect expected future service, are anticipated:        Year End                                                             Benefit Payments - -----------------                                                        ----------------         2006                                                                  $  107,000       2007                                                                     103,000       2008                                                                      97,000       2009                                                                      92,000       2010                                                                     115,000 Years 2011 - 2015                                                            1,151,000   Deferred Compensation Plan: The Company has a deferred compensation plan to provide retirement benefits to certain Directors, at their option, in lieu of annual directors' fees. The present value of future benefits are accrued annually over the period of active service of each participant. The expense for the plan was $656,000, $280,000 and $408,000 in 2005, 2004 and 2003. During 2005 an additional $315,000 was expensed to the deferred compensation plan to recognize the accelerated benefit amount payable due to the death of a director.  The Company has also purchased insurance on the lives of participating directors with the Company as the owner and beneficiary of the policies. At December 31, 2005 and 2004, the cash surrender value of the underlying policies was $1,137,000 and $1,340,000, which is included in other assets on the Balance Sheet.  The Company also has a deferred compensation plan that allows executive officers of the Bank, and certain Directors an opportunity to defer a portion of their compensation. On a monthly basis, the account of each participant accrues interest based on the interest rate determined for that year. The expense of the plan was $33,000, $35,000 and $28,000 in 2005, 2004 and 2003.  401(k) Plan: The Company has a 401(k) savings and retirement plan covering substantially all employees. Under the plan, employees may defer up to the lesser of 100% of their eligible compensation or the limitations set by the IRS. The employees may also make "catch-up" contributions to the extent the IRS allows. During 2005, 2004 and 2003, the Board of Directors elected to contribute a matching contribution equal to 100% of the first 2% and 50% of the next 2% of the employee's deferred compensation. Employee contributions and the Company's matching percentages are vested immediately. The Company's matching percentages are determined annually by the Board of Directors and resulted in total contributions of $71,000, $73,000 and $73,000 in 2005, 2004 and 2003.                                    (Continued)                                                                                19                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 8 - STOCK OPTIONS  Stock Option Plan: The shareholders approved an incentive stock option plan in May 1996 under which options may be issued at market prices to employees. The right to exercise the options vests over a one-year period. The exercise price of options granted is equivalent to the market value of underlying stock at the grant date. As of December 31, 2005, a total of 9,952 shares were available for future grants.  Activity in the option plan for the years ended, and as restated for all stock dividends, is summarized as follows:                                                                               Weighted       Weighted                                         Number of                          Average        Average                                        Outstanding        Exercise         Exercise      Fair Value                                          Options            Price           Price        of Grants                                        -----------       -------------     --------      ----------      Balance at January 1, 2003               30,957          $ 23.92-57.01     $  42.70  Granted                                   8,662            47.62-48.57        48.54      $     5.45 Exercised                                  (277)           23.92-33.61        25.39                                        --------          -------------     -------- Balance at December 31, 2003             39,342            23.92-57.01        44.10  Exercised                                (8,867)           23.92-33.62        31.41 Forfeitures                              (2,636)                 57.01        57.01                                        --------          -------------     -------- Balance at December 31, 2004             27,839            23.92-57.01        46.92   Exercised                                (1,382)           33.62-48.57        38.11 Forfeitures                                (525)                 48.57        48.57                                        --------          -------------     -------- Balance at December 31, 2005             25,932          $ 23.92-57.01     $  47.35                                        ========                                     (Continued)                                                                                20                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 8 - STOCK OPTIONS (Continued)  Options outstanding at year-end 2005 were as follows.                                                           Outstanding                          Exercisable                                           ----------------------------------------        ---------------------                                                          Weighted                                                           Average         Weighted                     Weighted Range of                                                 Remaining         Average                      Average Exercise                                                Contractual       Exercise                     Excerise Prices                                    Number      Life (in years)       Price          Number        Price - -----------------------                   ------      ---------------     --------        --------     --------        $20.00-$30.00                             1,180             0.5           $  23.92           1,180     $  23.92 $30.00-$40.00                              5,045            2.1              33.62           5,045        33.62 $40.00-$50.00                             11,367            6.4              48.80          11,367        48.80 $50.00-$60.00                              8,340            4.0              57.01           8,340        57.01                                           ------      ---------------     --------        --------     -------- Outstanding at year end                   25,932            4.5            $ 47.35          25,932     $  47.35                                           ======      ===============     ========        ========     ========   All options outstanding at December 31, 2004 were exercisable. There were 30,680 options exercisable at December 31, 2003 with a weighted average exercise price of $42.85.  NOTE 9 - INCOME TAXES  Income tax expense consists of:                                                              2005               2004             2003                                                          --------          --------         --------                                                                        (In thousands)        Current                                               $    944          $  1,265         $  1,595    Deferred                                                   296               (89)             (95)                                                          --------          --------         --------                                                          $  1,240          $  1,176         $  1,500                                                          ========          ========         ========   Year end deferred tax assets and liabilities consist of:                                                                                 2005               2004                                                                             -------           --------                                                                                  (In thousands)       Deferred tax assets          Allowance for loan losses                                           $   347           $    322         Deferred compensation                                                 1,024                848         Minimum pension liability                                                 -                162         Unrealized losses on securities available for sale                      310                 56         Other                                                                     4                  8                                                                             -------           --------               Total deferred tax assets                                       1,685              1,396                                                                             -------           --------                                     (Continued)                                                                                21                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 9 - INCOME TAXES (Continued)                                                                                    2005               2004                                                                               -------            --------                                                                                     (In thousands)       Deferred tax liabilities     Pension                                                                       367                  17     Fixed assets                                                                  216                 152     Mortgage servicing rights                                                     199                 176     Accretion                                                                      79                  44     Other                                                                          70                  48                                                                               -------            --------           Total deferred tax assets                                               931                 437                                                                               -------            --------                Net deferred tax asset                                         $   754            $    959                                                                               =======            ========   Income tax expense calculated at the statutory rate of 34% differs from actual income tax expense as follows:                                                                2005                2004               2003                                                           ----------         ----------         ----------                                                                            (In thousands)        Statutory rate applied to income before taxes          $    1,540         $    1,405         $    1,831    Deduct          Tax-exempt interest income, net                        (183)              (218)              (269)          Life insurance                                         (113)               (14)               (22)          Other                                                    (4)                 3                (40)                                                           ----------         ----------         ----------                                                            $    1,240         $    1,176         $    1,500                                                           ==========         ==========         ==========   NOTE 10 - EARNINGS PER SHARE  A reconciliation of the numerators and denominators of the basic earnings per share and diluted earnings per share computations is presented below:                                                                 2005                2004              2003                                                           ----------        -----------          ---------     Basic earnings per share        Net income available to common             shareholders (in thousands)                   $    3,288         $    2,955          $   3,885                                                           ==========         ==========          =========     Weighted average shares outstanding                     1,237,217          1,241,624          1,245,653              Basic earnings per share                      $     2.66         $     2.38          $    3.12                                                           ==========         ==========          =========                                     (Continued)                                                                                22                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 10 - EARNINGS PER SHARE (Continued)                                                            2005          2004           2003                                                     ----------    ----------    ----------     Diluted earnings per share         Net income available to common         shareholders (in thousands)                 $    3,288    $    2,955    $    3,885                                                     ==========    ==========    ==========       Weighted average shares outstanding             1,237,217     1,241,624     1,245,653       Add dilutive effects of assumed exercises         of stock options                                 2,603         3,883         3,541                                                     ----------    ----------    ----------       Weighted average dilutive        potential shares outstanding                  1,239,820     1,245,507     1,249,194                                                     ==========    ==========    ==========         Diluted earnings per share                   $     2.65    $     2.37    $     3.11                                                     ==========    ==========    ==========   Stock options for 8,340 shares of common stock were not considered in computing diluted earnings per share for 2005 because they were antidilutive.  NOTE 11 - RELATED PARTY TRANSACTIONS  Certain directors and executive officers of the Company and the Bank (including family members, affiliates and companies in which they are principal owners) had loans outstanding with the Bank in the ordinary course of business. A summary of the aggregate loans outstanding which exceeded $60,000 to these individuals follows:                                                                               2005      2004                                                                         -------    -------                                                                            (In thousands)    Balance outstanding, January 1                                          $ 2,043    $ 2,022 New loans and rewrites                                                      663        997 Payments and payoffs                                                       (501)      (921) Change in persons included                                                  (19)       (55)                                                                         -------    -------  Balance outstanding, December 31                                        $ 2,186    $ 2,043                                                                         =======    =======   Related party deposits totaled $3,953,000 and $2,005,000 at year end 2005 and 2004.                                     (Continued)                                                                              23.                                   CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK, AND CONTINGENCIES  There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or result of operations of the Company.  At year end 2005 and 2004, reserves of $1,848,000 and $1,975,000 were required as deposits with the Federal Reserve or as cash on hand. These reserves do not earn interest.  Some financial instruments are used in the normal course of business to meet the financing needs of customers and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to a varying degree, credit and interest-rate risk in excess of the amount reported in the financial statements.  Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. The same credit policies are used for commitments and conditional obligations as are used for loans.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. 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 used, the total commitments do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party.  A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:                                           2005       2004                                      -------   -------                                        (In thousands)    Commitments to extend credit         $19,054   $16,798 Standby letters of credit                387       148   The fair values of these commitments are not material. Substantially all of these commitments are at variable or uncommitted rates.                                     (Continued)                                                                              24.                                   CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS  The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for cash and variable rate loans or deposits that reprice frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis or underlying collateral values, where applicable. The fair value of off-balance-sheet items approximates cost and is not considered significant to this presentation.  The estimated year end values of financial instruments were:                                                        2005                     2004                                           ----------------------    ----------------------                                           Carrying       Fair       Carrying       Fair                                            Amount        Value       Amount        Value                                           ---------    ---------    ---------    ---------                                                             (In thousands)      Assets     Cash and cash equivalents             $  11,943    $  11,943    $  12,695    $  12,695     Securities available for sale            69,315       69,315       78,280       78,280     Securities held to maturity               4,117        4,128        4,621        4,663     Other securities                          1,053        1,053        6,050        6,050     Loans, net                              154,862      155,703      143,258      146,427  Liabilities     Deposits          Noninterest-bearing              $ (38,943)   $ (38,943)   $ (37,289)   $ (37,289)          Interest bearing                  (184,494)    (183,897)    (188,122)    (187,956)   NOTE 14 - REGULATORY CAPITAL  The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.                                    (Continued)                                                                               25.                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 14 - REGULATORY CAPITAL (Continued)  The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:                                      Capital to Risk-                                  Weighted Assets                Tier 1 Capital                                Total         Tier 1           To Average Assets                                -----         ------           -----------------     Well Capitalized                  10%             6%               5% Adequately capitalized             8%             4%               4% Undercapitalized                   6%             3%               3%   The Bank was categorized as well capitalized at year end. There are no conditions or events since year-end that management believes has changed the Bank's category. Actual capital levels (in millions) and minimum required levels were:                                                                                                   Minimum Required                                                                                                   To Be Well                                                                        Minimum Required       Capitalized Under                                                                           For Capital          Prompt Corrective                                                       Actual           Adequacy Purposes       Action Regulations                                               -------------------   ---------------------   ---------------------                                                 Amount      Ratio      Amount       Ratio      Amount       Ratio                                               ---------     -----   -----------     -----   -----------    ------        2005  Total capital (to risk weighted assets)   Consolidated                                $    26.5     17.0%   $      12.5     8.0%    $       N/A     10.0%   Bank                                             26.5     17.0           12.5     8.0            15.6     10.0 Tier 1 capital (to risk weighted assets)   Consolidated                                     25.0     16.1            6.2     4.0             N/A      6.0   Bank                                             25.0     16.0            6.2     4.0             9.4      6.0 Tier 1 capital (to average assets)   Consolidated                                     25.0      9.9           10.1     4.0             N/A      5.0   Bank                                             25.0      9.9           10.2     4.0            12.7      5.0  2004  Total capital (to risk weighted assets)   Consolidated                                $    25.6     17.7%   $      11.6     8.0%    $       N/A     10.0%   Bank                                             25.5     17.7           11.6     8.0            14.5     10.0 Tier 1 capital (to risk weighted assets)   Consolidated                                     24.2     16.7            5.8     4.0             N/A      6.0   Bank                                             24.2     16.7            5.8     4.0             8.7      6.0 Tier 1 capital (to average assets)   Consolidated                                     24.2      9.4           10.3     4.0             N/A      5.0   Bank                                             24.2      9.4           10.3     4.0            12.9      5.0                                     (Continued)                                                                              26.                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 14 - REGULATORY CAPITAL (Continued)  One of the principal sources of cash for the Company is dividends from the Bank. Regulatory agencies can place dividend restrictions on the Bank based on their evaluation of its financial condition. No restrictions are currently imposed by regulatory agencies on the Bank other than the limitations found in the regulations which govern the payment of dividends to the Company. Under the most restrictive of these regulations, in 2006, the Bank is limited to paying dividends of approximately $226,000 plus 2006 net income, without prior regulatory approval.  NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS  Following are condensed parent company financial statements:                              CONDENSED BALANCE SHEETS                            December 31, 2005 and 2004                                                          2005      2004                                                     ------    -------                                                       (In thousands)    ASSETS Cash                                                $    66   $     - Investment in subsidiary                             24,448    24,134 Dividends receivable                                  1,236     1,260                                                     -------   -------     Total assets                                     $25,750   $25,394                                                     =======   =======  LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable                                   $ 1,251   $ 1,238 Shareholders' equity                                 24,499    24,156                                                     -------   -------     Total liabilities and shareholders' equity       $25,750   $25,394                                                     =======   =======                                     (Continued)                                                                              27.                                    CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)                           CONDENSED STATEMENTS OF INCOME                   Years ended December 31, 2005, 2004 and 2003                                                                                             2005       2004       2003                                                                                        -------    -------    -------                                                                                                 (In thousands)     Dividends from subsidiary                                                              $ 2,826    $ 3,240    $ 2,802 Operating expenses                                                                         (44)       (28)       (36)                                                                                        -------    -------    -------  Income before income taxes and equity    in undistributed (overdistributed) net income of subsidiary                           2,782      3,212      2,766  Income tax benefit                                                                          15          9         12  Equity in undistributed income of subsidiary                                               491       (266)     1,107                                                                                        -------    -------    -------  NET INCOME                                                                             $ 3,288    $ 2,955    $ 3,885                                                                                        =======    =======    =======                            CONDENSED STATEMENTS OF INCOME                    Years ended December 31,2005,2004 and 2003                                                                                             2005        2004      2003                                                                                        -------    -------    -------                                                                                               (In thousands)     CASH FLOWS FROM OPERATING ACTIVITIES Net income                                                                             $ 3,288    $ 2,955    $ 3,885 Equity in undistributed(overdistributed) net income of subsidiary                         (491)       266     (1,107) Change in dividends receivable                                                              24        (60)       258 Change in other assets                                                                       -          -          4 Change in other liabilities                                                                  -        (21)      (270)                                                                                        -------    -------    -------    Net cash from operating activities                                                    2,821      3,140      2,770  CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid                                                                          (2,709)    (2,675)    (2,612) Net shares purchased                                                                       (46)      (472)      (170)                                                                                        -------    -------    -------    Net cash from financing activities                                                   (2,755)    (3,147)    (2,782)                                                                                        -------    -------    -------  Net change in cash and cash equivalents                                                     66         (7)       (12)  Cash at beginning of year                                                                    -          7         19                                                                                        -------    -------    ------- CASH AT END OF YEAR                                                                    $    66    $     -    $     7                                                                                        =======    =======    =======                                     (Continued)                                                                              28.                                   CNB CORPORATION                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         December 31, 2005, 2004 and 2003  NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)                                                   Net               Earnings Per Share                                 Interest   Interest    Net     ------------------                                  Income     Income    Income    Basic    Diluted                                 --------   --------   ------   -------   -------                                       (In thousands, except per share data)       2005       First quarter             $  3,161   $  2,508   $  805   $  0.65   $ 0.65       Second quarter               3,320      2,594      932      0.75     0.75       Third quarter                3,399      2,563      769      0.62     0.62       Fourth quarter               3,476      2,559      782      0.64     0.63  2004       First quarter             $  3,071   $  2,315   $  773   $  0.62   $ 0.62       Second quarter               3,073      2,359      732      0.59     0.59       Third quarter                3,138      2,455      819      0.66     0.66       Fourth quarter               3,184      2,573      631      0.51     0.50    During the second quarter of 2005 the Bank received a payment of life insurance proceeds in the amount of $300,000. The proceeds were offset by an additional expense of $315,000 to recognize amounts payable under a deferred compensation plan. The insurance proceeds are non-taxable income and resulted in the net increase in net income for the quarter.  The decrease in fourth quarter 2004 net income was the effect of the Company recording additional defined benefit pension expense for a plan settlement.                                    (Continued)                                                                              29.               REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Board of Directors and Shareholders CNB Corporation Cheboygan, Michigan  We have audited the accompanying consolidated balance sheets of CNB Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with auditing standards of the Public 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 from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNB Corporation as of December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.                                                      Crowe Chizek and Company LLC  Grand Rapids, Michigan March 10, 2006                                    (Continued)                                                                              30.                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  This discussion provides information about the consolidated financial condition and results of operations of CNB Corporation (the Company) and its wholly-owned subsidiary, Citizens National Bank of Cheboygan and the Bank's wholly-owned subsidiary CNB Mortgage Corporation (the Bank and the Mortgage Corporation are hereafter collectively referred to as the Bank). This discussion should be read in conjunction with the consolidated financial statements beginning on page 2 and the related footnotes.                                 FINANCIAL CONDITION  The overall financial condition of the Company was strong for 2005. The Company recognized an 8.1% increase in the loan portfolio. Deposits had a slight overall decline during 2005 while the Company's equity increased during 2005.  CASH AND CASH EQUIVALENTS  The Company's balances of cash and cash equivalents decreased $752,000 from 2004 to 2005. During the year, $3.9 million of cash was provided from operating activities due primarily to net income, while $105,000 was provided from investing activities. The company utilized $4.7 million on financing activities. The balances maintained in cash and cash equivalents vary based on daily fluctuations in loan and deposit balances. Sufficient cash is maintained on a daily basis to meet the anticipated liquidity needs of the Company for customer transactions and to clear checks drawn on other financial institutions. The amount of clearings can vary by as much as $3.0 million in one day, causing the Company's cash position to vary.  SECURITIES  The Company maintains securities portfolios that include obligations of federal agencies and government sponsored entities as well as securities issued by states and political subdivisions. Security balances decreased $14.5 million during 2005. Securities available for sale represent 93.1% of the portfolio. Currently, the Company primarily maintains a short-term securities portfolio. The Company will extend the average life of the portfolio moving forward as the rate environment continues to increase. As the amount of securities maturing on a regular basis decreases, liquidity will be maintained by adding to the available for sale portfolio. The reason for the decrease in the securities portfolio during 2005 is due to the fact that as the securities matured, the Company did not reinvest as many dollars back into securities as it has in the past. This was due to the increased loan demand. The Company used the dollars from the securities maturities to fund higher yielding loans. It is management's expectation that the Company will continue to change the balance sheet mix in this manner during 2006.                                                                                31                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  The chart below shows the change in each of the categories of the portfolio.                                            2005           2004          2003                                      ----------   -------------    --------                                                   (In thousands)     U.S. Government and agency securities                           $   (7,687)  $        7,984   $ 21,813 Mortgage backed                           4,991            3,149          - Tax exempt state and municipal           (4,149)          (4,901)    (2,810) Taxable state and municipal              (2,624)          (3,940)    (1,542) Other                                    (4,997)            (262)        60                                      ----------   --------------   --------  Total change in securities           $  (14,466)  $        2,030   $ 17,521                                      ==========   ==============   ========   Holdings in U.S. government and state and municipal securities decreased during the year primarily due to our increased loan activity funding requirements. The Company did reinvest some of its maturity dollars into the mortgage-backed security portfolio which continues to be one of its higher yielding investments. The Company maintains a short-term investment portfolio with maturities averaging less than two years. The Company will continue to monitor the rate environment and may extend the maturities of the investment portfolio. The chart below shows the percentage composition of the portfolio as of December 31.                                       2005        2004                                ---------     ---------    U.S. Government and agency securities                         65.92%        63.84% Mortgage backed                    10.93%         3.54% Tax exempt state and municipal     19.12%        20.67% Taxable state and municipal         2.62%         5.15% Other                               1.41%         6.80%                                  -------     ---------                                    100.00%       100.00%                                  =======     =========   Securities available for sale are recorded at fair value and securities held to maturity are recorded at amortized cost. The net unrealized loss on securities available for sale at December 31, 2005 was $601,000, net of taxes. The unrealized gains and losses are temporary since they are a result of market changes rather than a reflection of credit quality. Management has no specific intent to sell these securities at the present time.  The Company maintains a conservative security portfolio with a majority of the investments in U.S. Government and agency securities and issues of governmental units in its service area. The                                                                                32                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  maturities of the U.S. Government and agency securities have typically been very short, two years or less, providing liquidity in addition to quality.  During 2006, management feels that there will be sufficient liquidity to increase the maturity of the investment portfolio, in addition to increasing yields.  LOANS  Total loans increased $11.7 million or 8.1% during 2005, with the primary increase in commercial real estate loans of $9.8 million or 22.6%. As a full service lender, the Company offers a variety of personal and commercial loans. Home mortgages comprise the largest portion of the loan portfolio. The Company generally retains the ownership of adjustable rate loans and short to medium-term fixed-rate loans and originates and sells long-term single family residential fixed-rate mortgage loans to the secondary market. This practice allows the Company to meet the housing credit needs of its service area while maintaining an appropriate interest rate sensitivity and liquidity position. Due to the lower rate environment, consumer real estate mortgage refinancing was stronger in 2003 than 2004 or 2005. The Company originated $11.6 million in loans for sale in 2005 and $18.6 million in 2004 as compared to $40.4 million in 2003. Management anticipates the volume of mortgage refinancing in 2006 will be comparable to 2005. In addition to mortgage loans, the Company makes loans for personal and business use, secured and unsecured, to customers in its service area. It is the Company's intent to continue to increase both the commercial mortgage and commercial loan portfolios during 2006.  The Company maintains a conservative loan policy and strict credit underwriting standards, which reflects highly in its credit quality with a small percent of total loans as non-performing. All loans are domestic. An annual review of loan concentrations at December 31, 2005 indicated the pattern of loans in the portfolio has not changed. There is no individual industry with more than a 10% concentration, except for all tourism-related businesses which, when combined, represent 13.6% of total loans.  ALLOWANCE FOR LOAN LOSSES  The allowance for loan losses represents that amount which management estimates is adequate to provide for probable incurred losses in the loan portfolio. Management determines the adequacy of the allowance for loan losses by reviewing selected loans (including large loans, nonaccrual loans, problem loans and delinquent loans) and establishes specific loss allowances on these loans. Historical loss information, local economic conditions and other factors are considered in establishing allowances on the remaining loan portfolio. The allowance is increased by provisions charged to expense and reduced by charge-offs, net of recoveries.  The quality of the Company's loan portfolio compares well with its peer group with non-performing loans at .16% of total loans at December 31, 2005 and 0.47% at December 31, 2004. Net loans charged off were .01% of total loans during 2005 and .16% in 2004. There were no significant changes in the allowance for loan losses in 2005 and 2004 due to stable loan quality and a continued modest identified loss potential for individual loans and groups of loans. A                                                                                33                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  provision expense of $120,000 was recorded during 2005 due primarily to responding to overall loan growth while no provision expense was recorded in 2004 or 2003.  CREDIT QUALITY  The Company continues to maintain a high level of asset quality as a result of actively managing delinquencies, nonperforming assets and potential problem loans. The Company performs an ongoing review of all large credits to watch for any deterioration in quality. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in the nonaccrual loans in (1) above); and (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above). The aggregate amount of nonperforming loans is shown in the table below.                                      2004          2005                                ---------     -----------                                 (Dollars in thousands)    Nonaccrual loans               $       -     $         - Loans past due 90 days or            255             674 Troubled debt restructurings           -               -                                ---------     -----------   Total nonperforming          $     255     $       674                                =========     ===========  Percent of total loans              0.16%           0.47%                                =========     ===========   DEPOSITS  Deposits decreased $2.0 million or .88% during 2005. This was due to several factors including a highly competitive rate environment and the withdrawal of several large deposits by two governmental units to complete building projects. As the interest rate environment increases the Company will in turn change the rates it offers its customers.  The majority of the Company's deposits are derived from core customers, as a result of long-term personal, business and public relationships. Deposit rates are monitored continually to assure that the Company pays a competitive rate.  As of December 31, 2005, the loan to deposit ratio was 70.0% compared to 64.2% at December 31, 2004. This ratio increased due to a high increase in the loan portfolio and a decrease in the deposit portfolio. Management continues to emphasize loan growth with a targeted loan to deposit ratio at a minimum of 65.0%. A change in asset mix from securities to higher yielding loans provides an increase in the net interest margin.  As of December 31, 2005, long-term debt obligations consist of the Company's time deposits which are presented in Note 6 to the consolidated financial statements.                                                                                34                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  EQUITY  Total equity for the Company at year end 2005 was $24.5 million compared to $24.2 million in 2004. The Company had a stock repurchase program in place and during 2005 repurchased $98,000 worth of stock under the plan before the plan ended. Accumulated other comprehensive income decreased by $177,000 as the market value of the Company's available for sale securities declined.                           LIQUIDITY AND FUNDS MANAGEMENT  Effective liquidity management ensures that the cash flow requirements of the Company's depositors and borrowers, as well as the operating cash needs of the Company are met. The Company's primary source of funds is dividends from the Bank. The Company manages its liquidity position to provide cash necessary to pay dividends to shareholders and satisfy other operating requirements.  The Company's most readily available sources of liquidity are federal funds sold, securities classified as available for sale and securities classified as held to maturity maturing within one year. These sources of liquidity are supplemented by new deposits and by loan payments received from customers. As of December 31, 2005, the Company held $5.4 million in federal funds sold, $69.3 million in securities available for sale, and $1.6 million in held to maturity securities maturing within one year. These short-term assets represent 34.1% of total deposits as of December 31, 2005. Historically, the Company's security portfolio has been short term in nature, with the average life of the portfolio consistently being less than two years. The Company serves a market which is highly tied to the tourist industry. Consequently, the Company experiences seasonal swings in liquidity. Deposit growth occurs during July, August, and September, then may decline through the fall and winter months. The Company does not anticipate any significant change in its seasonal pattern. In addition to the above readily available sources of liquidity, the Company has lines of credit available from other institutions totaling $14 million. There were no advances outstanding on these lines of credit at December 31, 2005 or 2004.                                                                                35                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  INTEREST RATE SENSITIVITY  The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates at December 31, 2005 and 2004. For loans receivable, securities, and liabilities with contractual maturities, the tables present principal cash flows and related weighted-average interest rates by contractual maturities, as well as the Company's historical experience relative to the impact of interest rate fluctuations on the prepayment of loans. For core deposits (demand deposits, interest-bearing checking, savings, and money market deposits) that have no contractual maturity, the tables present principal cash flows and, as applicable, related weighted-average interest rates based upon the Company's historical experience, management's judgment, and statistical analysis concerning their most likely withdrawal behaviors. The current historical interest rates for core deposits are assumed to apply for future periods in these tables as the actual interest rates that will need to be paid to maintain these deposits are not currently known. Weighted-average variable rates are based upon contractual rates existing at the reporting date.  The primary source of market risk for the financial instruments presented is interest rate risk, that is, the risk that a change in market rates could adversely affect the market value of the instruments. Generally, the longer the maturity, the greater the interest rate risk exposure. While maturity information does not necessarily present all aspects of exposure, it may provide an indication of where risks are prevalent.  All financial institutions assume interest rate risk as an integral part of normal operations. Managing and measuring interest rate risk is a dynamic, multi-faceted process that ranges from assuring sufficient capital and liquidity in support of future balance sheet growth to reducing the exposure of the Company's net interest margin from swings in interest rates. The Company manages interest rate risk through the Asset/Liability Committee. The Asset/Liability Committee is comprised of Bank officers from various disciplines. The Committee establishes policies and rates which lead to the prudent investment of resources, the effective management of risks associated with changing interest rates, the maintenance of adequate liquidity and the earning of an adequate return on shareholders' equity.  The following market risk disclosure tables allow management to measure the imbalance between the amount of assets and liabilities repricing in the next five years and thereafter.                                                                                36                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003                    MARKET RISK DISCLOSURE AT DECEMBER 31, 2004                              (Dollars in thousands)                                                                                                                   Fair value                                    2006       2007      2008      2009      2010     Thereafter     Total      12/31/2005                                  --------    ------    ------    -----     ------    ----------    -------     ----------          RATE-SENSITIVE ASSETS   Variable interest rate loans   $ 32,436    $  775    $1,659    $   51    $    -    $        -    $34,921     $   35,109 Average interest rate                7.73%     7.35%     7.34%     6.50%        -%            -%      7.70%   Fixed interest rate loans        14,769     7,078     9,091    13,187    17,780        59,500    121,405        122,058 Average interest rate                6.84%     7.58%     7.22%     6.93%     6.99%         6.35%      6.71% Variable interest rate   securities                          310         -         -         -         -         1,157      1,467          1,467 Average interest rate                5.36%        -%        -%        -%        -%         4.90%      5.00% Fixed interest rate securities     37,219    22,830     7,529     1,605       680         3,155     73,018         73,029 Average interest rate                2.87%     3.13%     4.18%     3.71%     3.94%         4.26%      3.17% RATE-SENSITIVE LIABILITIES Noninterest-bearing deposits       38,943         -         -         -         -             -     38,943         38,943 Average interest rate                   -%        -%        -%        -%        -%            -%         -% Fixed interest rate savings and interest-bearing deposits         114,316         -         -         -         -             -    114,316        113,946 Average interest rate                1.18%        -%        -%        -%        -%            -%      1.18% Fixed interest rate time deposits                      40,008    24,145     2,884     1,689     1,452             -     70,178         69,951 Average interest rate                2.91%     3.34%     3.33%     3.35%     4.04%            -%      3.11%                     MARKET RISK DISCLOSURE AT DECEMBER 31, 2004                              (Dollars in thousands)                                                                                                                   Fair Value                                    2005       2006      2007      2008      2009     Thereafter     Total      12/31/2004                                  --------    ------    ------    ------    ------    ----------    -------     ----------          RATE-SENSITIVE ASSETS   Variable interest rate loans   $ 29,812    $1,410    $1,161    $  214    $    -    $        -    $32,597     $   33,311   Average interest rate              5.67%     6.54%     7.26%     7.10%        -%            -%      5.77% Fixed interest rate loans          20,496    12,968    12,198     9,653    13,207         43,500   112,022        114,477   Average interest rate              6.29%     6.13%     5.97%     5.46%     5.61%         5.92%      5.94% Variable interest rate securities                            515         -         -         -         -         6,259      6,774          6,774   Average interest rate              3.26%        -%        -%        -%        -%         2.68%      2.72% Fixed interest rate securities     18,246     34,702   18,938     1,155       560         8,576     82,177         82,218 Average interest rate                2.99%     2.95%     2.83%     4.04%     3.40%         3.97%      3.06% RATE-SENSITIVE LIABILITIES Noninterest-bearing   deposits                         37,289         -         -         -         -             -     37,289         37,289 Average interest rate                   -%        -%        -%                  -%            -%         -%             -% Fixed interest rate   savings and interest-bearing deposits         124,655         -         -         -         -             -    124,655        124,655   Average interest rate              0.88%        -%        -%        -%        -%            -%      0.88%   Fixed interest rate time deposits                      41,596    14,487     3,694     2,180     1,510             -     63,467         63,301 Average interest rate                2.19%     1.98%     3.92%     3.23%     3.34%            -%      2.31%                                                                                 37                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  CAPITAL RESOURCES  The capital ratios of the Bank exceed the regulatory guidelines for well capitalized institutions. This strong capital position of the Company provides the Company with the flexibility to take advantage of expansion opportunities and to continue with a high dividend payout ratio.  A five percent stock dividend was declared to shareholders in 2003. The stock of the Company is generally traded locally. Additional information concerning capital ratios and shareholder return is included in the Financial Highlights on page 1. The Company maintains a five-year plan and utilizes a formal strategic planning process. Management and the Board continue to monitor long-term goals, which include increasing market share and maintaining long-term earnings sufficient to pay consistent dividends.                                RESULTS OF OPERATIONS  NET INCOME  Consolidated net income was $3.3 million for 2005 compared to $3.0 million for 2004. The increase can be attributed to an increase in net interest income from 2004. Noninterest income also increased during 2005 by $198,000 primarily due to $300,000 of life insurance proceeds received due to the death of a director. This increase in noninterest income was offset by additional expense of $315,000 to recognize the acceleration of the amount payable to the director's beneficiaries upon death under the deferred compensation plan. Basic earnings per share for 2005 was $2.66 compared to $ 2.38 for 2004. Diluted earnings per share for 2005 was $2.65 compared to $2.37 for 2004.  Consolidated net income was $3.0 million for 2004 compared to $3.9 million for 2003. The decrease can be attributed to a large increase in noninterest expenses and a decrease in interest income from 2003. Noninterest income also declined during 2004 due to a significant slow down in residential mortgage loan refinances and the resulting decline in loans sold to the secondary market during 2004. These negative trends were offset in part by a decline in interest expense on deposits due to the interest rate environment remaining flat during the first part of 2004. Basic earnings per share for 2004 was $2.38 compared to $ 3.12 for 2003. Diluted earnings per share for 2004 was $2.37 compared to $3.11 for 2003.  NET INTEREST INCOME  Interest income is the total amount earned on funds invested in federal funds sold, securities and loans. Interest expense is the amount of interest paid on interest-bearing checking, money market, savings and time deposits accounts. Net interest income is the difference between interest income and interest expense. The net margin is the net interest income as a percentage of average interest-earning assets. Interest spread is the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. In 2005, net interest income increased by $522,000, due primarily to the change in the rate on our interest-earning assets and the change in asset mix due to the increase in loan volume and decrease in the                                                                                38                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  securities portfolio. Interest expense paid on the Company's deposit accounts also increased in 2005 due to the rate environment.  The $200,000 decrease in net interest income from 2004 to 2003 was due primarily to the change in rates from year to year.  The following table shows the daily average consolidated balance sheets, revenue on average interest-earning assets on a tax-equivalent basis, expense on average interest-bearing liabilities and the annualized effective yield or rate. Interest on loans includes loan fees. For the periods ending:            Yield Analysis of Consolidated Average Assets and Liabilities                              (Dollars in thousands)                                          Year Ended                      Year Ended                       Year Ended                                   December 31, 2005               December 31, 2004                December 31, 2003                              Average               Yield/    Average               Yield/    Average                Yield/                              Balance      Int       Rate     Balance      Int       Rate     Balance       Int       Rate                              -------    -------    ------   --------    --------   ------    --------    -------    ------           Interest-earning assets:  Other interest-   earning assets             $ 7,460    $   252      3.38%   $10,842    $   145      1.34%   $ 18,101    $   203      1.12%  Total securities (1) (2)     85,035      2,921      3.44     89,737      2,953      3.29      74,604      3,010      4.03  Loans (2)                   149,672     10,473      7.00    143,800      9,711      6.75     146,330     10,489      7.17                              -------    -------             --------    --------             --------    -------   Total    interest-earning    assets                    242,167     13,646      5.63%   244,379     12,809      5.24%    239,035     13,702      5.73%   Cash and due from   banks                        6,376                           6,181                            6,645  Premises and   equipment, net               4,785                           4,462                            3,407  Allowance for loan   losses                      (1,412)                         (1,469)                          (1,634)  Other assets                  5,309                           4,759                            5,754                             --------                        --------                         --------     Total                   $257,225                        $258,312                         $253,207                             ========                        ========                         ========  Interest-bearing  liabilities:  Interest-bearing   demand deposits           $ 18,145    $     88     0.48%  $ 17,648    $    87      0.49%   $ 16,899    $   103      0.61%  Savings deposits            104,415       1,345     1.29    105,587        917      0.87     100,979      1,159      1.15  Time deposits                66,300       1,699     2.56     67,282      1,760      2.62      69,851      2,118      3.03                             --------    --------            --------    -------              --------    -------   Total    interest-bearing    liabilities               188,860      3,132      1.66%   190,517      2,764      1.45%    187,729      3,380      1.80%  Noninterest-bearing  deposits                     39,825                          38,888                           36,867 Other liabilities              3,702                           3,607                            2,955 Shareholders' equity          24,838                          25,300                           25,656                             --------                        --------                         --------     Total                   $257,225                        $258,312                         $253,207                             ========                        ========                         ========  Net interest income                     $10,514                         $10,045                          $10,322                                         =======                         =======                          ======= Net interest spread (FTE)                            3.97%                           3.79%                            3.93%                                                    ======                          ======                           ====== Net yield on  Interest-earning (FTE)  assets                                              4.34%                           4.11%                            4.32%                                                    ======                          ======                           ====== Ratio of interest-  earning assets  to interest-bearing  liabilities                                         1.28x                           1.28x                            1.27x                                                    ======                          ======                           ======   - ---------- (1)   Yield computed using the average amortized cost for securities available       for sale. (2)   Tax exempt income was converted to a fully taxable equivalent basis at a       34% tax rate. The tax equivalent rate for tax exempt loans and tax exempt       securities acquired after January 1, 1983 included the TEFRA adjustment       applicable to nondeductible interest expenses.                                                                                39                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  The table below shows the effect of volume and rate changes on net interest income on a pre-tax basis.                                         2005 Compared to 2004      2004 Compared to 2003                                     ----------------------    -------------------------                                     Volume    Rate    Net     Volume     Rate      Net                                     ------    ----    ----    ------    ------    -----                                                         (In thousands)        Other interest-earning assets       $  (57)   $164    $107    $  (92)   $   34    $ (58) Total Securities                      (158)    126     (32)      552      (609)     (57) Loans, net                             404     358     762      (179)     (599)    (778)                                     ------    ----    ----    ------    ------    -----   Total interest-earning assets        189     648     837       281    (1,174)    (893)  Interest-bearing demand deposits         2      (1)      1         4       (20)     (16) Savings deposits                       (10)    438     428        51      (293)    (242) Time deposits                          (25)     (36)   (61)      (76)     (282)    (358)                                     ------    ----    ----    ------    ------    ----- Total interest-bearing liabilities     (33)    401     368       (21)     (595)    (616)                                     ------    ----    ----    ------    ------    -----    Net change in net interest     income (a)                      $  222    $247    $469    $  302    $ (579)   $(277)                                     ======    ====    ====    ======    ======    =====   - ---------- (a)   The net change in interest due to both rate and volume has been allocated       to volume and rate changes in proportion to the relationship of the       absolute dollar amounts of the change in each.  NONINTEREST INCOME  Noninterest income includes fees and service charges on deposit accounts, loan servicing fees, gains on sales of loans and other income. Noninterest income increased during 2005 as a result of the life insurance proceeds as mentioned above. This increase was partially offset by a decrease in the net realized gains from the sales of loans due to a continued decline in the residential mortgage refinance boom that had occurred during the lower rate environment of 2003 and 2002. The number of loans processed during 2005 decreased from 2004. The Company will continue to focus more on commercial lending during 2006 as it did during 2005.  NONINTEREST EXPENSE  Noninterest expense increased during 2005. During 2004, the Company distributed a lump sum pension benefit to a highly compensated executive which triggered a settlement of the Company's pension expense. Accordingly, pension expense for 2004 was $768,000 compared to $370,000 for 2003. The Company continues to fund 100% of the employee hospitalization premium which was $545,000 for 2005 compared to $490,000 and $394,000 for 2004 and 2003 respectively. The deferred compensation expense for 2005 was $690,000 compared to $315,000 and $436,000 in 2004 and 2003. The deferred compensation expense for 2005 includes an expense of $315,000 to recognize the accelerated amount payable due to the death of a director as mentioned above.                                                                                40                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  FEDERAL INCOME TAXES  Income tax expense increased slightly during 2005 to $1.24 million compared to $1.18 million in 2004. Income before taxes increased from 2004 which resulted in the increase in income tax expense. The lower effective tax rate in 2005 was due to the nontaxable income in the form of life insurance proceeds received during the year which has been previously discussed.  The effective tax rates for 2005, 2004 and 2003 were fairly stable and are shown in the table below:                                           2005      2004       2003                                      -------    -------    -------     Income before tax (In thousands)     $ 4,528    $ 4,131    $ 5,385 Income tax expense (In thousands)      1,240      1,176      1,500 Effective tax rate                      27.4%      28.5%      27.9%                             CRITICAL ACCOUNTING POLICIES  Certain of the Company's accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could effect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities.  The Company believes that the allowance for loan losses and related provision expense are particularly susceptible to material change in the near term. As a result of strong asset quality and low levels of charge-offs during the past three years, the Company recorded no provision expense during 2004 and 2003. Due to overall loan growth, a provision expense of $120,000 was recorded during 2005. In future periods the allowance for loan losses may be dramatically impacted due to changes in the local economy, increased commercial loans and individual borrower situations. The Company believes its significant concentration in residential mortgage loans and the importance of the tourism industry to the local economy are particularly important factors that could have a significant impact on the allowance for loan losses and provision for loan losses if these factors significantly change from current conditions. As of December 31, 2005, the Company held $63.2 million of commercial and commercial real estate loans, and the ability of our borrowers to repay such loans may be significantly impacted by changes in the economy or individual borrower conditions. Management continues to take steps to help ensure the asset quality of the loan portfolio; however, the allowance for loan losses and related provision expense could increase significantly in future periods depending on changes in the factors discussed above.  Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income, net of tax. As a result of changes in the fair market value of the Company's available for sale securities portfolio, total comprehensive income decreased by $492,000, $745,000 and $361,000 for 2005, 2004 and 2003.                                                                                41                                    CNB CORPORATION                       MANAGEMENT'S DISCUSSION AND ANALYSIS                         December 31, 2005, 2004 and 2003  Additionally, all investment securities are required to be written down to fair value when a decline in fair value is not temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company's operating results.  FORWARD-LOOKING STATEMENTS  When used in this filing and in future filings involving the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phases, "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "project," or similar expressions are intended to identify, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected.  The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.                                                                                42                                    CNB CORPORATION                      OFFICERS, COMMUNITY ADVISORS AND STAFF                         OFFICERS AND COMMUNITY ADVISORS OF                    CNB CORPORATION AND CITIZENS NATIONAL BANK      CNB                         CITIZENS NATIONAL            SALLY J. LACROSS             MACKINAW CITY CORPORATION                 BANK OFFICERS AND              ASSISTANT VICE PRESIDENT OFFICERS                    COMMUNITY ADVISORS           RANDY J. MALTBY              SUSAN M. BRANDT                                                            TECHNOLOGY OFFICER          BANKING OFFICER & JOHN P. WARD                JOHN P. WARD                 SUSAN J. CLEARY                 BRANCH MANAGER   CHAIRMAN                    CHAIRMAN                    LOAN OFFICER                DEAN SCHEERENS JAMES C. CONBOY, JR.        JAMES C. CONBOY, JR.         MICHELLE J. OSTWALD            COMMUNITY ADVISOR   PRESIDENT & CHIEF           PRESIDENT & CHIEF            LOAN OFFICER               JAMES E. TAMLYN     EXECUTIVE OFFICER          EXECUTIVE OFFICER         FLORENCE CASWELL               COMMUNITY ADVISOR SUSAN A. ENO                SUSAN A. ENO                   ASSISTANT LOAN   EXECUTIVE VICE             EXECUTIVE VICE PRESIDENT       OPERATIONS OFFICER     PRESIDENT & SECRETARY      & CASHIER                 NANCY K. LINDSAY DOUGLAS W. DAMM             DOUGLAS W. DAMM               DIRECTOR OF MARKETING &     PELLSTON   SENIOR VICE PRESIDENT      SENIOR VICE PRESIDENT &        COMMUNITY RELATIONS JEFFREY L. SCHMIDT            SENIOR LOAN OFFICER        CHRISTINA E. SWEET           KELLEY ATKINS   SENIOR VICE PRESIDENT     JEFFREY L. SCHMIDT            MANAGER OF INTERNAL          COMMUNITY ADVISOR SHANNA L. HANLEY             SENIOR VICE PRESIDENT          AUDIT                     RICHARD CONRAD   TREASURER                 SHANNA L. HANLEY                                           COMMUNITY ADVISOR                               VICE PRESIDENT &                                 SENIOR CONTROLLER                             KENNETH N. SHELDON           ONAWAY                              VICE PRESIDENT                                EXAMINATION               LAURA L. SHACK                             RICHARD L. WINE               BANKING OFFICER &                              VICE PRESIDENT                 BRANCH MANAGER                                MORTGAGE LOANS                             SUSAN L. CASWELL                              ASSISTANT VICE PRESIDENT    INDIAN RIVER                             STEPHEN J. CRUSOE                              ASSISTANT VICE PRESIDENT    BARBARA J. JOPPICH                             IRENE M. ENGLISH              ASSISTANT VICE PRESIDENT                               ASSISTANT VICE PRESIDENT     & BRANCH MANAGER                                & CONTROLLER              PAUL FISHER                             VICTORIA J. HAND              COMMUNITY ADVISOR                               ASSISTANT VICE PRESIDENT   LISA RENAUD-LAPRAIRIE                                & COMPLIANCE OFFICER       COMMUNITY ADVISOR                             MARIAN L. HARRISON           JOHN J. OLSZEWSKI                             ASSISTANT VICE PRESIDENT      COMMUNITY ADVISOR                                                                                    43                                    CNB CORPORATION                      OFFICERS, COMMUNITY ADVISORS AND STAFF                           STAFF OF CITIZENS NATIONAL BANK        MAIN OFFICE                                    DOWNTOWN            MACKINAW CITY          INDIAN RIVER                                                DRIVE-IN Eugene Andrzejewski      Penny L. Newman       CHEBOYGAN           Susan M. Brandt        Barbara J. Joppich Kurt Blaskowski          Rudi Raab                                 Deborah L. Closs       Jennifer Bartlett Kathleen A. Charboneau   Kelli M. Reimann      Deanna Hudson       Jennifer M. LaHaie     Julie Davis Joan T. Clarey           Katherine H. Rhome    Carla Jankoviak                            Jody L. Jacobs Patricia K. Comps        Ronald D. Rose                            PELLSTON               Amber Perkins Arlene Daniel            Carla Roznowski       EAST SIDE                                  Michelle Miller Trisha M. Dobias         Carolyn A. Scheele    DRIVE-IN            Lora Clouser           Helen K. Stumpf Nicole Drake             Nancy Scott           CHEBOYGAN           Sheri L. Kindell Mary E. Greenwood        Darren Selden                             Tammy Kirsch Debra Grice              Sandra L. Shawl       Tonya Hiller Susan M. Hansen          Lee Sheets            Lori Thornton       ONAWAY Helen R. Hart            Sally A. Spray Sherri Kosan             Kelisue Stachon       SOUTH BRANCH        Laura L. Shack Miranda Lake             M. Teresa Sullivan                        Rachel Bischoff-Peel Susan Leonardi           Kathy S. Swackhamer   CHEBOYGAN           Pamela A. Kolasa Betty J. Lewis           Megan Tomaski                             Sara L. LaLonde Steven R. Luttmann       Rebecca Tomaski       Karen Barrette      Lynn D. Porter Loretta Merchant         Darlene L. Vallance   Susan D. Bliss      Kathleen T. Robbins Kathryn Miller           Wendelin K. Whippo    Sharon Coppernoll   Kathleen S. Wilson Adam Newman              Sherry M. Wichlacz    Diane S. Mushlock                                                Diane S. Poirier                                                                                 44                                    CNB CORPORATION                          DIRECTORS AND DIRECTORS EMERITI                           DIRECTORS OF CNB CORPORATION &                              CITIZENS NATIONAL BANK                                    JOHN P. WARD                                     Chairman                               STEVEN J. BAKER, D.V.M.                          Indian River Veterinary Clinic                                JAMES C. CONBOY, JR.               President & Chief Executive Officer, CNB Corporation            President & Chief Executive Officer, Citizens National Bank                                 KATHLEEN M. DARROW                     President, Darrow Bros. Excavating, Inc.                  Retired, formerly Group Sales & Special Events                 Coordinator for the Mackinac State Historic Parks                                THOMAS J. ELLENBERGER                            Vice President & Secretary                         Albert Ellenberger Lumber Company                                VINCENT J. HILLESHEIM                            President, Anchor In Marina                        Co-Manager, Crusoe Enterprises, LLC                                 *KATHLEEN A. LIEDER                            Retired Partner, Bodman LLP                           Co-Owner, Log Mark Bookstore                                   JOHN L. ORMSBEE                                Owner, Jack's Sales                                *R. JEFFERY SWADLING                       Vice President, Ken's Village Market                             FRANCIS J. VANANTWERP, JR.                      Vice President Durocher Marine Division                        Kokosing Construction Company, Inc.                      *Directors of Citizens National Bank Only                                  DIRECTORS EMERITI                       LYLE MCKINLEY, THOMAS A. ELLENBERGER,                                 THOMAS J. FISHER                               HOW TO ORDER FORM 10-K     Shareholders may obtain, without charge, a copy of Form 10-K or the 2005                                   Annual Report     Summary & Highlights by writing Susan A. Eno, Secretary, CNB Corporation,                                   P.O. Box 10,                            Cheboygan, Michigan 49721.                                                                                45    EX-21 3 k03701exv21.txt SUBSIDIARIES OF THE COMPANY                                       EXHIBIT 21                             SUBSIDIARY OF THE COMPANY:  Citizens National Bank of Cheboygan is the sole subsidiary of the Company. CNB Mortgage Corporation, a Michigan corporation, is a wholly-owned subsidiary of Citizens National Bank of Cheboygan.     EX-23 4 k03701exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                       EXHIBIT 23              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (the CNB Corporation 2004 Employee Stock Purchase Plan) (File No. 114225) and the Registration Statement on Form S-8 (the CNB Corporation 1996 Stock Option Plan) (File No. 333-100250) of our report dated March 10, 2006 relating to the financial statements of CNB Corporation at and for the years ended December 31, 2005, 2004, and 2003, which report is included in Item 13 of the Annual Report on Form 10-K on CNB Corporation.                                        Crowe Chizek and Company LLC  Grand Rapids, Michigan March 22, 2006     EX-31.1 5 k03701exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER                                      EXHIBIT 31.1                      CERTIFICATION OF CHIEF EXECUTIVE OFFICER  I, James C. Conboy, Jr. President and Chief Executive Officer of CNB Corporation (the "registrant") certify that:        1.) I have reviewed this annual report on Form 10-K of the registrant;        2.) Based on my knowledge, this annual report does not contain any untrue       statement of a material fact or omit to state a material fact necessary to       make the statements made, in light of the circumstances under which such       statements were made, not misleading with respect to the period covered by       this annual report;        3.) Based on my knowledge, the financial statements, and other financial       information included in this annual report, fairly present in all material       respects the financial condition, results of operations and cash flows of       the registrant as of, and for, the periods presented in this annual       report;        4.) The registrant's other certifying officer and I are responsible for       establishing and maintaining disclosure controls and procedures (as       defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant       and have:              a.) designed such disclosure controls and procedures, or caused such             disclosure controls and procedures to be designed under our             supervision, to ensure that material information relating to the             registrant, including its consolidated subsidiaries, is made known             to us by others within those entities, particularly during the             period in which this annual report is being prepared;              b.) evaluated the effectiveness of the registrant's disclosure             controls and procedures presented in this report our conclusions             about the effectiveness of the disclosure controls and procedures,             as of the end of the period covered by this report based on such             evaluation; and              c.) disclosed in this report any change in the registrant's             disclosure controls and procedures and presented in this report our             conclusions about the effectiveness of the disclosure controls and             procedures, as of the end of the period covered by this report based             on such evaluation.        5.) The registrant's other certifying officer and I have disclosed, based       on our most recent evaluation of internal control over financial       reporting, to the registrant's auditors and the audit committee of the       board of directors (or persons fulfilling the equivalent functions):              a.) all significant deficiencies and material weaknesses in the             design or operation of internal control over financial reporting             which are reasonably likely to affect the registrant's ability to             record, process, summarize, and report financial information; and              b.) any fraud, whether or not material, that involves management or             other employees who have a significant role in the registrant's             internal control over financial reporting.  Date: March 23, 2006                                       /s/ James C. Conboy, Jr.                                       ---------------------------------------                                       James C. Conboy, Jr.                                       President and Chief Executive Officer     EX-31.2 6 k03701exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER                                      EXHIBIT 31.2                      CERTIFICATION OF CHIEF FINANCIAL OFFICER  I, Shanna L. Hanley, Treasurer of CNB Corporation (the "registrant") certify that:        1.) I have reviewed this annual report on Form 10-K of the registrant;        2.) Based on my knowledge, this annual report does not contain any untrue       statement of a material fact or omit to state a material fact necessary to       make the statements made, in light of the circumstances under which such       statements were made, not misleading with respect to the period covered by       this annual report;        3.) Based on my knowledge, the financial statements, and other financial       information included in this annual report, fairly present in all material       respects the financial condition, results of operations and cash flows of       the registrant as of, and for, the periods presented in this annual       report;        4.) The registrant's other certifying officer and I are responsible for       establishing and maintaining disclosure controls and procedures (as       defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant       and have:              a.) designed such disclosure controls and procedures, or caused such             disclosure controls and procedures to be designed under our             supervision, to ensure that material information relating to the             registrant, including its consolidated subsidiaries, is made known             to us by others within those entities, particularly during the             period in which this annual report is being prepared;              b.) evaluated the effectiveness of the registrant's disclosure             controls and procedures presented in this report our conclusions             about the effectiveness of the disclosure controls and procedures,             as of the end of the period covered by this report based on such             evaluation.              c.) disclosed in this report any change in the registrant's             disclosure controls and procedures and presented in this report our             conclusions about the effectiveness of the disclosure controls and             procedures, as of the end of the period covered by this report based             on such evaluation; and        5.) The registrant's other certifying officer and I have disclosed, based       on our most recent evaluation of internal control over financial       reporting, to the registrant's auditors and the audit committee of the       board of directors (or persons fulfilling the equivalent functions):              a.) all significant deficiencies and material weaknesses in the             design or operation of internal control over financial reporting             which are reasonably likely to affect the registrant's ability to             record, process, summarize, and report financial information; and              b.) any fraud, whether or not material, that involves management or             other employees who have a significant role in the registrant's             internal control over financial reporting.  Date: March 23, 2006                                        /s/ Shanna L. Hanley                                       -----------------------------------                                       Shanna L. Hanley                                       Treasurer                                       (Chief Financial Officer)     EX-32.1 7 k03701exv32w1.txt CERTIFICATION PURSUANT TO SECTION 906                                      EXHIBIT 32.1  CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.  The undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our respective knowledge and belief, that this Annual Report on Form 10-K for the period ended December 31, 2005 ("Report") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that information contained in this Report presents, in all material respects, the financial condition and results of operations of the registrant.                                        /s/ James C. Conboy, Jr.                                       -------------------------- Date: March 23, 2006                  James C. Conboy, Jr.                                       President and Chief Executive Officer                                        /s/ Shanna L. Hanley                                       --------------------------                                       Shanna L. Hanley                                       Treasurer                                       (Chief Financial Officer)    -----END PRIVACY-ENHANCED MESSAGE-----