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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act
of 1934



For the fiscal year ended December 31, 2004



Commission File Number 000-31711



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BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Exact name of registrant as
specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 54-1980794                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|323 Prince Street, Tappahannock, VA                            |  | 22560                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(804) 443-4343

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act: None



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



Common Stock, $5.00 par value



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



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



The issuers revenues for the fiscal year ended December 31, 2004 were $14,502,201.



The aggregate market value of common stock held by non-affiliates of the issuer as of February 18, 2005 was approximately
$33,433,275.



The number of outstanding shares of the
issuers Common Stock, par value $5.00, issued and outstanding as of March 14, 2005 was 1,190,988.



DOCUMENTS INCORPORATED BY REFERENCE



The registrants Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed no later than 120 days following the
Corporations fiscal year end.



Transitional Small
Business Disclosure Format    Yes ̈No  x



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BOE FINANCIAL SERVICES OF VIRGINIA, INC.

FORM 10-KSB



INDEX



|         |  |                                                                                                                  |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                  |  | Page
|PART I  
|Item 1.  |  | Description of Business                                                                                          |  | 3   
|Item 2.  |  | Description of Property                                                                                          |  | 8   
|Item 3.  |  | Legal Proceedings                                                                                                |  | 8   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 8   
|        
|PART II 
|         |  |                                                                                                                 
|Item 5.  |  | Market for Common Equity And Related Stockholder Matters                                                         |  | 9   
|Item 6.  |  | Managements Discussion and Analysis Or Plan of Operation                                                        |  | 9   
|Item 7.  |  | Financial Statements                                                                                             |  | 28  
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 29  
|Item 8A. |  | Controls and Procedures                                                                                          |  | 29  
|Item 8B. |  | Other Information                                                                                                |  | 29  
|        
|PART III
|         |  |                                                                                                                 
|Item 9.  |  | Directors, Executive Officers, Promoters And Control Persons; Compliance with Section 16 (a) of the Exchange Act |  | 30  
|Item 10. |  | Executive Compensation                                                                                           |  | 30  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 31  
|Item 12. |  | Certain Relationships and Related Transactions                                                                   |  | 31  
|Item 13. |  | Exhibits                                                                                                         |  | 32  
|Item 14. |  | Principal Accountant Fees and Services                                                                           |  | 32  



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PART I



INTRODUCTION



FORWARD LOOKING STATEMENTS



Any statements in this document that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expect, believe, intend,
estimate, project, may and similar expressions are intended to identify forward-looking statements. These forward-looking statements are predicated on managements beliefs and assumptions based on information
known to management of BOE Financial Services of Virginia, Inc. (the Corporation) as of the date of this document and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and
objectives of the Corporations management for future or past operations, products or services, and forecasts of the Corporations revenue, earnings or other measures of economic performance, including statements of profitability, business
segments and subsidiaries, and estimates of credit quality trends. Such statements reflect the view of the Corporations management as of this date with respect to future events and are not guarantees of future performance; involve assumptions
and are subject to substantial risks and uncertainties, such as possible changes in the Corporations plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions
prove incorrect, the Corporations actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in interest rates, changes in the accounting treatment of any particular
item, the result of regulatory examinations, changes in industries where the Corporation has a concentration of loans, changes in the level of fee income, changes in general economic conditions and related credit and market conditions, and the
impact or regulatory responses to any of the foregoing.



Forward-looking statements speak only as of the date they are made. The Corporation does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking
statements are made. For any forward-looking statements made in this document, the Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.



ITEM 1. DESCRIPTION OF BUSINESS.



General



On May 12, 2000, the stockholders of Bank of Essex (the
Bank) approved a plan of share exchange pursuant to which the Bank became a wholly owned subsidiary of the Corporation, which became a newly formed one-bank holding company. (References herein to the Corporation shall include
the Bank unless the context otherwise requires.)



Upon consummation of the share exchange and related reorganization effective July 1, 2000, each outstanding common share of the Bank was exchanged for one share of Corporation common stock, par value $5.00 per share. The exchange of shares
was a tax-free reorganization for federal income tax purposes. The share exchange was accounted for on the same basis as pooling-of-interests and financial statements for prior periods are identical to the financial statements of the Bank.
Stockholders equity was restated to reflect this transaction in all prior periods.



The Corporation is a bank holding company, which owns all of the stock of its sole direct subsidiary, the Bank. The headquarters of the Corporation is located in Tappahannock, Virginia.



The Bank was established in 1926 and is headquartered in Tappahannock,
Virginia. The Bank operates six full-service offices in Virginia, engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial
demand



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and time deposit accounts, commercial and consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential
mortgages.



Essex Services, Inc. is a wholly owned subsidiary
of the Bank and was formed to sell title insurance to the Banks mortgage loan customers. Essex Services, Inc. also offers insurance products through an ownership interest in Bankers Insurance, LLC and investment products through an affiliation
with VBA Investments, LLC.



The Corporations strategic
plan has been directed toward the enhancement of its franchise value and operating profitability by increasing its asset size and expanding its customer base. Accordingly, the Bank expanded into Hanover County in 1992, purchased the Banks
fifth branch office in West Point, Virginia from a regional bank in February 1996 and, in June 1999 opened its sixth office, in Henrico County near Virginia Center Commons. Since its opening in 1992, the Banks Hanover County branch has
experienced the strongest deposit growth of the Banks branches. According to the U.S. Census Bureau, Hanover Countys population grew 36.4% and Henrico Countys population grew 20.4% from 1990 to 2000 compared to a 14.4% growth for
the Commonwealth of Virginia over the same time period. In June of 1999, the Bank opened its newest office near Virginia Center Commons, one of the largest shopping malls in the Richmond metropolitan area, on Route 1 in Henrico County.



The Corporation has applied to and been approved by the Commonwealth of
Virginia Bureau of Financial Institutions to construct a new headquarters facility located approximately one mile from its current Main Office in Tappahannock, Virginia. Once this office is opened, the Bank will simultaneously close a branch bank
located across the highway from the new headquarters and redesignate the current Main Office as a branch bank. The current Main Office will also house the Banks data processing department and loan processing center.



Management believes that its most significant profitable growth opportunities
will continue to be in the greater Richmond metropolitan area. Furthermore, management believes that the trend toward consolidation of the banking industry and the closings and acquisitions of financial institutions in the Corporations service
area, and in particular the Richmond metropolitan area, have created and will continue to create opportunities for the Corporation to grow its branching network and customer base in these markets.



The Corporations expansion efforts have contributed to its growth and
improved profitability. Total assets have increased from $81.8 million at the end of 1994 to $237.1 million at December 31, 2004. Net income has grown from $781,000 in 1994 to $2.9 million in 2004. Diluted earnings per share have grown from $0.97 in
1994 to $2.42 in 2004. Net loan have grown $101.3 million from December 31, 1994 to December 31, 2004.



Loan growth since the Corporation expanded into Hanover County has come principally from rate sensitive commercial loans which have served to mitigate the
Corporations interest rate risk. At the same time this growth in commercial loans has increased the Banks credit risk.



Regulation and Supervision



Bank holding companies and banks operate in a highly regulated environment and are regularly examined by federal and state regulators. The following
description briefly discusses certain provisions of federal and state laws and certain regulations and the potential impact of such provisions on the Corporation and the Bank. These federal and state laws and regulations have been enacted for the
protection of depositors in national and state banks and not for the protection of stockholders of bank holding companies or banks.



Bank Holding Companies. As a result of the share exchange previously discussed, the Bank became a subsidiary of the Corporation, and the
Corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the BHCA), and became subject to regulation by the Board of Governors of the Federal Reserve. The Federal Reserve System (the
Federal Reserve) has jurisdiction under the BHCA to



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approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank
holding company and its subsidiaries to those of banking, managing or controlling banks, or any other activity which is so closely related to banking or to managing or controlling banks as to be a proper incident thereto.



Federal law permits bank holding companies from any state to acquire banks
and bank holding companies located in any other state. The law allows interstate bank mergers, subject to opt-in or opt-out action by individual states. Virginia adopted early opt-in legislation that allows interstate bank
mergers. These laws also permit interstate branch acquisitions and de novo branching in Virginia by out-of-state banks if reciprocal treatment is accorded Virginia banks in the state of the acquirer.



There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositor of such depository institutions and to the FDIC insurance fund in the event the
depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the cross-guarantee provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund (SAIF) or the Bank Insurance Fund (BIF) as a result of the default of a
commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDICs claim for
reimbursement is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institution.



The Federal Deposit
Insurance Act (FDIA) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities
of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or stockholders in the event a receiver is appointed to distribute the assets of the Bank.



The Corporation was required to register in Virginia with the State
Corporation Commission (the SCC) under the financial institution holding company laws of Virginia. Accordingly, both the Corporation and the Bank are subject to extensive regulation and supervision by the SCC.



The Corporation is also subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly, and other current reports with the Securities and Exchange Commission.



The Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the Act) was enacted on November
12, 1999. The Act draws new lines between the types of activities that are permitted for banking organizations as financial in nature and those that are not permitted because they are commercial in nature. The Act imposes Community Reinvestment Act
requirements on financial service organizations that seek to qualify for the expanded powers to engage in broader financial activities and affiliations with financial companies that the Act permits.



The Act creates a new form of financial organization called a financial
holding company that may own and control banks, insurance companies and securities firms. A financial holding company is authorized to engage in any activity that is financial in nature or incidental to an activity that is financial in nature or is
a complementary activity. These activities include insurance, securities transactions and traditional banking related activities. The



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Act establishes a consultative and cooperative procedure between the Federal Reserve and the Secretary of the Treasury for the designation of new activities
that are financial in nature within the scope of the activities permitted by the Act for a financial holding company. A financial holding company must satisfy special criteria to qualify for the expanded financial powers authorized by the Act. Among
those criteria are requirements that all of the depository institutions owned by the financial holding company be rated as well-capitalized and well-managed and that all of its insured depository institutions have received a satisfactory ratio for
Community Reinvestment Act compliance during their last examination. A bank holding company that does not qualify as a financial holding company under the Act is generally limited in the types of activities in which it may engage to those that the
Federal Reserve has recognized as permissible for bank holding companies prior to the date of enactment of the Act. The Act also authorizes a state bank to have a financial subsidiary that engages as a principal in the same activities that are
permitted for a financial subsidiary of a national bank if the state bank meets eligibility criteria and special conditions for maintaining the financial subsidiary.



The Act repeals the prohibition in the Glass-Steagall Act on bank affiliations with companies that are engaged primarily in
securities underwriting activities. The Act authorizes a financial holding company to engage in a wide range of securities activities, including underwriting, broker/dealer activities and investment company and investment advisory activities.



The Act provides additional opportunities for financial
holding companies to engage in activities that are financial in nature or incidental to an activity that is financial in nature or complementary thereto provided that any such financial holding company is willing to comply with the conditions,
restrictions and limitations placed on financial holding companies contained in the Act and the regulations to be adopted under the Act. Financial in nature activities include: securities underwriting, dealing and market making, sponsoring mutual
funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking
or managing or controlling banks as to be proper incidents thereto.



Under the Act, federal banking regulators are required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations will
require disclosure of privacy policies to consumers and, in some circumstances, will allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Pursuant to these rules, effective July 1, 2001, financial
institutions must provide: initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; annual notices of their
privacy policies to current customers; and a reasonable method for customers to opt out of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.



The Corporation has
not applied to become a financial holding company under the Act.



Supervision and Regulation of the Bank. The Bank is a state bank and a member of the Federal Reserve System. The Federal Reserve and the Virginia Bureau of Financial Institutions regulate and monitor all significant aspects of the
Banks operations. The Federal Reserve requires quarterly reports on the Banks financial condition, and both federal and state regulators conduct periodic examinations of the Bank.



The Banks deposits are insured by the FDIC for a maximum of $100,000
per depositor. For this protection, the Bank pays a semi-annual statutory assessment and must comply with the rules and regulations of the FDIC. FDIC assessments can change, affecting the Banks costs, depending on the solvency of the banking
industry as a whole.



The Community Reinvestment Act of 1977,
or CRA, requires that federal banking regulators evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.



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The Bank is subject to a variety of other regulations. State and federal laws restrict interest rates on
loans, potentially affecting its income. The Truth in Lending Act and the Home Mortgage Disclosure Act impose information requirements on the Bank in making loans. The Equal Credit Opportunity Act prohibits discrimination in lending on the basis of
race, creed, or other prohibited factors. The Fair Credit Reporting Act governs the use and release of information to credit reporting agencies. The Truth in Savings Act requires disclosure of yields and costs of deposits and deposit accounts. Other
acts govern confidentiality of consumer financial records, automatic deposits and withdrawals, check settlement, endorsement and presentment, and disclosure of cash transactions exceeding $10,000 to the Internal Revenue Service.



Credit Policies



The Corporation follows written policies and procedures to enhance management of credit risk. The loan portfolio is managed
under a specifically defined credit process. This process includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration,
and regular portfolio reviews to estimate loss exposure and ascertain compliance with the Corporations policies. Lending authority is granted to individual lending officers with the current highest limit being $250,000 for either secured or
unsecured loans. A Loan Committee comprised of five loan officers can approve credits of up to $500,000. Approval of such credits requires a majority vote of the Loan Committee. The Executive Committee of the Board of Directors, meeting monthly, can
approve loans up to the Banks legal lending limit. The Board of Directors meets monthly as well and it too may approve loans up to the Banks legal lending limit.



The Corporations management generally requires that secured loans have a loan-to-value ratio of 85% or less.
Management believes that when a borrower has significant equity in the assets securing the loan, the borrower is less likely to default on the outstanding loan balance.



A major element of credit risk management is diversification. The Corporations objective is to maintain a diverse loan
portfolio to minimize the impact of any single event or set of circumstances. Concentration parameters are based on factors of individual risk, policy constraints, economic conditions, collateral and product type.



Lending activities include a variety of consumer, real estate and commercial
loans with a strong emphasis on serving the needs of customers within the Corporations market territory. Consumer loans are made primarily on a secured basis in the form of installment obligations or personal lines of credit. The focus of real
estate lending is single family residential mortgages, but also includes home improvement loans, construction lending and home equity lines of credit. Commercial lending is provided to businesses seeking credit for working capital, the purchase of
equipment and facilities and commercial development.



Market Area



The Corporations six offices serve a diverse market
from the edge of the City of Richmond in Hanover and Henrico Counties to Tappahannock, Virginia on the Rappahannock River in Essex County. From suburban Hanover and Henrico Counties, the market area is primarily rural along Route 360 through King
William and King and Queen Counties into Essex County. The Corporations management believes Route 360 is a developing growth corridor from Richmond to the east. Tappahannock is approximately 40 miles from downtown Richmond and about one hour
from Fredericksburg. Through its Tappahannock branches, the Corporation also serves the central portions of the Middle Peninsula and the upper Northern Neck of Virginia. Through its West Point office, the Corporation serves portions of the Middle
Peninsula of Virginia.



However, the Corporations
expansion strategy has recently been directed at higher growth markets in Hanover, Henrico and the City of Richmond. This has created a concentration of lending activity in the retail commerce and light industry areas.



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Competition



Within the Richmond, Middle Peninsula and upper Northern Neck areas, the Corporation operates in a highly competitive environment, competing for deposits
and loans with commercial corporations, savings and loans and other financial institutions, including non-bank competitors, many of which possess substantially greater financial resources than those available to the Corporation. Many of these
institutions have significantly higher lending limits than the Corporation. In addition, there can be no assurance that other financial institutions, with substantially greater resources than the Corporation, will not establish operations in the
Corporations service area.



In Essex County, the
Corporation commands 41.7% of the deposits in the market, according to the most recently available survey of deposits by the FDIC (June 30, 2004) and is the second largest banking corporation headquartered in Essex County. Serving King William
County, the branches at Central Garage and West Point have experienced steady growth, reaching 21.0% of the deposits in the King William County market as of the June 30, 2004 FDIC survey of deposits, while competing with previously established
branches. The Corporations office located on Route 360 in eastern Hanover County, east of Mechanicsville, has experienced strong growth while competing against other community banking corporations and established offices of statewide banking
corporations in the vicinity.



Employees



At December 31, 2004, the Corporation had 88 full-time equivalent employees.
None of its employees is represented by any collective bargaining unit. The Corporation considers relations with its employees to be good.



ITEM 2. DESCRIPTION OF PROPERTIES.



The principal office of the Corporation and the Bank is located at 323 Prince Street, Tappahannock, Virginia 22560. The Bank has operated a branch in the Tappahannock Towne Center in Tappahannock since 1981. In November 1988, the Bank
opened the King William office at Central Garage near Manquin in King William County. The fourth facility, the East Hanover office, opened in August 1992, on Route 360 east of Mechanicsville in Hanover County. In February of 1996, the Bank opened
its fifth office in West Point, Virginia in King William County. In June 1999, the Bank opened its sixth office in Henrico County near Virginia Center Commons. This office houses other lines of business such as the commercial loan department and
fixed rate mortgages. In June of 1990, the Bank purchased land in Tappahannock, Virginia. An additional adjoining parcel was purchased in 2004 and the Commonwealth of Virginia Bureau of Financial Institutions has approved the building of a new
facility that will house executive offices of the Corporation as well as a branch office. When this new facility opens, the Tappahannock Towne Center Office will be closed and then sold. In October of 2002, the Bank purchased a small parcel of land
adjoining the King William Office. The Corporation or the Bank owns all of its properties.



ITEM 3. LEGAL PROCEEDINGS.



In the
course of its operations, the Corporation is party to various legal proceedings. Based upon information currently available, and after consultation with its general counsel, management believes that such legal proceedings, in the aggregate, will not
have a material adverse effect on the Corporations business, financial position or results of operations.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



No matters were submitted to the Corporations stockholders for their vote during the quarter ended December 31, 2004.



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PART II



ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.



(a) Market Information. The Corporations Common Stock trades on the NASDAQ Small Cap Market under the symbol BSXT.



The following table indicates the high and low bid prices for the Common Stock as reported on the NASDAQ Small Cap Market
for the quarterly periods indicated:



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2004           |  | High |       | Low
|Fourth Quarter |  | $    | 30.25 |     | $ | 25.70
|Third Quarter  |  |      | 27.17 |     |   | 25.50
|Second Quarter |  |      | 29.50 |     |   | 23.12
|First Quarter  |  |      | 28.60 |     |   | 26.50
|               |  |     
|2003           |  | High |       | Low
|Fourth Quarter |  | $    | 28.00 |     | $ | 25.00
|Third Quarter  |  |      | 26.50 |     |   | 23.50
|Second Quarter |  |      | 25.00 |     |   | 21.60
|First Quarter  |  |      | 24.20 |     |   | 19.18



(b) Holders. At
December 31, 2004, there were 1,188,951 shares of Common Stock of the Corporation outstanding held by approximately 1,100 holders of record.



(c) Dividends. The Corporation began paying cash dividends in 1944 and semi-annual cash dividends in 1989. The Board of Directors intends to continue its
present policy of paying semi-annual cash dividends on the Common Stock when justified by the financial condition of the Corporation. The timing and amount of future dividends, if any, will depend on general business conditions encountered by the
Corporation, its earnings, its financial condition and cash and capital requirements, governmental regulations and other such factors as the Board of Directors may deem relevant. The following table sets forth the semi-annual and total cash
dividends paid per share for the period for 2004 and 2003.



|     |  |                                           |      |                                           |   |                                     |  |   |     
|---- |  | ----------------------------------------- | ---- | ----------------------------------------- | - | ----------------------------------- |  | - | ----
|Year |  | 1st Semi-AnnualDividend PaidPer share (1) |      | 2nd Semi-AnnualDividend Paidper share (1) |   | Total AnnualDividends Paidper share
|2004 |  | $                                         | 0.30 |                                           | $ | 0.33                                |  | $ | 0.63
|2003 |  | $                                         | 0.27 |                                           | $ | 0.29                                |  | $ | 0.56

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|(1) | The Corporation generally pays its semi-annual dividends in June and December. BOE has no repurchase plans.
|--- | -----------------------------------------------------------------------------------------------------------



DIVIDEND POLICY



Federal and state banking laws contain limitations on the ability of the
Corporation to pay dividends to its shareholders. Additionally, the Corporation depends on dividends it receives from the Bank to provide funding for future dividends, if any, on its common stock. As a banking corporation organized under Virginia
law, the Banks ability to pay the Corporation dividends is generally limited to the amount of its retained earnings. The Federal Reserve recommends that banking organizations pay dividends only if the net income available to shareholders in
the past year fully funds those dividends and the expected rate of earnings retention is consistent with capital needs, asset quality and overall financial condition.



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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of BOE Financial
Services of Virginia, Inc. (the Corporation). This review should be read in conjunction with the Corporations consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This analysis provides
an overview of the significant changes that occurred during the periods presented.



CRITICAL ACCOUNTING POLICIES



General



The Corporations financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The financial information contained in these statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already
occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing expense, recovering an asset or relieving a liability. The Corporation uses historical loss factors as one factor in determining
the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Corporation uses. In addition, GAAP itself may change from one previously acceptable method to another method.
Although the economics of the Corporations transactions would be the same, the timing of events that would impact the Corporations transactions could change.



Allowance for Loan Losses



The allowance for loan losses is an estimate of the losses that may be sustained in the Corporations loan portfolio. The allowance is based on two
basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is inherently subjective and the
Corporations actual losses could be greater or less than the estimates.



The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Managements periodic evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, and current economic conditions.



OVERVIEW



Year 2004 Compared to Year 2003



The Corporations strategic plan is directed toward the enhancement of its franchise value and operating profitability by increasing its asset size
and expanding its customer base. The Corporation operates six full-service offices between its headquarters in Tappahannock, Virginia along the U.S. 360 corridor to the Richmond, Virginia metropolitan market. Management believes that its most
significant profitable growth opportunities will continue to be in the greater Richmond metropolitan area.



On December 31, 2004, the Corporation had total assets of $237.1 million, total loans of $159.6 million, total deposits of $207.0 million and total
stockholders equity of $24.7 million. The Corporation had net income of $2.9 million in 2004, a $478,000, or 19.9%, increase from $2.4 million in net income in 2003. This resulted in a return on average equity of 12.12% in 2004 compared to
10.80% in 2003. Return on average assets in 2004 was 1.23%, compared to 1.04% in 2003. The Corporations total loans declined 0.6%, or $950,000 in 2004 from 2003. Total loans were $159.6 million at December 31, 2004 compared to $160.5 million
at December 31, 2003. At December 31, 2004, the ratio of non-performing assets to total assets was 0.14% compared to 0.75% at December 31, 2003. Net charge offs to average loans were 0.21% in 2004 compared to 0.42% in 2003. Loans



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past due 90 days or more and still accruing interest at December 31, 2004 were $100,000 and $285,000 at December 31, 2003. The Corporations allowance
for loan losses to period end loans at December 31, 2004 was 1.31% compared to 1.33% at December 31, 2003.



Operating results for 2004 reflected a continued effort by management to improve the Corporations net interest margin. This was accomplished by
continuing to price most interest bearing certificates of deposit at below average market rates and focusing on growing lower cost savings and checking deposit account categories. This had the effect of not attracting new certificate of deposit
dollars to the institution and the repricing of maturing certificates of deposit at lower rates, on average. This lowered the Corporations cost of interest-bearing liabilities from 2.20% in 2003 to 1.95% in 2004. The Corporations net
interest margin increased from 4.45% in 2003 to 4.54% in 2004 and its interest spread increased from 4.16% in 2003 to 4.24% in 2004.



Additional management efforts in 2004, though not materially impacting the Corporations financial performance, were concentrated on the
implementation of internet banking and, in the second half of 2004, on focusing on the impending requirements of the Sarbanes-Oxley Act of 2002 (SOX) with respect to internal controls over financial reporting.



Year 2003 Compared to Year 2002



On December 31, 2003, the Corporation had total assets of $231.8 million,
total loans of $160.5 million, total deposits of $203.3 million and total stockholders equity of $22.9 million. The Corporation had net income of $2.4 million in 2003, a $625,000, or 35.1%, increase from $1.8 million in net income in 2002.
This resulted in a return on average equity of 10.80% in 2003 compared to 8.87% in 2002. Return on average assets in 2003 was 1.04%, compared to 0.80% in 2002. The Corporations total loans declined 2.0%, or $3.3 million, in 2003 over 2002.
Total loans were $160.5 million at December 31, 2003 compared to $163.8 million at December 31, 2002. At December 31, 2003, the ratio of non-performing assets to total assets was 0.75% compared to 1.06% at December 31, 2002. Net charge offs to
average loans were 0.42% in 2003 compared to 0.74% in 2002. Loans past due 90 days or more and still accruing interest at December 31, 2003 were $285,000 and $102,000 at December 31, 2002. The Corporations allowance for loan losses to period
end loans at December 31, 2003 was 1.33% compared to 1.29% at December 31, 2002.



Operating results for the year ended December 31, 2003 reflected a 37.9% increase in non-interest bearing deposits coupled with 2.6% decrease in interest-bearing deposit accounts. High interest cost certificate of
deposit accounts decreased $12.8 million dollars and resulted in improvement in the Corporations cost of interest-bearing liabilities from 3.10% in 2002 to 2.20% in 2003. Net interest margin improved, as a result, from 4.10% in 2002 to 4.45%
in 2003.



RESULTS OF OPERATIONS



NET INCOME



Year 2004 Compared to Year 2003



The Corporation had net income of $2.9 million in 2004 compared to $2.4 million in 2003. This represented an increase of 19.9%, or $478,000. Diluted
earnings per share in 2004 were $2.42, compared to diluted earnings per share in 2003 of $2.03. These earnings per share are based on average shares outstanding of 1,194,511 in 2004 and 1,187,639 in 2003.



The Corporations profitability increased in 2004 in comparison to 2003
due to an increase of $270,000, or 3.0%, in net interest income. Net interest income increased from $9.0 million in 2003 to $9.3 million in 2004. Additionally, provision for loan losses decreased by $395,000, or 56.4%, in 2004 compared to 2003, due
to improved asset quality and lower loan balances, on average, in 2004. Provision for loan losses was $305,000 in 2004 compared to $700,000 in 2003. The reduction of provision for loan losses has been a result of improvement in loan quality. This
combination of improved net interest income and lower provision for loan losses resulted in



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an increase in net interest income after provision for loan losses of $665,000, or 8.0%. Management has focused its loan efforts in 2004 and 2003 on
improving loan underwriting efforts and in the administration of loans. Also improving profitability was noninterest income which was $1.6 million in 2004 compared to $1.4 million in 2003. The increase in noninterest income was $244,000 and
represented an increase in 2004 over 2003 of 17.6%. The major component of this increase was from the implementation of an automated overdraft program in July 2003. 2004 was the first full year of this program and therefore, service charge income
increased $129,000 in 2004 over 2003 due to this program and higher balance levels in demand deposit accounts, on average.



Offsetting these increases in net income was a $255,000, or 3.9%, increase in noninterest expenses in 2004 compared to 2003. Noninterest expenses were
$6.9 million in 2004 and $6.6 million in 2003. The largest component of this noninterest expense increase was an increase of $161,000, or 6.0% in salaries Also offsetting net income increases was an increase of $176,000, or 27.1%, in income tax
expenses. Income tax expense totaled $823,000 in 2004 and $648,000 in 2003.



Year 2003 Compared to Year 2002



The
Corporation had net income of $2.4 million in 2003 compared to $1.8 million in 2002. This represented an increase of 35.1%, or $625,000. Diluted earnings per share in 2003 were $2.03, compared to diluted earnings per share in 2002 of $1.51. These
earnings per share are based on average shares outstanding of 1,187,639 in 2003 and 1,181,558 in 2002.



The Corporations profitability increased in 2003 in comparison to 2002 due to an increase of $953,000, or 11.8%, in net interest income through
conservative deposit pricing strategies. Net interest income increased from $8.0 million in 2002 to $9.0 million in 2003. Additionally, provision for loan losses decreased by $508,000, or 42.1%, in 2003 compared to 2002 due to improved asset quality
and a lower loan level at year end 2003 compared to 2002. The provision for loan losses was $700,000 in 2003 compared to $1.2 million in 2002. This combination resulted in a net interest income after provision for loan losses increase of $1.5
million, or 21.4%. Noninterest income was $1.4 million in 2003 compared to $1.1 million in 2002. The increase in noninterest income was $306,000 and represented an increase in 2003 over 2002 of 28.4%.



Offsetting these increases in net income was an $862,000, or 14.9%, increase
for 2003 compared to 2002 in noninterest expenses. Noninterest expenses were $6.6 million in 2003 and $5.8 million in 2002. Also offsetting net income increases was an increase of $279,000, or 75.8%, in income tax expenses. Income tax expense
totaled $648,000 in 2003 and $368,000 in 2002.



NET INTEREST INCOME



Year 2004 Compared to Year 2003



Net interest income is the major component of the Corporations
earnings and is equal to the amount by which interest income exceeds interest expense. The Corporations earning assets are composed primarily of loans and securities, while deposits, short-term borrowings and trust preferred debt represent the
major portion of interest-bearing liabilities. Changes in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income.



Net interest income, on a fully tax equivalent basis, was $9.9 million in
2004, 4.2% higher than the $9.5 million reported for 2003. The Corporations level of earning assets increased $4.3 million, or 2.0%, on average, in 2004 to $218.0 million compared to $213.7 million in 2003. Loans receivable were $162.5
million, on average, in 2004 compared to $164.0 million in 2003, a decrease of $1.5 million, or 0.9%. The yield on loans receivable decreased from 6.65% in 2003 to 6.56% in 2004. On a fully tax equivalent basis the yield on loans receivable
decreased $235,000 in 2004, from $10.9 million in 2003 to $10.7 million in 2004. This represents a decrease of 2.2%. Investment securities and federal funds sold increased, on average, 11.6% in 2004 to $55.5 million, up from $49.8 million, on
average, in 2003. The tax equivalent yield on investment securities, including equity securities and federal funds sold, was 5.12% in 2004 compared to 5.39% in 2003. On a fully taxable



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equivalent basis, income on investment securities and federal funds sold income increased 6.1%, or $163,000, from $2.7 million in 2003 to $2.8 million in
2004. This earning asset rate and volume activity resulted in a yield on earning assets of 6.19% in 2004 based on $13.5 million in fully taxable equivalent income compared to 6.35% in 2003 based on $13.6 million in fully taxable equivalent income.
This is a $72,000 decrease from 2003 to 2004, or 0.5%. The Corporations interest-bearing liabilities decreased $135,000, on average, from $185.5 million in 2003 to $185.4 million in 2004. The cost of interest-bearing liabilities decreased from
2.20% in 2003 to 1.95% in 2004, a decrease of 11.4%.



The
decrease in yield on earning assets of 16 basis points coupled with the decreased cost of interest-bearing liabilities of 25 basis points resulted in a net interest margin for the Corporation of 4.54% in 2004 compared to a net interest margin of
4.45% in 2003. Net interest margin is calculated by dividing the Corporations net interest income on a tax equivalent basis by the average earning assets. Volume increases in loans and in securities, coupled with lower rate and volume
decreases in higher costing interest-bearing liabilities resulted in an increase in the interest spread. The Corporations net interest spread increased 8 basis points from 4.16% in 2003 to 4.24% in 2004. Spread is calculated by subtracting the
cost of interest-bearing liabilities from the yield on earning assets.



Year
2003 Compared to Year 2002



Net interest income, on a
fully tax equivalent basis, was $9.5 million in 2003, 11.0% higher than the $8.6 million reported for 2002. The Corporations level of earning assets increased $5.0 million, or 2.4%, on average, in 2003 to $213.7 million compared to $208.8
million in 2002. Loans receivable were $164.0 million, on average, in 2003 compared to $160.9 million in 2002, an increase of $3.1 million, or 1.9%. The yield on loans receivable decreased from 7.10% in 2002 to 6.65% in 2003. On a fully tax
equivalent basis the yield on loans receivable decreased $523,000 in 2003, from $11.4 million in 2002 to $10.9 million in 2003. This represented a decrease of 4.8%. Investment securities and federal funds sold increased, on average, 4.0% in 2003 to
$50.0 million, up from $47.8 million, on average, in 2002. The tax equivalent yield on investment securities, including equity securities and federal funds sold, was 5.39% in 2003 compared to 5.94% in 2002. On a fully taxable equivalent basis,
income on investment securities and federal funds sold income decreased 5.7%, or $161,000, from $2.8 million in 2002 to $2.7 million in 2003. This earning asset rate and volume activity resulted in a yield on earning assets of 6.35% in 2003 based on
$13.6 million in fully taxable equivalent income compared to 6.83% in 2002 based on $14.3 million in fully taxable equivalent income. This is a $684,000 decrease from 2002 to 2003, or 4.8%. The Corporations interest-bearing liabilities
increased $1.8 million, or 1.0%, on average, from $183.7 million in 2002 to $185.5 million in 2003. The cost of interest-bearing liabilities decreased from 3.10% in 2002 to 2.20% in 2003, a decrease of 28.5%.



The decrease in yield on earning assets of 48 basis points coupled with the
decreased cost of interest-bearing liabilities of 90 basis points resulted in a net interest margin for the Corporation of 4.45% in 2003 compared to a net interest margin of 4.10% in 2002. Volume increases in loans and in securities, coupled with
lower rate and volume decreases in higher costing interest-bearing liabilities resulted in an increase in the interest spread. The Corporations net interest spread increased 43 basis points from 3.73% in 2002 to 4.16% in 2003.



The Corporations net interest margin is affected by changes in the
amount and mix of earning assets and interest-bearing liabilities, referred to as a volume change. It is also affected by changes in yields earned on earning assets and rates paid on interest-bearing deposits and other borrowed funds,
referred to as a rate change. The following table sets forth for each category of earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or incurred on such amounts and the average rate
earned or incurred for the years ended December 31, 2004, 2003 and 2002. The table also sets forth the average rate earned on total earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin on average
total earning assets for the same periods.



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AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES





|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|------------------------------------------ |  | -------------- | ------- | - | ----------------------------------------------- | - | ----------------- | ---- | ---- | -------------- |  | - | ---------------------- | - | ----------------- | - | ------ | -------------- | ---- | - | ---------------------- | - | ----------------- | - |  | - | ------ |  | ---- | -
|                                           |  |                |         |   | Years Ended December 31, (Dollars in
thousands) |   |                   |      |     
|                                           |  |                |        
|                                           |  | 2004           |         |   | 2003                                            |   |                   | 2002 |     
|                                           |  | AVERAGEBALANCE |         |   | INTERESTINCOME/EXPENSE                          |   | AVERAGEYIELD/RATE |      |      | AVERAGEBALANCE |  |   | INTERESTINCOME/EXPENSE |   | AVERAGEYIELD/RATE |   |        | AVERAGEBALANCE |      |   | INTERESTINCOME/EXPENSE |   | AVERAGEYIELD/RATE |  
|Earning Assets:                            |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Loans receivable                           |  | $              | 162,507 |   |                                                 | $ | 10,664            |      | 6.56 | %              |  | $ | 163,976                |   |                   | $ | 10,899 |                | 6.65 | % |                        | $ | 160,941           |   |  | $ | 11,422 |  | 7.10 | %
|Securities, taxable                        |  |                | 20,232  |   |                                                 |   | 890               |      | 4.40 | %              |  |   | 17,925                 |   |                   |   | 858    |                | 4.79 | % |                        |   | 17,389            |   |  |   | 1,016  |  | 5.84 | %
|Securities, non-taxable                    |  |                | 31,448  |   |                                                 |   | 1,861             |      | 5.92 | %              |  |   | 28,333                 |   |                   |   | 1,752  |                | 6.18 | % |                        |   | 24,734            |   |  |   | 1,688  |  | 6.82 | %
|Equity securities                          |  |                | 935     |   |                                                 |   | 40                |      | 4.28 | %              |  |   | 1,001                  |   |                   |   | 44     |                | 4.40 | % |                        |   | 1,283             |   |  |   | 122    |  | 9.51 | %
|Federal funds sold                         |  |                | 2,927   |   |                                                 |   | 53                |      | 1.81 | %              |  |   | 2,507                  |   |                   |   | 27     |                | 1.08 | % |                        |   | 4,433             |   |  |   | 70     |  | 1.58 | %
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total earning assets                       |  |                | 218,049 |   |                                                 | $ | 13,508            |      | 6.19 | %              |  |   | 213,742                |   |                   | $ | 13,580 |                | 6.35 | % |                        | $ | 208,780           |   |  | $ | 14,318 |  | 6.86 | %
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Non-Earning Assets:                        |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Cash and due from banks                    |  |                | 8,964   |   |                                                 |   |                   |      |      |                |  |   | 8,409                  |   |                   |   |        |                |      |   |                        |   | 6,169             |   |  |   |        |  |      |  
|Allowance for loan losses                  |  |                | (2,060  | ) |                                                 |   |                   |      |      |                |  |   | (2,193                 | ) |                   |   |        |                |      |   |                        |   | (2,167            | ) |  |   |        |  |      |  
|Other assets                               |  |                | 10,689  |   |                                                 |   |                   |      |      |                |  |   | 10,557                 |   |                   |   |        |                |      |   |                        |   | 11,112            |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total non-earning assets                   |  |                | 17,593  |   |                                                 |   |                   |      |      |                |  |   | 16,773                 |   |                   |   |        |                |      |   |                        |   | 15,114            |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total assets                               |  | $              | 235,642 |   |                                                 |   |                   |      |      |                |  | $ | 230,515                |   |                   |   |        |                |      |   |                        | $ | 223,894           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Deposits:                                  |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest-bearing demand (NOW) deposits     |  | $              | 27,387  |   |                                                 | $ | 95                |      | 0.35 | %              |  | $ | 24,263                 |   |                   | $ | 103    |                | 0.42 | % |                        | $ | 22,357            |   |  | $ | 236    |  | 1.06 | %
|Money market deposits                      |  |                | 17,085  |   |                                                 |   | 143               |      | 0.84 | %              |  |   | 17,244                 |   |                   |   | 173    |                | 1.00 | % |                        |   | 14,313            |   |  |   | 288    |  | 2.01 | %
|Savings deposits                           |  |                | 22,767  |   |                                                 |   | 174               |      | 0.76 | %              |  |   | 20,072                 |   |                   |   | 180    |                | 0.90 | % |                        |   | 17,237            |   |  |   | 292    |  | 1.69 | %
|Time deposits                              |  |                | 112,749 |   |                                                 |   | 2,987             |      | 2.65 | %              |  |   | 120,118                |   |                   |   | 3,511  |                | 2.92 | % |                        |   | 122,145           |   |  |   | 4,670  |  | 3.82 | %
|Federal funds purchased                    |  |                | 1,405   |   |                                                 |   | 20                |      | 1.42 | %              |  |   | 270                    |   |                   |   | 5      |                | 1.85 | % |                        |   | 281               |   |  |   | 6      |  | 2.14 | %
|Other borrowings                           |  |                | 4,000   |   |                                                 |   | 187               |      | 4.68 | %              |  |   | 3,561                  |   |                   |   | 101    |                | 2.84 | % |                        |   | 7,364             |   |  |   | 203    |  | 2.76 | %
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total interest-bearing liabilities         |  |                | 185,393 |   |                                                 | $ | 3,606             |      | 1.95 | %              |  |   | 185,528                |   |                   | $ | 4,073  |                | 2.20 | % |                        |   | 183,697           |   |  | $ | 5,695  |  | 3.10 | %
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Non-Interest Bearing Liabilities:          |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Demand deposits                            |  |                | 25,139  |   |                                                 |   |                   |      |      |                |  |   | 20,894                 |   |                   |   |        |                |      |   |                        |   | 18,308            |   |  |   |        |  |      |  
|Other liabilities                          |  |                | 1,290   |   |                                                 |   |                   |      |      |                |  |   | 1,805                  |   |                   |   |        |                |      |   |                        |   | 1,793             |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total non-interest bearing liabilities     |  |                | 26,429  |   |                                                 |   |                   |      |      |                |  |   | 22,699                 |   |                   |   |        |                |      |   |                        |   | 20,101            |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total liabilities                          |  |                | 211,822 |   |                                                 |   |                   |      |      |                |  |   | 208,227                |   |                   |   |        |                |      |   |                        |   | 203,798           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Stockholders equity                       |  |                | 23,820  |   |                                                 |   |                   |      |      |                |  |   | 22,288                 |   |                   |   |        |                |      |   |                        |   | 20,096            |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Total liabilities and stockholders equity |  | $              | 235,642 |   |                                                 |   |                   |      |      |                |  | $ | 230,515                |   |                   |   |        |                |      |   |                        | $ | 223,894           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                                                 |   |                   |      |      |                |  |   |                        |   |                   |   |        |                |      |   |                        |   |                   |   |  |   |        |  |      |  
|Interest spread                            |  |                |         |   |                                                 |   |                   |      | 4.24 | %              |  |   |                        |   |                   |   |        |                | 4.16 | % |                        |   |                   |   |  |   |        |  | 3.76 | %
|Net interest margin                        |  |                |         |   |                                                 | $ | 9,902             |      | 4.54 | %              |  |   |                        |   |                   | $ | 9,507  |                | 4.45 | % |                        |   |                   |   |  | $ | 8,623  |  | 4.13 | %



Net interest income is
affected by both (1) changes in the interest rate spread (the difference between the weighted average yield on interest earning assets and the weighted average cost of interest- bearing liabilities) and (2) changes in volume (average balances of
interest earning assets and interest-bearing liabilities).



For
each category of interest-earning assets and interest-bearing liabilities, information is provided regarding changes attributable to (1) changes in volume of balances outstanding (changes in volume multiplied by prior period interest rate) (2)
changes in the interest earned or paid on the balances (changes in rate multiplied by prior period volume) and (3) a combination of changes in volume and rate allocated pro rata.



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RATE AND VOLUME ANALYSIS

(Dollars in thousands)



|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|-------------------------------------- |  | -------------------------------------------------------------------------------- | ---- | - | -------------------------------------------------------------------------------- | - | ---- | ----- |  | - | ---- | - |  | ------ | ------ | - | ----- | - | ---- | - |  | - | ------ | -
|                                       |  | Year EndedDecember 31, 2004Compared toDecember 31, 2003Increase (Decrease)Due to |      |   | Year EndedDecember 31, 2003Compared toDecember 31, 2002Increase (Decrease)Due to |  
|                                       |  | Rate                                                                             |      |   | Volume                                                                           |   |      | Total |  |   | Rate |   |  | Volume |        |   | Total |  
|Interest Earned On:                    |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Loans receivable                       |  | $                                                                                | (138 | ) |                                                                                  | $ | (97  | )     |  | $ | (235 | ) |  | $      | (744   | ) |       | $ | 221  |   |  | $ | (523   | )
|Securities, taxable                    |  |                                                                                  | (54  | ) |                                                                                  |   | 86   |       |  |   | 32   |   |  |        | (190   | ) |       |   | 32   |   |  |   | (158   | )
|Securities, non-taxable                |  |                                                                                  | (70  | ) |                                                                                  |   | 179  |       |  |   | 109  |   |  |        | (117   | ) |       |   | 181  |   |  |   | 64     |  
|Equity securities                      |  |                                                                                  | (1   | ) |                                                                                  |   | (3   | )     |  |   | (4   | ) |  |        | (10    | ) |       |   | (14  | ) |  |   | (78    | )
|Federal funds sold                     |  |                                                                                  | 21   |   |                                                                                  |   | 5    |       |  |   | 26   |   |  |        | (18    | ) |       |   | (25  | ) |  |   | (43    | )
|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Total interest income                  |  | $                                                                                | (242 | ) |                                                                                  | $ | 170  |       |  | $ | (72  | ) |  | $      | (1,079 | ) |       | $ | 395  |   |  | $ | (738   | )
|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Interest Paid On:                      |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Interest bearing demand (NOW) deposits |  | $                                                                                | (27  | ) |                                                                                  | $ | 19   |       |  | $ | (8   | ) |  | $      | (155   | ) |       | $ | 22   |   |  | $ | (133   | )
|Money market deposits                  |  |                                                                                  | (28  | ) |                                                                                  |   | (2   | )     |  |   | (30  | ) |  |        | (194   | ) |       |   | 79   |   |  |   | (115   | )
|Savings deposits                       |  |                                                                                  | (66  | ) |                                                                                  |   | 60   |       |  |   | (6   | ) |  |        | (172   | ) |       |   | 60   |   |  |   | (112   | )
|Time deposits                          |  |                                                                                  | (317 | ) |                                                                                  |   | (207 | )     |  |   | (524 | ) |  |        | (1,083 | ) |       |   | (76  | ) |  |   | (1,159 | )
|Federal funds purchased                |  |                                                                                  | (1   | ) |                                                                                  |   | 16   |       |  |   | 15   |   |  |        | (1     | ) |       |   |     |   |  |   | (1     | )
|Other borrowings                       |  |                                                                                  | 72   |   |                                                                                  |   | 14   |       |  |   | 86   |   |  |        | 6      |   |       |   | (108 | ) |  |   | (102   | )
|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Total interest expense                 |  | $                                                                                | (367 | ) |                                                                                  | $ | (100 | )     |  | $ | (467 | ) |  | $      | (1,599 | ) |       | $ | (23  | ) |  | $ | (1,622 | )
|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  
|Net interest income                    |  | $                                                                                | 125  |   |                                                                                  | $ | 270  |       |  | $ | 395  |   |  | $      | 520    |   |       | $ | 418  |   |  | $ | 884    |  
|                                       |  |                                                                                  |      |   |                                                                                  |   |      |       |  |   |      |   |  |        |        |   |       |   |      |   |  |   |        |  



INTEREST RATE SENSITIVITY



An important component of both earnings performance and
liquidity is management of interest rate sensitivity. Interest rate sensitivity reflects the potential effect on net interest income of a movement in market interest rates. The Corporation is subject to interest rate sensitivity to the degree that
its interest earning assets mature or reprice at a different time interval from that of its interest-bearing liabilities.



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INTEREST SENSITIVITY ANALYSIS

December 31, 2004 (Dollars in thousands)



|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ----------- | - | ------- | ----------- |  | - | ------- | - |  | - | -------
|                                                                                |  | Maturing or Repricing In:
|                                                                                |  | < 3 Months                |        |   | 3-12 Months |   |         | Over 1 Year |  |   | Total  
|Interest-sensitive assets:                                                      |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Cash                                                                            |  | $                         | 4,354  |   |             | $ |        |             |  | $ |        |   |  | $ | 4,354  
|Loans                                                                           |  |                           | 55,082 |   |             |   | 20,254  |             |  |   | 84,223  |   |  |   | 159,559
|Short-term investments                                                          |  |                           | 5,064  |   |             |   |        |             |  |   |        |   |  |   | 5,064  
|Securities                                                                      |  |                           | 2,323  |   |             |   | 1,971   |             |  |   | 53,661  |   |  |   | 57,955 
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Total interest-sensitive assets                                                 |  | $                         | 66,823 |   |             | $ | 22,225  |             |  | $ | 137,884 |   |  | $ | 226,932
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Interest-sensitive liabilities:                                                 |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Non-interest bearing deposits                                                   |  | $                         |       |   |             | $ |        |             |  | $ | 25,605  |   |  | $ | 25,605 
|Certificates of deposit                                                         |  |                           | 18,033 |   |             |   | 48,239  |             |  |   | 47,030  |   |  |   | 113,302
|Interest-bearing checking, money market deposits, NOW and savings accounts (1)  |  |                           | 3,403  |   |             |   | 10,210  |             |  |   | 54,452  |   |  |   | 68,065 
|Trust Preferred Securities                                                      |  |                           |       |   |             |   |        |             |  |   | 4,124   |   |  |   | 4,124  
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Total interest sensitive liabilities                                            |  | $                         | 21,436 |   |             | $ | 58,449  |             |  | $ | 131,211 |   |  | $ | 211,096
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Period gap                                                                      |  |                           | 45,387 |   |             |   | (36,224 | )           |  |   | 6,673   |   |  |   | 15,836 
|Cumulative gap                                                                  |  |                           | 45,387 |   |             |   | 9,163   |             |  |   | 15,836  |   |  |   |        
|Ratio of cumulative interest sensitive assets to interest sensitive liabilities |  |                           | 311.7  | % |             |   | 111.5   | %           |  |   | 107.5   | % |  |   |        
|Ratio of cumulative gap to interest sensitive assets                            |  |                           | 20.0   | % |             |   | 4.0     | %           |  |   | 7.0     | % |  |   |        

---

|(1) | The Corporation has determined that interest-bearing checking, money market deposits, Now and savings accounts are not as rate-sensitive as other funding sources to changes in
market rates, and therefore has allocated them evenly over a five-year period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PROVISION FOR LOAN LOSSES



The provision for loan losses is charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Corporation based on such factors as historical experience, the volume and type of lending
conducted by the Corporation, the amount of non-performing assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Corporations
portfolio.



The provision for loan losses was $305,000 in 2004,
a decrease of $395,000, or 56.4%, compared to the $700,000 in provision for 2003. The provision for loan losses reflected a decrease of $341,000 in net charged-off loans in 2004. Net charged-off loans were $346,000 in 2004 after charging off
$431,000 and recovering a total of $85,000. This compares to $687,000 in net charge-offs in 2003 after charging off $829,000 in loans and recognizing $142,000 in recoveries. The declining trend in charge-off loans and provision for loan losses has
been caused by improving loan quality and moderating loan growth in 2003 and 2004.



Management believes the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio. In view of the Corporations plans to continue its loan growth, management will continue to closely
monitor the performance of its portfolio and make additional provisions as necessary.



NON-INTEREST INCOME



Non-interest income in
2004 was $1.6 million, an increase of $244,000, or 17.6%, from non-interest income of $1.4 million in 2003. Service charges on deposit accounts were the largest component of this increase, $129,000, or 15.0%, from $865,000 in 2003 to $994,000 in
2004. The increase in 2004 over 2003 was primarily from the implementation in July 2003 of an automated program for overdraft fees, which significantly reduced the percentage of fees waived by the bank. Also, in December 2004 the Corporation closed
on the sale of 1.837



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acre parcel adjoining its Virginia Center Office on Brook Road in Henrico County. This resulted in a gain on the sale of $63,000. Other income increased
20.1%, or $86,000, in 2004. Other income was $511,000 in 2004 and $425,000 in 2003. Net security gains were $66,000 in 2004 and $31,000 in 2003. This increase is 114.4%, or $35,000.



Non-interest income in 2003 was $1.4 million, an increase of $306,000, or 28.4%, from non-interest income of $1.1 million in
2002. The largest dollar volume component of the noninterest income increase was $127,000, or 17.2% in service charge income, which was $738,000 in 2002 and increased to $865,000 in 2003. Net security gains (losses) increased $32,000 from a loss of
$1,000 in 2002 to a gain of $31,000 in 2003. Net gains on sale of loans increased $60,000 from $3,000 in 2002 to $63,000 in 2003. Other income of $425,000 in 2003 increased $87,000 over 2002 other income of $339,000. This represents an increase of
25.6%.



NON-INTEREST EXPENSE



Non-interest expense was $6.9 million in 2004, a $255,000, or 3.8%, increase
over non-interest expense of $6.6 million in 2003. Salaries were $2.9 million in 2004 and were the largest component of this increase, 6.0%, or $161,000 over salaries of $2.7 million in 2003. Data processing expense of $471,000 in 2004 was 28.9%, or
$106,000, higher than data processing expense of $366,000 in 2003. This increase occurred due to computer upgrades throughout the Corporation and start-up costs related to internet banking which was launched in September of 2004. Bank franchise tax
increased $50,000, or 30.6%, in 2004 and was $214,000 compared to $164,000 in 2003. This increase was due to the downstreaming of capital to the Bank from the Corporations trust preferred debt in December of 2003. Part of the calculation of
the franchise tax, paid to the Treasurer of the Commonwealth of Virginia, includes bank equity capital. Other increases to non-interest expenses in 2004 over 2003 were to stationary and printing, up $19,000 to $180,000, occupancy expenses were up
$21,000 to $342,000, employee benefits and costs up $16,000 to $804,000 and postage increased $4,000 to $171,000.



Other operating expenses were $1.4 million and were 7.8%, or $119,000, less than the $1.5 million in 2003. Comprising this decrease in other operating
expenses were decreases to deferred directors compensation expense, $45,000, legal fees $42,000, repossession and collection costs $35,000 and FDIC expense $32,000. Offsetting these decreases to other operating expenses was an increase of $71,000 in
marketing expense.



Non-interest expense was $6.6 million in
2003, a 14.9% or $862,000 increase over non-interest expense of $5.8 million in 2002. Salaries comprised the largest dollar volume component of this increase, $361,000, and increased from $2.3 million in 2002 to $2.7 million during 2003. This
increase in salaries was primarily attributable to an increase of five full-time equivalent employees during 2003. As a result, employee benefits and costs in 2002 increased $173,000, or 28.0%, from $616,000 in 2002 to $788,000 in 2003. Other
operating expenses increased $249,000, or 19.6%, and were $1.3 million in 2002 compared to $1.5 million in 2003. Occupancy expenses were $321,000 in 2003, an increase of $7,000, or 2.3% from occupancy expenses of $314,000 in 2002.



While management has generally been able to abate large increases to
overhead, the cost of complying with regulation and compliance will continue to add pressure to noninterest expenses.



ANALYSIS OF FINANCIAL CONDITION



Loan Portfolio



The loan portfolio is the largest category of the Corporations earning assets and is comprised of commercial loans, agricultural loans, real estate
loans, home equity loans, construction loans, consumer loans, and participation loans with other financial institutions. The primary markets in which the Corporation makes loans include the counties of Essex, King and Queen, King William, Hanover,
Henrico and the City of Richmond. The mix of the loan portfolio is weighted toward loans secured by real estate and commercial loans. In managements opinion, there are no significant concentrations of credit with particular borrowers engaged
in similar activities.



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Net loans consist of total loans minus the allowance for loan losses, unearned discounts and deferred
loan fees. The Corporations net loans were $157.5 million at December 31, 2004, representing a decrease of 0.6%, or $910,000, less than net loans of $158.4 million at December 31, 2003. The average balance of loans as a percentage of average
earning assets was 74.5% in 2004, down slightly from 76.7% in 2003.



In the normal course of business, the Corporation makes various commitments and incurs certain contingent liabilities, which are disclosed but not reflected in the consolidated financial statements contained in this Annual Report, including
standby letters of credit and commitments to extend credit. At December 31, 2004, commitments for standby letters of credit totaled $3.9 million and commitments to extend credit totaled $41.9 million. Commitments for standby letters of credit
totaled $3.9 million at December 31, 2003 and commitments to extend credit totaled $33.1 million.



LOAN PORTFOLIO



|                           |  |                                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------- |  | ---------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                           |  | December 31,(Dollars in thousands) |        
|                           |  | 2004                               |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Loans:                     |  |                                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                 |  | $                                  | 23,534  |   |      | $ | 26,099  |      |  | $ | 33,428  |   |  | $    | 32,714  |   |  | $ | 29,783  |  
|Real Estate                |  |                                    | 103,387 |   |      |   | 106,212 |      |  |   | 121,570 |   |  |      | 110,336 |   |  |   | 94,662  |  
|Real Estate - construction |  |                                    | 25,924  |   |      |   | 21,505  |      |  |   | 1,465   |   |  |      | 3,505   |   |  |   | 6,242   |  
|Installment & other        |  |                                    | 6,714   |   |      |   | 6,693   |      |  |   | 7,375   |   |  |      | 7,406   |   |  |   | 10,624  |  
|                           |  |                                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans                |  | $                                  | 159,559 |   |      | $ | 160,509 |      |  | $ | 163,838 |   |  | $    | 153,961 |   |  | $ | 141,311 |  
|                           |  |                                    |         |   |     
|Allowance for loan losses  |  |                                    | (2,088  | ) |      |   | (2,128  | )    |  |   | (2,116  | ) |  |      | (2,084  | ) |  |   | (1,819  | )
|                           |  |                                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans                  |  | $                                  | 157,471 |   |      | $ | 158,381 |      |  | $ | 161,722 |   |  | $    | 151,877 |   |  | $ | 139,492 |  
|                           |  |                                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



Remaining Maturities of Selected
Loan Categories



|                  |  |                |        |                         |   |       
|----------------- |  | -------------- | ------ | ----------------------- | - | ------
|                  |  | Commercial     |        | Real EstateConstruction
|                  |  | (in thousands)
|Within one year   |  | $              | 13,592 |                         | $ | 22,153
|                  |  |                |        |                         |   |       
|Variable Rate     |  |                |        |                         |   |       
|One to five years |  | $              | 1,538  |                         | $ | 1,638 
|After five years  |  |                | 421    |                         |   |      
|                  |  |                |        |                         |   |       
|Total             |  | $              | 1,959  |                         | $ | 1,638 
|                  |  |                |        |                         |   |       
|Fixed Rate        |  |                |        |                         |   |       
|One to five years |  | $              | 7,286  |                         | $ | 2,133 
|After five years  |  |                | 697    |                         |   |      
|                  |  |                |        |                         |   |       
|Total             |  | $              | 7,983  |                         | $ | 2,133 
|                  |  |                |        |                         |   |       
|Total Maturities  |  | $              | 23,534 |                         | $ | 25,924
|                  |  |                |        |                         |   |       



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ASSET QUALITY



Generally, interest on loans is accrued and credited to income based upon the principal balance outstanding. It is typically the Corporations policy
to discontinue the accrual of interest income and classify a loan on non- accrual when principal or interest is past due 90 days or more and the loan is not well-secured and in the process of collection, or when, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of the obligation.



The Corporation will generally charge-off loans after 120 days of delinquency unless they are adequately collateralized, in the process of collection and, based on a probable specific event, management believes that
the loan will be repaid or brought current within a reasonable period of time. Loans will not be returned to accrual status until future payments of principal and interest appear certain. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments received are applied to the outstanding principal balance.



Real estate acquired by the Corporation as a result of foreclosure or in-substance foreclosure is classified as other real estate owned
(OREO). Such real estate is recorded at the lower of cost or fair market value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at that time. Further allowances for losses are
recorded as charges to other expenses at the time management believes additional deterioration in value has occurred. The Corporation had no OREO at December 31, 2004 or 2003.



The Corporations credit policies generally require a loan-to-value ratio of 85% for secured loans. At December 31,
2004, loans past due 90 days or more and still accruing interest totaled $100,000, all of which were secured by real estate. As of December 31, 2003, loans past due 90 days or more and still accruing totaled $285,000, of which $134,000 was secured
by real estate with the remainder consisting of secured and unsecured commercial and installment loans. Non-accrual loans at December 31, 2004 were $340,000 and at December 31, 2003 were $1.7 million.



NON-PERFORMING ASSETS

(Dollars in thousands)



|                                                  |  |              |      |   |      |   |       |      |  |   |       |   |  |      |      |   |      |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                  |  | December 31, |     
|                                                  |  | 2004         |      |   | 2003 |   |       | 2002 |  |   | 2001  |   |  | 2000 |      |   | 1999 |   |      | 1998 | 
|Nonaccrual loans                                  |  | $            | 340  |   |      | $ | 1,737 |      |  | $ | 2,411 |   |  | $    | 760  |   |      | $ | 956  |      |  | $ | 1,319 |   |  | $ | 485   |  
|Restructured loans                                |  |              | 0    |   |      |   |      |      |  |   |      |   |  |      |     |   |      |   |     |      |  |   |      |   |  |   |      |  
|                                                  |  |              |      |   |      |   |       |      |  |   |       |   |  |      |      |   |      |   |      |      |  |   |       |   |  |   |       |  
|Total nonperforming loans                         |  | $            | 340  |   |      | $ | 1,737 |      |  | $ | 2,411 |   |  | $    | 760  |   |      | $ | 956  |      |  | $ | 1,319 |   |  | $ | 485   |  
|Foreclosed assets                                 |  |              | 0    |   |      |   |      |      |  |   |      |   |  |      |     |   |      |   |     |      |  |   | 72    |   |  |   |      |  
|                                                  |  |              |      |   |      |   |       |      |  |   |       |   |  |      |      |   |      |   |      |      |  |   |       |   |  |   |       |  
|Total nonperforming assets                        |  | $            | 340  |   |      | $ | 1,737 |      |  | $ | 2,411 |   |  | $    | 760  |   |      | $ | 956  |      |  | $ | 1,391 |   |  | $ | 485   |  
|                                                  |  |              |      |   |      |   |       |      |  |   |       |   |  |      |      |   |      |   |      |      |  |   |       |   |  |   |       |  
|Loans past due 90 or more days accruing interest  |  | $            | 100  |   |      | $ | 285   |      |  | $ | 102   |   |  | $    | 988  |   |      | $ | 303  |      |  | $ | 632   |   |  | $ | 1,216 |  
|Nonperforming loans to total loans, at period end |  |              | 0.21 | % |      |   | 1.08  | %    |  |   | 1.47  | % |  |      | 0.49 | % |      |   | 0.68 | %    |  |   | 1.05  | % |  |   | 0.45  | %
|Nonperforming assets to period end assets         |  |              | 0.14 | % |      |   | 0.75  | %    |  |   | 1.06  | % |  |      | 0.35 | % |      |   | 0.49 | %    |  |   | 0.83  | % |  |   | 0.33  | %



The Corporation has
two potential problem loans not included in non performing loans or non performing assets. These two relationships total $2.6 million with $520,000 in reserve. Both loans are performing at December 31, 2004 but the Corporation has questions about
collectibility.



ALLOWANCE FOR LOAN LOSSES



In originating loans, the Corporation recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of



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the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. The Corporation maintains an
allowance for loan losses based upon, among other things, historical experience, the volume and type of lending conducted by the Corporation, the amount of non-performing assets, regulatory policies, generally accepted accounting principles, general
economic conditions, and other factors related to the collectibility of loans in the Corporations portfolios. In addition to general allowances, specific allowances are provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans, which are contractually past due and after considering the net realizable value of any collateral for the loan.



Management actively monitors the Corporations asset quality in a continuing effort to charge-off loans against the
allowance for loan losses when appropriate and to provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations. As of December 31, 2004, the allowance for loan losses amounted to $2.1 million, or 1.31% of total loans. The
Corporations allowance for loan losses were $2.1 million at December 31, 2003, or 1.33% of total loans.



The allowance for loan losses as a percentage of non-performing assets was 614.12% at December 31, 2004. The ratio of allowance for loan losses as a
percentage of non-performing assets at December 31, 2003 was 122.57%.



ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)



|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|-------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                   |  | Years ended December 31, |       
|                                                   |  | 2004                     |        |   | 2003 |   |        | 2002 |  |   | 2001  |   |  | 2000 |       
|Balance, beginning of period                       |  | $                        | 2,129  |   |      | $ | 2,116  |      |  | $ | 2,084 |   |  | $    | 1,819  |   |  | $ | 1,601  |  
|Less chargeoffs:                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Commercial                                         |  |                          | 128    |   |      |   | 613    |      |  |   | 943   |   |  |      | 21     |   |  |   | 85     |  
|Installment                                        |  |                          | 265    |   |      |   | 203    |      |  |   | 262   |   |  |      | 150    |   |  |   | 172    |  
|Real estate                                        |  |                          | 38     |   |      |   | 13     |      |  |   | 39    |   |  |      |       |   |  |   | 10     |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Total chargeoffs                                   |  |                          | 431    |   |      |   | 829    |      |  |   | 1,244 |   |  |      | 171    |   |  |   | 267    |  
|Plus recoveries:                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Commercial                                         |  |                          | 24     |   |      |   | 98     |      |  |   | 17    |   |  |      | 3      |   |  |   | 2      |  
|Installment                                        |  |                          | 55     |   |      |   | 44     |      |  |   | 51    |   |  |      | 43     |   |  |   | 28     |  
|Real estate                                        |  |                          | 6      |   |      |   |       |      |  |   |      |   |  |      |       |   |  |   |       |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Total recoveries                                   |  |                          | 85     |   |      |   | 142    |      |  |   | 68    |   |  |      | 46     |   |  |   | 30     |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Net chargeoffs                                     |  |                          | 346    |   |      |   | 687    |      |  |   | 1,176 |   |  |      | 125    |   |  |   | 237    |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Provision for loan losses                          |  |                          | 305    |   |      |   | 700    |      |  |   | 1,208 |   |  |      | 390    |   |  |   | 455    |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|Balance, end of period                             |  | $                        | 2,088  |   |      | $ | 2,129  |      |  | $ | 2,116 |   |  | $    | 2,084  |   |  | $ | 1,819  |  
|                                                   |  |                          |        |   |      |   |        |      |  |   |       |   |  |      |        |   |  |   |        |  
|                                                   |  |                          |        |   |     
|Allowance for loan losses to period end loans      |  |                          | 1.31   | % |      |   | 1.33   | %    |  |   | 1.29  | % |  |      | 1.35   | % |  |   | 1.29   | %
|                                                   |  |                          |        |   |     
|Allowance for loan losses to non performing assets |  |                          | 614.12 | % |      |   | 122.57 | %    |  |   | 87.76 | % |  |      | 274.21 | % |  |   | 190.27 | %
|                                                   |  |                          |        |   |     
|Net chargeoffs to average loans                    |  |                          | 0.21   | % |      |   | 0.42   | %    |  |   | 0.74  | % |  |      | 0.08   | % |  |   | 0.17   | %



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ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)



|            |  |              |       |             |       |   |      |   |             |  |       |      |  |             |       |  |       |   |             |   |       |      |       |             |  |   |       |  |       |  
|----------- |  | ------------ | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | ---- |  | ----------- | ----- |  | ----- | - | ----------- | - | ----- | ---- | ----- | ----------- |  | - | ----- |  | ----- | -
|            |  | December 31, |      
|            |  | 2004         |       | Percent (1) |       |   | 2003 |   | Percent (1) |  |       | 2002 |  | Percent (1) |       |  | 2001  |   | Percent (1) |   |       | 2000 |       | Percent (1) | 
|Commercial  |  |              | 428   |             | 14.7  | % |      | $ | 346         |  | 16.3  | %    |  | $           | 432   |  | 20.4  | % |             | $ | 1,863 |      | 21.2  | %           |  | $ | 1,301 |  | 21.1  | %
|Installment |  |              | 180   |             | 4.2   | % |      |   | 89          |  | 4.2   | %    |  |             | 95    |  | 4.5   | % |             |   | 18    |      | 4.8   | %           |  |   | 340   |  | 7.5   | %
|Real Estate |  |              | 1,480 |             | 81.1  | % |      |   | 1,694       |  | 79.6  | %    |  |             | 1,589 |  | 75.1  | % |             |   | 203   |      | 74.0  | %           |  |   | 178   |  | 71.4  | %
|            |  |              |       |             |       |   |      |   |             |  |       |      |  |             |       |  |       |   |             |   |       |      |       |             |  |   |       |  |       |  
|            |  | $            | 2,088 |             | 100.0 | % |      | $ | 2,129       |  | 100.0 | %    |  | $           | 2,116 |  | 100.0 | % |             | $ | 2,084 |      | 100.0 | %           |  | $ | 1,819 |  | 100.0 | %
|            |  |              |       |             |       |   |      |   |             |  |       |      |  |             |       |  |       |   |             |   |       |      |       |             |  |   |       |  |       |  

---

|(1) | Percent of loans in each category to total loans.
|--- | -------------------------------------------------



INVESTMENT ACTIVITIES



Securities available-for-sale are used as part of the Corporations interest rate risk management strategy and may be sold in response to interest
rate changes, changes in prepayment risk, liquidity needs, the need to increase regulatory capital and other factors. The fair value of the Corporations securities available-for-sale totaled $55.0 million at December 31, 2004, compared to
$52.2 million at December 31, 2003.



The Corporation is
required to account for the effect of market changes in the value of securities available-for-sale (AFS) under Statement of Financial Accounting Standard #115 (SFAS 115). The market value of the December 31, 2004 securities available-for-sale
portfolio was $1.2 million greater than the associated book value of these securities. On December 31, 2003, the market value of securities available-for-sale exceeded their book value by $2.0 million.



As of December 31, 2004, the book value of the investment portfolio increased
$3.5 million, or 7.0%, from $50.2 million at December 31, 2003 to $53.8 million at December 31, 2004. This increase in the Corporations investment portfolio was in response to increased deposit account balances and a reduction of $910,000 in
net loan balances incurred during the course of 2004.



SECURITIES PORTFOLIO

(Dollars in thousands)



|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|------------------------------------------------------ |  | -------------- | ------ | ---------- | - | -------------- |  | ---------- | ------ | -------------- | - | ---------- |  | - | ------ |  | - | ------
|                                                       |  | 2004           |        | 2003       |   | 2002          
|                                                       |  | Amortized Cost |        | Fair Value |   | Amortized Cost |  | Fair Value |        | Amortized Cost |   | Fair Value
|Held-to-Maturity:                                      |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|U.S. Treasury Issue and other U.S. Government agencies |  | $              | 3,000  |            | $ | 3,000          |  | $          |       |                | $ |           |  | $ |       |  | $ |      
|State, county and municipal                            |  |                | 0      |            |   | 0              |  |            |       |                |   |           |  |   |       |  |   |      
|Other                                                  |  |                | 0      |            |   | 0              |  |            |       |                |   |           |  |   |       |  |   |      
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total Available-for-Sale                               |  | $              | 3,000  |            | $ | 3,000          |  | $          |       |                | $ |           |  | $ |       |  | $ |      
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|                                                       |  |                |       
|                                                       |  | 2004           |        | 2003       |   | 2002          
|                                                       |  | Amortized Cost |        | Fair Value |   | Amortized Cost |  | Fair Value |        | Amortized Cost |   | Fair Value
|Available-for-Sale:                                    |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|U.S. Treasury Issue and other U.S. Government agencies |  | $              | 17,129 |            | $ | 17,057         |  | $          | 14,049 |                | $ | 14,099     |  | $ | 8,874  |  | $ | 9,144 
|State, county and municipal                            |  |                | 33,720 |            |   | 34,733         |  |            | 31,373 |                |   | 32,868     |  |   | 28,647 |  |   | 30,275
|Other                                                  |  |                | 2,904  |            |   | 3,165          |  |            | 4,803  |                |   | 5,233      |  |   | 5,576  |  |   | 6,069 
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total Available-for-Sale                               |  | $              | 53,753 |            | $ | 54,955         |  | $          | 50,225 |                | $ | 52,200     |  | $ | 43,097 |  | $ | 45,488
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       



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SECURITIES PORTFOLIO  MATURITY AND YIELDS

December 31, 2004 (Dollars in thousands)



|                                                       |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|------------------------------------------------------ |  | ------------ | ----- | - | ------------ | - | ------ | ------------- |  | - | ------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                       |  | Under 1 Year |       |   | 1 to 5 Years |   |        | 5 to 10 Years |  |   | Over 10 Years |   |  | Total |     
|Maturity Distribution:                                 |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|U.S. Treasury Issue and other U.S. Government agencies |  | $            | 1,254 |   |              | $ | 15,689 |               |  | $ | 115           |   |  | $     |     |   |  | $ | 17,058 |  
|State, county and municipal-tax exempt                 |  |              | 2,396 |   |              |   | 18,630 |               |  |   | 11,374        |   |  |       | 317  |   |  |   | 32,717 |  
|State, county and municipal-taxable                    |  |              |      |   |              |   | 1,874  |               |  |   | 140           |   |  |       |     |   |  |   | 2,014  |  
|Other                                                  |  |              | 1,769 |   |              |   | 1,162  |               |  |   |              |   |  |       | 235  |   |  |   | 3,166  |  
|                                                       |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|Total Investment Securities                            |  | $            | 5,419 |   |              | $ | 37,355 |               |  | $ | 11,629        |   |  | $     | 552  |   |  | $ | 54,955 |  
|                                                       |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|Weighted Average Yield:                                |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|U.S. Treasury Issue and other U.S. Government agencies |  |              | 3.02  | % |              |   | 3.57   | %             |  |   | 2.76          | % |  |       | 0.00 | % |  |   | 3.52   | %
|State, county and municipal-tax exempt                 |  |              | 4.53  | % |              |   | 5.84   | %             |  |   | 5.49          | % |  |       | 6.00 | % |  |   | 5.91   | %
|State, county and municipal-taxable                    |  |              | 0.00  | % |              |   | 5.56   | %             |  |   | 6.40          | % |  |       | 0.00 | % |  |   | 5.46   | %
|Other                                                  |  |              | 7.39  | % |              |   | 6.30   | %             |  |   | 0.00          | % |  |       | 5.18 | % |  |   | 7.24   | %
|                                                       |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  
|Weighted Average Yield by Category                     |  |              | 5.11  |   |              |   | 4.89   |               |  |   | 5.47          |   |  |       | 5.65 |   |  |   | 5.25   |  
|                                                       |  |              |       |   |              |   |        |               |  |   |               |   |  |       |      |   |  |   |        |  



The Corporation holds
one U.S. Government agencies security with a book value of $3 million with a final maturity over 10 years and a weighted average yield of 6.00% in the held-to-maturity portfolio.



DEPOSITS



The Corporation primarily uses deposits to fund its loans and investment portfolio. In 2004, the Corporations deposits grew $3.7 million, or 1.8%.
Total deposits at December 31, 2004 were $207.0 million compared to $203.3 million at December 31, 2003. Deposit growth was cautiously gauged in 2004 to preserve the Corporations net interest margin and in response to a second consecutive year
of declining loan balances. Certificates of deposit increased only $644,000 in 2004, or 0.6%, from $112.7 million at December 31, 2003 to $113.3 million at December 31, 2004. The largest component of deposit growth in 2004 came from savings
accounts, which grew 19.0%, or $4.0 million. Non-interest bearing deposits grew from $24.5 million at December 31, 2003 to $25.6 million at December 31, 2004. On average, noninterest bearing deposits were $20.9 million for 2003 compared to $25.1
million for 2004. This represents an increase of 20.3%. Other less costly components of total deposits also grew in 2004.



The Corporation offers a variety of deposit accounts to individuals and small-to-medium sized businesses. Deposit accounts include checking, savings,
money market deposit accounts and certificates of deposit. Certificates of deposit of $100,000 or more totaled $23.0 million at December 31, 2004 and $21.7 million at December 31, 2003 an increase of $1.3 million, or 6.0%.



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AVERAGE DEPOSITS AND AVERAGE RATES PAID

(Dollars in thousands)



|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                |  | Year Ended December 31, |        
|                                |  | 2004                    |         |             | 2003 |   |                | 2002 |            
|                                |  | AverageBalance          |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|Interest bearing deposits:      |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|NOW accounts                    |  | $                       | 27,387  |             | 0.35 | % |                | $    | 24,263      |  | 0.42 | %              |  | $           | 22,357  |  | 1.06 | %
|Money market deposits           |  |                         | 17,085  |             | 0.84 | % |                |      | 17,244      |  | 1.00 | %              |  |             | 14,313  |  | 2.01 | %
|Regular savings                 |  |                         | 22,767  |             | 0.76 | % |                |      | 20,072      |  | 0.90 | %              |  |             | 17,237  |  | 1.69 | %
|Certificates of deposit         |  |                         | 112,749 |             | 2.65 | % |                |      | 120,118     |  | 2.92 | %              |  |             | 122,145 |  | 3.82 | %
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest bearing deposits |  | $                       | 179,988 |             | 1.89 | % |                | $    | 181,697     |  | 2.18 | %              |  | $           | 176,052 |  | 3.12 | %
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Noninterest bearing deposits    |  |                         | 25,139  |             |      |   |                |      | 20,894      |  |      |                |  |             | 18,308  |  |      |  
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total deposits                  |  | $                       | 205,127 |             |      |   |                | $    | 202,591     |  |      |                |  | $           | 194,360 |  |      |  
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  



MATURITIES OF CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 2004

(Dollars in thousands)



|                                |  |         |        |         |        |  
|------------------------------- |  | ------- | ------ | ------- | ------ | -
|                                |  | Dollars |        | Percent |       
|Three months or less            |  | $       | 4,115  |         | 17.91  | %
|Over three months to six months |  |         | 3,534  |         | 15.38  | %
|Over six months to one year     |  |         | 7,174  |         | 31.22  | %
|Over one year                   |  |         | 8,154  |         | 35.49  | %
|                                |  |         |        |         |        |  
|                                |  | $       | 22,977 |         | 100.00 | %
|                                |  |         |        |         |        |  



SHORT-TERM BORROWINGS



The Corporation occasionally finds it necessary to
purchase funds on a short-term basis due to fluctuations in loan and deposit levels. The Corporation has several arrangements under which it may purchase funds. Federal Funds guidance facilities are maintained with correspondent banks totaling $18.5
million for the year ending December 31, 2004. No amounts were drawn on these facilities at December 31, 2004. As another means of borrowing funds, the Corporation may borrow from the Federal Home Loan Bank of Atlanta. Total expense on Federal Home
Loan Bank of Atlanta borrowings in 2003 was $92,000 and in 2004 as $0. Total expense on Federal Funds purchased and other borrowings was $20,000 in 2004 and $5,000 in 2003.



CAPITAL REQUIREMENTS



The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions.
The Corporation seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Corporation.



The Corporations capital position exceeds all regulatory minimums. The
federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. Tier 1 Capital is defined as a combination of common and qualifying preferred
stockholders equity less goodwill. Tier 2 Capital is defined as qualifying subordinated debt and a portion of the allowance for loan losses. Total Capital is defined as Tier 1 Capital plus Tier 2 Capital. Three
risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against



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##### Table of Contents

regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a
risk-weighting and the resulting total is risk-weighted assets. Total Risk-based Capital is Total Capital divided by risk-weighted assets. The Leverage ratio is Tier 1 Capital divided by total average assets.



During the fourth quarter of 2003 the Corporation completed a trust preferred
offering, raising $4.0 million in trust preferred subordinated debt which qualifies as capital for regulatory purposes. This trust preferred debt has a 30-year maturity with a 5-year call option and was issued at a rate of three month LIBOR plus
3.00% for an initial rate of 4.17%.



The following table shows
the Corporations capital ratios:



CAPITAL RATIOS



|                          |  |              |   |  |       |   |  |       |  
|------------------------- |  | ------------ | - |  | ----- | - |  | ----- | -
|                          |  | December 31, |  
|                          |  | 2004         |   |  | 2003  |   |  | 2002  |  
|Tier 1 Risk-based Capital |  | 15.31        | % |  | 13.70 | % |  | 10.42 | %
|Total Risk-based Capital  |  | 16.49        | % |  | 14.88 | % |  | 11.59 | %
|Leverage Ratio            |  | 11.50        | % |  | 10.80 | % |  | 8.13  | %



LIQUIDITY



Liquidity represents the Corporations ability to meet present and
future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, and
certain investment securities. As a result of the Corporations management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to
satisfy its depositors requirements and meet its customers credit needs.



As of December 31, 2004, cash, federal funds sold and available-for-sale securities represented 30.91% of deposits and other liabilities compared to 30.00% at December 31, 2003. Managing loan maturities also provides
asset liquidity. At December 31, 2004 approximately $75.3 in loans would mature or reprice with a one-year period.



The following table summarizes the Corporations liquid assets for the periods indicated:



SUMMARY OF LIQUID ASSETS

(Dollars in thousands)



|                                                         |  |              |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                         |  | December 31, |        
|                                                         |  | 2004         |         |   | 2003 |   |         | 2002 | 
|Cash and due from banks                                  |  | $            | 4,354   |   |      | $ | 8,949   |      |  | $ | 5,603   |  
|Federal funds sold                                       |  |              | 5,064   |   |      |   | 285     |      |  |   | 2,305   |  
|Available for sale securities, at fair value             |  |              | 54,955  |   |      |   | 52,200  |      |  |   | 45,488  |  
|                                                         |  |              |         |   |      |   |         |      |  |   |         |  
|Total liquid assets                                      |  | $            | 64,373  |   |      | $ | 61,434  |      |  | $ | 53,396  |  
|                                                         |  |              |         |   |      |   |         |      |  |   |         |  
|Deposits and other liabilities                           |  | $            | 208,657 |   |      | $ | 204,795 |      |  | $ | 206,765 |  
|Ratio of liquid assets to deposits and other liabilities |  |              | 30.91   | % |      |   | 30.00   | %    |  |   | 25.82   | %



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##### Table of Contents

FINANCIAL RATIOS



Return on average assets is net income as a percentage of average total assets. It is a key profitability ratio that indicates how effectively a bank has
used its total resources. Return on average assets was 1.23% in 2004 and 1.04% in 2003. Return on average equity is net income as a percentage of average shareholders equity. It provides a measure of how productively a banks equity has
been employed. The Corporations return on average equity was 12.12% in 2004 and 10.80% in 2003. Dividend payout ratio is the percentage of net income paid to shareholders as cash dividends during a given period. It is computed by dividing
dividends per share by net income per share. The Corporation has a dividend payout ratio of 25.90% in 2004 and 27.45% in 2003. Leverage is average stockholders equity divided by total average assets. This ratio was 10.11% in 2004 and 9.66% in
2003.



FINANCIAL RATIOS



|                                      |  |                          |   |  |       |   |  |       |  
|------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                      |  | Years ended December 31, |  
|                                      |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Return on average assets              |  | 1.23                     | % |  | 1.04  | % |  | 0.80  | %
|Return on average equity              |  | 12.12                    | % |  | 10.80 | % |  | 8.87  | %
|Dividend payout ratio                 |  | 25.90                    | % |  | 27.45 | % |  | 34.96 | %
|Average equity to average asset ratio |  | 10.11                    | % |  | 9.66  | % |  | 8.98  | %



IMPACT OF INFLATION, CHANGING
PRICES AND MONETARY POLICIES



The consolidated financial
statements and related financial data concerning the Corporation presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Corporation is reflected in increased
operating costs. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial
institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors beyond the Corporations control, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the U.S. government and federal agencies, particularly the Federal Reserve.
The Federal Reserve implements national monetary policies such as seeking to curb inflation and combat recession by its open market operations in U.S. government securities control of the discount rate applicable to borrowing by banks, and
establishment of reserve requirements against bank deposits. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The
nature, timing and impact of any future changes in federal monetary and fiscal policies on the Corporation and its results of operations are not predictable.



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##### Table of Contents

RECENT ACCOUNTING STANDARDS



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). This Interpretation provides guidance with respect to the identification of variable interest entities when the assets, liabilities, non-controlling interests, and results of operations of a variable
interest entity need to be included in a Companys consolidated financial statements. An entity is deemed a variable interest entity, subject to the interpretation, if the equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from other parties, or in cases in which the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability
to make decisions about the entitys activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. Due to
significant implementation issues, the FASB modified the wording of FIN 46 and issued FIN 46R in December of 2003. FIN 46R deferred the effective date for the provisions of FIN 46 to entities other than Special Purpose Entities (SPEs) until
financial statements issued for periods ending after March 15, 2004. SPEs were subject to the provisions of either FIN 46 or FIN 46R as of December 15, 2003. Management has evaluated the Companys investments in variable interest entities and
potential variable interest entities or transactions, particularly in trust preferred securities structures because these entities or transactions constitute the Companys primary FIN 46 and FIN 46R exposure. The adoption of FIN 46 and FIN 46R
did not have a material effect on the Companys consolidated financial position or consolidated results of operations.



In December 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of the SOP applies to unhealthy
problem loans that have been acquired, either individually in a portfolio, or in a business acquisition. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The SOP does not apply to loans originated by the Company. The Company intends
to adopt the provisions of SOP 03-3 effective January 1, 2005, and does not expect the initial implementation to have a significant effect on the Companys consolidated financial position or consolidated results of operations.



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105,
Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to
SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component
and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The Company has adopted the provisions of SAB 105. Since
the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not anticipate that this guidance will have a material adverse effect on either the Companys consolidated financial position or
consolidated results of operations.



Emerging Issues Task Force
(EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, was issued and is effective March 31, 2004. The EITF provides guidance for determining the meaning of other
than temporarily impaired and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities
(SFAS No. 115) and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other than temporarily
impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. This issue also
requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that



26



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##### Table of Contents

an investment with a fair value less than cost is not other than temporarily impaired. On September 30, 2004, the Financial Accounting Standards Board
decided to delay the effective date for the measurement and recognition guidance contained in Issue 03-1. This delay does not suspend the requirement to recognize other than temporary impairments as required by existing authoritative literature. The
disclosure guidance in Issue 03-1 was not delayed.



EITF No.
03-16, Accounting for Investments in Limited Liability Companies, was ratified by the FASB and is effective for reporting periods beginning after June 15, 2004. APB Opinion No. 18, The Equity Method of Accounting
Investments in Common Stock, prescribes the accounting for investments in common stock of corporations that are not consolidated. AICPA Accounting Interpretation 2, Investments in Partnerships Ventures, of Opinion 18,
indicates that many of the provisions of the Opinion would be appropriate in accounting for partnerships. In EITF Abstracts, Topic No. D-46, Accounting for Limited Partnership Investments, the SEC staff
clarified its view that investments of more than 3 to 5 percent are considered to be more than minor and, therefore, should be accounted for using the equity method. Limited liability companies (LLCs) have characteristics of both corporations and
partnerships, but are dissimilar from both in certain respects. Due to those similarities and differences, diversity in practice exists with respect to accounting for non-controlling investments in LLCs. The consensus reached was that an LLC should
be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment should be accounted for using the cost method or the equity method of accounting.



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting
period). The entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation
cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This Statement is effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. Under the transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated under Statement 123 for either recognition or pro forma disclosures. For periods before the required effective date, entities may elect to apply a modified version of
retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123.



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##### Table of Contents

ITEM 7. FINANCIAL STATEMENTS.



The
following table sets forth certain historical financial information for the Corporation. This information is based on the consolidated financial statements of the Corporation including applicable notes which can be found on pages F-1 through F-28.



Selected Financial Data



(Dollars in thousands, except per share data)



|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|As of and for the Years ended December 31,        |  | 2004 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|STATEMENT OF INCOME INFORMATION                   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                   |  | $    | 12,875  |   |      | $ | 13,071  |      |  | $ | 13,741  |   |  | $    | 14,749  |   |  | $ | 14,302  |  
|Interest expense                                  |  |      | 3,606   |   |      |   | 4,073   |      |  |   | 5,695   |   |  |      | 7,482   |   |  |   | 7,106   |  
|Net interest income                               |  |      | 9,269   |   |      |   | 8,998   |      |  |   | 8,046   |   |  |      | 7,267   |   |  |   | 7,196   |  
|Provsion for loan losses                          |  |      | 305     |   |      |   | 700     |      |  |   | 1,208   |   |  |      | 390     |   |  |   | 455     |  
|Noninterest income                                |  |      | 1,627   |   |      |   | 1,384   |      |  |   | 1,078   |   |  |      | 1,120   |   |  |   | 959     |  
|Noninterest expense                               |  |      | 6,882   |   |      |   | 6,627   |      |  |   | 5,766   |   |  |      | 5,393   |   |  |   | 5,280   |  
|Income taxes                                      |  |      | 823     |   |      |   | 648     |      |  |   | 368     |   |  |      | 597     |   |  |   | 577     |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                        |  | $    | 2,885   |   |      | $ | 2,407   |      |  | $ | 1,782   |   |  | $    | 2,007   |   |  | $ | 1,843   |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|PER SHARE DATA                                    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income, basic                                 |  | $    | 2.43    |   |      | $ | 2.04    |      |  | $ | 1.52    |   |  | $    | 1.71    |   |  | $ | 1.58    |  
|Net income, diluted                               |  |      | 2.42    |   |      |   | 2.03    |      |  |   | 1.51    |   |  |      | 1.71    |   |  |   | 1.58    |  
|Cash dividend                                     |  |      | 0.63    |   |      |   | 0.56    |      |  |   | 0.53    |   |  |      | 0.50    |   |  |   | 0.47    |  
|Book value at period end                          |  |      | 20.76   |   |      |   | 19.37   |      |  |   | 18.12   |   |  |      | 16.22   |   |  |   | 14.71   |  
|Tangible book value at period end                 |  |      | 20.10   |   |      |   | 18.61   |      |  |   | 17.25   |   |  |      | 15.24   |   |  |   | 13.62   |  
|                                                  |  |      |         |   |     
|BALANCE SHEET DATA                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                      |  | $    | 237,126 |   |      | $ | 231,840 |      |  | $ | 228,111 |   |  | $    | 217,172 |   |  | $ | 193,933 |  
|Loans, net                                        |  |      | 157,471 |   |      |   | 158,381 |      |  |   | 161,722 |   |  |      | 151,877 |   |  |   | 139,492 |  
|Securities                                        |  |      | 58,788  |   |      |   | 53,147  |      |  |   | 46,568  |   |  |      | 39,613  |   |  |   | 36,315  |  
|Deposits                                          |  |      | 206,973 |   |      |   | 203,282 |      |  |   | 201,261 |   |  |      | 188,497 |   |  |   | 164,348 |  
|Stockholders equity                              |  |      | 24,681  |   |      |   | 22,922  |      |  |   | 21,346  |   |  |      | 19,047  |   |  |   | 17,215  |  
|                                                  |  |      |         |   |     
|PERFORMANCE RATIOS                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                          |  |      | 1.23    | % |      |   | 1.04    | %    |  |   | 0.80    | % |  |      | 1.00    | % |  |   | 1.01    | %
|Return on average equity                          |  |      | 12.12   | % |      |   | 10.80   | %    |  |   | 8.87    | % |  |      | 10.97   | % |  |   | 11.38   | %
|Net interest margin                               |  |      | 4.54    | % |      |   | 4.45    | %    |  |   | 4.13    | % |  |      | 4.12    | % |  |   | 4.50    | %
|Dividend payout                                   |  |      | 25.90   | % |      |   | 27.45   | %    |  |   | 34.96   | % |  |      | 29.18   | % |  |   | 29.78   | %
|                                                  |  |      |         |   |     
|ASSET QUALITY RATIOS                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses to period end loans     |  |      | 1.31    | % |      |   | 1.33    | %    |  |   | 1.29    | % |  |      | 1.35    | % |  |   | 1.29    | %
|Allowance for loan losses to nonperforming assets |  |      | 614.12  | % |      |   | 122.57  | %    |  |   | 87.76   | % |  |      | 274.21  | % |  |   | 190.27  | %
|Nonperforming assets to total assets              |  |      | 0.14    | % |      |   | 0.75    | %    |  |   | 1.06    | % |  |      | 0.35    | % |  |   | 0.49    | %
|Net chargeoffs to average loans                   |  |      | 0.21    | % |      |   | 0.42    | %    |  |   | 0.74    | % |  |      | 0.08    | % |  |   | 0.17    | %
|                                                  |  |      |         |   |     
|CAPITAL AND LIQUIDITY RATIOS                      |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Leverage                                          |  |      | 11.50   | % |      |   | 10.80   | %    |  |   | 8.13    | % |  |      | 8.41    | % |  |   | 8.27    | %
|Tier 1 Risk-Based Capital                         |  |      | 15.31   | % |      |   | 13.70   | %    |  |   | 10.42   | % |  |      | 9.95    | % |  |   | 10.51   | %
|Total Risk-Based Capital                          |  |      | 16.49   | % |      |   | 14.88   | %    |  |   | 11.59   | % |  |      | 11.14   | % |  |   | 11.73   | %



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



None.



ITEM 8A. CONTROLS AND PROCEDURES.



Based on their most recent review, which was completed within 90 days of the filing of this report, the Corporations principal executive officer and principal financial officer have concluded that the
Corporations disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934, as amended is accumulated
and communicated to the Corporations management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such
information is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There were no significant changes in the Corporations internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation.



ITEM 8B. OTHER INFORMATION.



None.



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##### Table of Contents

PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.



Certain information with respect to the Corporations directors is incorporated by reference to the Corporations Proxy Statement for its 2005
annual meeting of shareholders (the Proxy Statement), which will be filed no later than 120 days following the Corporations fiscal year end.



Set forth below is certain information with respect to the Corporations principal executive officers:



K. Wayne Aylor, 62, is Vice President and Senior Credit Officer. Mr. Aylor
joined the Corporation in February 2002. Prior to joining the Corporation Mr. Aylor served as Vice President and Senior Credit Officer with The Community Bankers Bank in Richmond, Virginia since February 1989.



Bonnie S. Courtney, 51, is Vice President of Operations. Mrs. Courtney has
held various positions with the Corporation since 1981.



George
M. Longest, Jr., 44, became President and Chief Executive Officer of the Corporation on January 1, 1999. Prior to assuming his present position, Mr. Longest had been Senior Vice President and Senior Loan Officer since February 1989. Mr. Longest has
served as a director of the Corporation since 1999.



Suzanne S.
Rennolds, 55, is Vice President, Human Resources, Branch Administration and has been employed by the Corporation since December 1980.



Bruce E. Thomas, 41, is Senior Vice President, Chief Financial Officer and Corporate Secretary and has been employed by the Corporation since October
1990.



Terrell D. Vaughan, 58, is Senior Vice President,
Commercial Lending and has been employed by the Corporation since April 1, 1998. Prior to that time, Mr. Vaughan had been a commercial lender and business development officer at Hanover Bank for at least five years.



ITEM 10. EXECUTIVE COMPENSATION.



The response to this Item is incorporated by reference to the registrants Proxy Statement, which will be filed no later than 120 days following the Corporations fiscal year end.



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##### Table of Contents

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



Equity Compensation Plans



The following table summarizes information, as of December 31, 2004, relating to the Corporations 2000 Employee and Director Stock Option Plans,
pursuant to which grants of options to acquire shares of common stock may be granted from time to time.



Equity Compensation Plan Information



Year Ended December 31, 2004



|                                                       |  |                                                                 |  |                                                      |  |                                                                  
|------------------------------------------------------ |  | --------------------------------------------------------------- |  | ---------------------------------------------------- |  | -----------------------------------------------------------------
|                                                       |  | Number of sharesto be Issued UponExercise ofOutstanding Options |  | Weighted-AverageExercise Price ofOutstanding Options |  | Number of SharesRemaining Availablefor Future IssuanceUnder Plans
|Equity compensation plans approved by shareholders     |  | 45,921                                                          |  | 22.81                                                |  | 53,707                                                           
|Equity compensation plans not approved by shareholders |  |                                                                |  |                                                     |  |                                                                 
|Total                                                  |  | 45,921                                                          |  | 22.81                                                |  | 53,707                                                           



The remaining
information required by Item 11 is incorporated by reference to the registrants Proxy Statement, which will be filed no later than 120 days following the Corporations fiscal year end.



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



The information required by Item 12 is incorporated by reference to the registrants Proxy Statement, which will be filed no later than 120 days following the Corporations fiscal year end.



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##### Table of Contents

ITEM 13. EXHIBITS.



(a) Exhibit Listing



|              |  |                                                                                                                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                      
|              | 
|2             |  | Agreement and Plan of Reorganization (the Reorganization Agreement) dated as of March 20, 2000 between the Corporation and Bank. Exhibit A of the Proxy Statement included in Form
S-4 Registration Statement filed March 24, 2000, incorporated by reference).
|              | 
|3(a)          |  | Articles of Incorporation of the Corporation (Appendix 1 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement filed March 24, 2000, incorporated by
reference).                                                                       
|              | 
|3(b)          |  | Bylaws (Appendix 2 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement filed March 24, 2000, incorporated by reference).                                                                                                             
|              | 
|10(a)         |  | The Corporations Stock Incentive Plan (Appendix 3 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement filed March 24, 2000, incorporated by
reference).                                                                             
|              | 
|10(b)         |  | First Amendment to the Corporations Stock Incentive Plan (Exhibit 99(b) to Form S-8 Registration Statement filed November 8, 2000, incorporated by reference).                                                                                                  
|              | 
|10(c)         |  | The Corporations Stock Option Plan for Outside Directors (Appendix 4 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement filed March 24, 2000, incorporated
by Reference).                                                          
|              | 
|10(d)         |  | First Amendment to the Corporations Stock Option Plan for Outside Directors (Exhibit 99(d) to Form S-8 Registration Statement filed November 8, 2000, incorporated by
reference).                                                                               
|              | 
|21            |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                  
|              | 
|23            |  | Consent of Yount, Hyde & Barbour, P.C.                                                                                                                                                                                                                           
|              | 
|31.1          |  | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                                                                                                                                             
|              | 
|31.2          |  | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                                                                                                                                             
|              | 
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                           
|              | 
|99.1          |  | BOE Financial Services Dividend Reinvestment Plan (Incorporated by reference to the Registrants Registration Statement on Form S-3D filed November 8, 2000.)                                                                                                    



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.



Incorporated by reference from the Proxy Statement, which will be filed no later than 120 days following the Corporations fiscal year end.



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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, in the town of Tappahannock, State of Virginia, on March 30, 2005.



|                                         |  |                                                                  
|---------------------------------------- |  | -----------------------------------------------------------------
|BOE FINANCIAL SERVICES OF VIRGINIA, INC.
|                                         | 
|By:                                      |  | /S/    BRUCE E.
THOMAS                                           
|                                         |  | Bruce E. Thomas Senior Vice President and Chief Financial Officer



Date: March 30, 2005



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and in the capacities indicated.



|                                                          |  |                                                                                                                    
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------
|SIGNATURE                                                 |  | TITLE                                                                                                              
|                                                          | 
|/S/    GEORGE M. LONGEST,
JR.George M. Longest,
Jr.       |  | President, Chief Executive Officer and Director (Principal Executive Officer)                                      
|                                                          | 
|/S/    BRUCE E.
THOMASBruce E.
Thomas                     |  | Senior Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer)
|                                                          | 
|/S/    ALEXANDER F. DILLARD,
JR.Alexander F. Dillard,
Jr. |  | Chairman of the Board                                                                                              
|                                                          | 
|/S/    R. HARDING
BALLR. Harding
Ball                     |  | Director                                                                                                           
|                                                          | 
|/S/    R. TYLER BLAND,
IIIR. Tyler Bland, III             |  | Director                                                                                                           
|                                                          | 
|/S/    L. MCCAULEY
CHENAULTL. McCauley
Chenault           |  | Director                                                                                                           
|                                                          | 
|/S/    FRANCES H.
ELLISFrances H.
Ellis                   |  | Director                                                                                                           
|                                                          | 
|/S/    GEORGE B.
ELLIOTTGeorge B.
Elliott                 |  | Director                                                                                                           
|                                                          | 
|/S/    PAGE EMERSON
HUGHESPage Emerson
Hughes             |  | Director                                                                                                           
|                                                          | 
|/S/    PHILIP T.
MINORPhilip T.
Minor                     |  | Director                                                                                                           
|                                                          | 
|/S/    ELSIE L.
ROSEElsie L. Rose                         |  | Director                                                                                                           



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BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Tappahannock, Virginia



CONSOLIDATED
FINANCIAL REPORT



DECEMBER 31, 2004











---

##### Table of Contents

CONTENTS



|                                                        |  |         
|------------------------------------------------------- |  | --------
|                                                        |  | Page    
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-1     
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS                       |  |         
|                                                        | 
|Consolidated balance sheets                             |  | F-2     
|Consolidated statements of income                       |  | F-3     
|Consolidated statements of stockholders equity         |  | F-4     
|Consolidated statements of cash flows                   |  | F-5     
|Notes to consolidated financial statements              |  | F-6-F-28



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

BOE Financial Services of Virginia, Inc.

Tappahannock, Virginia



We have audited the accompanying consolidated balance sheets of BOE
Financial Services of Virginia, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Corporations internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 BOE Financial Services of Virginia, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



LOGO

Winchester, Virginia

January 25,
2005



F-1



---

##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Balance Sheets

December 31, 2004 and 2003



|                                                                                                                |  |      |             |      |   |            
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                                                                                |  | 2004 |             | 2003
|Assets                                                                                                          |  |      |             |      |   |            
|Cash and due from banks                                                                                         |  | $    | 4,353,745   |      | $ | 8,948,582  
|Federal funds sold                                                                                              |  |      | 5,064,000   |      |   | 285,000    
|Securities available for sale, at fair value                                                                    |  |      | 54,955,245  |      |   | 52,200,104 
|Securities held to maturity (fair value approximates $3,000,000)                                                |  |      | 3,000,000   |      |   |           
|Equity securities, restricted, at cost                                                                          |  |      | 832,800     |      |   | 946,900    
|Loans held for sale                                                                                             |  |      | 360,643     |      |   |           
|Loans, net of allowance for loan losses of $2,088,329 in 2004 and $2,128,254 in 2003                            |  |      | 157,471,472 |      |   | 158,381,402
|Bank premises and equipment, net                                                                                |  |      | 6,447,957   |      |   | 6,525,926  
|Accrued interest receivable                                                                                     |  |      | 1,153,594   |      |   | 1,186,110  
|Intangible assets, net                                                                                          |  |      | 775,909     |      |   | 901,733    
|Other assets                                                                                                    |  |      | 2,710,198   |      |   | 2,464,570  
|                                                                                                                |  |      |             |      |   |            
|Total assets                                                                                                    |  | $    | 237,125,563 |      | $ | 231,840,327
|                                                                                                                |  |      |             |      |   |            
|Liabilities and Stockholders Equity                                                                            |  |      |             |      |   |            
|Liabilities                                                                                                     |  |      |             |      |   |            
|Deposits:                                                                                                       |  |      |             |      |   |            
|Noninterest-bearing                                                                                             |  | $    | 25,605,135  |      | $ | 24,521,735 
|Interest-bearing                                                                                                |  |      | 181,367,584 |      |   | 178,759,833
|                                                                                                                |  |      |             |      |   |            
|Total deposits                                                                                                  |  | $    | 206,972,719 |      | $ | 203,281,568
|Trust preferred capital notes                                                                                   |  |      | 4,124,000   |      |   | 4,124,000  
|Accrued interest payable                                                                                        |  |      | 319,401     |      |   | 329,933    
|Other liabilities                                                                                               |  |      | 1,028,687   |      |   | 1,183,078  
|                                                                                                                |  |      |             |      |   |            
|Total liabilities                                                                                               |  | $    | 212,444,807 |      | $ | 208,918,579
|                                                                                                                |  |      |             |      |   |            
|Commitments and Contingent Liabilities                                                                          |  |      |             |      |   |            
|                                                                                                                |  |     
|Stockholders Equity                                                                                            |  |      |             |      |   |            
|Preferred stock, $5 par value, authorized 100,000 shares; no shares issued and outstanding                      |  | $    |            |      | $ |           
|Common stock, $5 par value, authorized 10,000,000 shares; issued and outstanding 1,188,951 and 1,183,147 shares |  |      | 5,944,755   |      |   | 5,915,735  
|Additional paid-in capital                                                                                      |  |      | 5,110,776   |      |   | 5,008,853  
|Retained earnings                                                                                               |  |      | 12,831,641  |      |   | 10,693,464 
|Accumulated other comprehensive income, net                                                                     |  |      | 793,584     |      |   | 1,303,696  
|                                                                                                                |  |      |             |      |   |            
|Total stockholders equity                                                                                      |  | $    | 24,680,756  |      | $ | 22,921,748 
|                                                                                                                |  |      |             |      |   |            
|Total liabilities and stockholders equity                                                                      |  | $    | 237,125,563 |      | $ | 231,840,327
|                                                                                                                |  |      |             |      |   |            



See Notes to
Consolidated Financial Statements.



F-2



---

##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Income

Three Years Ended December 31, 2004



|                                                    |  |      |            |      |   |            |  |   |            |  
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                                    |  | 2004 |            | 2003 |   | 2002       | 
|Interest and Dividend Income                        |  |      |            |      |   |            |  |   |            |  
|Interest and fees on loans                          |  | $    | 10,663,837 |      | $ | 10,899,057 |  | $ | 11,418,686 |  
|Interest and dividends on securities:               |  |      |            |      |   |            |  |   |            |  
|U.S. Treasury                                       |  |      | 45,349     |      |   | 5,692      |  |   |           |  
|U.S. Government agencies                            |  |      | 436,010    |      |   | 301,771    |  |   | 418,816    |  
|State and political subdivisions, nontaxable        |  |      | 1,228,077  |      |   | 1,156,581  |  |   | 1,114,078  |  
|State and political subdivisions, taxable           |  |      | 127,425    |      |   | 183,442    |  |   | 196,493    |  
|Other securities                                    |  |      | 321,596    |      |   | 498,301    |  |   | 522,581    |  
|Interest on federal funds sold                      |  |      | 52,737     |      |   | 26,553     |  |   | 70,475     |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Total interest and dividend income                  |  | $    | 12,875,031 |      | $ | 13,071,397 |  | $ | 13,741,129 |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Interest Expense                                    |  |      |            |      |   |            |  |   |            |  
|Interest on deposits                                |  | $    | 3,399,013  |      | $ | 3,967,250  |  | $ | 5,486,489  |  
|Interest on borrowings                              |  |      | 207,224    |      |   | 105,708    |  |   | 208,770    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Total interest expense                              |  | $    | 3,606,237  |      | $ | 4,072,958  |  | $ | 5,695,259  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Net interest income                                 |  | $    | 9,268,794  |      | $ | 8,998,439  |  | $ | 8,045,870  |  
|Provision for Loan Losses                           |  |      | 305,000    |      |   | 700,000    |  |   | 1,208,000  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Net interest income after provision for loan losses |  | $    | 8,963,794  |      | $ | 8,298,439  |  | $ | 6,837,870  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Noninterest Income                                  |  |      |            |      |   |            |  |   |            |  
|Service charge income                               |  | $    | 993,880    |      | $ | 864,499    |  | $ | 737,565    |  
|Net security gains (losses)                         |  |      | 65,606     |      |   | 30,603     |  |   | (1,371     | )
|Net gains on sales of loans                         |  |      | 56,981     |      |   | 63,400     |  |   | 3,291      |  
|Other income                                        |  |      | 510,703    |      |   | 425,113    |  |   | 338,533    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Total noninterest income                            |  | $    | 1,627,170  |      | $ | 1,383,615  |  | $ | 1,078,018  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Noninterest Expenses                                |  |      |            |      |   |            |  |   |            |  
|Salaries                                            |  | $    | 2,857,580  |      | $ | 2,696,853  |  | $ | 2,335,715  |  
|Employee benefits and costs                         |  |      | 804,201    |      |   | 788,271    |  |   | 615,689    |  
|Occupancy expenses                                  |  |      | 342,340    |      |   | 321,163    |  |   | 313,954    |  
|Furniture and equipment related expenses            |  |      | 437,259    |      |   | 441,168    |  |   | 446,155    |  
|Data processing                                     |  |      | 471,357    |      |   | 365,601    |  |   | 327,094    |  
|Stationary and printing                             |  |      | 180,004    |      |   | 160,512    |  |   | 149,876    |  
|Postage                                             |  |      | 170,695    |      |   | 166,258    |  |   | 159,494    |  
|Bank franchise tax                                  |  |      | 214,457    |      |   | 164,254    |  |   | 143,879    |  
|Other operating expenses                            |  |      | 1,404,262  |      |   | 1,523,191  |  |   | 1,273,849  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Total noninterest expenses                          |  | $    | 6,882,155  |      | $ | 6,627,271  |  | $ | 5,765,705  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Net income before income taxes                      |  | $    | 3,708,809  |      | $ | 3,054,783  |  | $ | 2,150,183  |  
|Income Taxes                                        |  |      | 823,314    |      |   | 647,731    |  |   | 368,493    |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Net income                                          |  | $    | 2,885,495  |      | $ | 2,407,052  |  | $ | 1,781,690  |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Earnings Per Share,basic                            |  | $    | 2.43       |      | $ | 2.04       |  | $ | 1.52       |  
|                                                    |  |      |            |      |   |            |  |   |            |  
|Earnings Per Share,diluted                          |  | $    | 2.42       |      | $ | 2.03       |  | $ | 1.51       |  
|                                                    |  |      |            |      |   |            |  |   |            |  



See Notes to
Consolidated Financial Statements.



F-3



---

##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Stockholders Equity

Three Years Ended December 31, 2004



|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | ----------- | --------- | ------------------------ | - | ---------------- |  | - | ----------------------------------- | - |  | ------------------- | --------- | - | ----- | - | --------- | - |  | - | ---------- | -
|                                                                                    |  | CommonStock |           | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | ComprehensiveIncome |           |   | Total |  
|Balance, December 31, 2001                                                          |  | $           | 5,870,390 |                          | $ | 4,874,752        |  | $ | 7,788,467                           |   |  | $                   | 513,870   |   |       |   |           |   |  | $ | 19,047,479 |  
|Comprehensive income:                                                               |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Net income                                                                          |  |             |          |                          |   |                 |  |   | 1,781,690                           |   |  |                     |          |   |       | $ | 1,781,690 |   |  |   | 1,781,690  |  
|Other comprehensive income, net of tax:                                             |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Unrealized gain on securities available for sale, net of deferred taxes of $547,631 |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | 1,063,049 |   |  |   |           |  
|Add reclassification adjustment, net of taxes of $466                               |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | 905       |   |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Other comprehensive income, net of tax                                              |  |             |          |                          |   |                 |  |   |                                    |   |  |                     | 1,063,954 |   |       |   | 1,063,954 |   |  |   | 1,063,954  |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Total comprehensive income                                                          |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       | $ | 2,845,644 |   |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Cash dividends, $0.53 per share                                                     |  |             |          |                          |   |                 |  |   | (622,716                            | ) |  |                     |          |   |       |   |           |   |  |   | (622,716   | )
|Fractional shares purchased under dividend reinvestment plan                        |  |             |          |                          |   |                 |  |   | (83                                 | ) |  |                     |          |   |       |   |           |   |  |   | (83        | )
|Issuance of common stock under dividend reinvestment plan                           |  |             | 17,840    |                          |   | 55,009           |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 72,849     |  
|Exercise of stock options                                                           |  |             | 1,015     |                          |   | 1,472            |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 2,487      |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Balance, December 31, 2002                                                          |  | $           | 5,889,245 |                          | $ | 4,931,233        |  | $ | 8,947,358                           |   |  | $                   | 1,577,824 |   |       |   |           |   |  | $ | 21,345,660 |  
|Comprehensive income:                                                               |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Net income                                                                          |  |             |          |                          |   |                 |  |   | 2,407,052                           |   |  |                     |          |   |       | $ | 2,407,052 |   |  |   | 2,407,052  |  
|Other comprehensive loss, net of tax:                                               |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Unrealized loss on securities available for sale, net of deferred taxes of $130,812 |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | (253,930  | ) |  |   |           |  
|Less reclassification adjustment, net of taxes of $10,405                           |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | (20,198   | ) |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Other comprehensive loss, net of tax                                                |  |             |          |                          |   |                 |  |   |                                    |   |  |                     | (274,128  | ) |       |   | (274,128  | ) |  |   | (274,128   | )
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Total comprehensive income                                                          |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       | $ | 2,132,924 |   |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Cash dividends, $0.56 per share                                                     |  |             |          |                          |   |                 |  |   | (660,940                            | ) |  |                     |          |   |       |   |           |   |  |   | (660,940   | )
|Fractional shares purchased under dividend reinvestment plan                        |  |             |          |                          |   |                 |  |   | (6                                  | ) |  |                     |          |   |       |   |           |   |  |   | (6         | )
|Issuance of common stock under dividend reinvestment plan                           |  |             | 14,280    |                          |   | 58,627           |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 72,907     |  
|Exercise of stock options                                                           |  |             | 12,210    |                          |   | 18,993           |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 31,203     |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Balance, December 31, 2003                                                          |  | $           | 5,915,735 |                          | $ | 5,008,853        |  | $ | 10,693,464                          |   |  | $                   | 1,303,696 |   |       |   |           |   |  | $ | 22,921,748 |  
|Comprehensive income:                                                               |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Net income                                                                          |  |             |          |                          |   |                 |  |   | 2,885,495                           |   |  |                     |          |   |       | $ | 2,885,495 |   |  |   | 2,885,495  |  
|Other comprehensive loss, net of tax:                                               |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Unrealized loss on securities available for sale, net of deferred taxes of $240,479 |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | (466,812  | ) |  |   |           |  
|Less reclassification adjustment, net of taxes of $22,306                           |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       |   | (43,300   | ) |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Other comprehensive loss, net of tax                                                |  |             |          |                          |   |                 |  |   |                                    |   |  |                     | (510,112  | ) |       |   | (510,112  | ) |  |   | (510,112   | )
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Total comprehensive income                                                          |  |             |          |                          |   |                 |  |   |                                    |   |  |                     |          |   |       | $ | 2,375,383 |   |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Cash dividends, $0.63 per share                                                     |  |             |          |                          |   |                 |  |   | (747,240                            | ) |  |                     |          |   |       |   |           |   |  |   | (747,240   | )
|Fractional shares purchased under dividend reinvestment plan                        |  |             |          |                          |   |                 |  |   | (78                                 | ) |  |                     |          |   |       |   |           |   |  |   | (78        | )
|Issuance of common stock under dividend reinvestment plan                           |  |             | 15,120    |                          |   | 69,375           |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 84,495     |  
|Exercise of stock options                                                           |  |             | 13,900    |                          |   | 32,548           |  |   |                                    |   |  |                     |          |   |       |   |           |   |  |   | 46,448     |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Balance, December 31, 2004                                                          |  | $           | 5,944,755 |                          | $ | 5,110,776        |  | $ | 12,831,641                          |   |  | $                   | 793,584   |   |       |   |           |   |  | $ | 24,680,756 |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                     |   |  |                     |           |   |       |   |           |   |  |   |            |  



See Notes to
Consolidated Financial Statements.



F-4



---

##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Three Years Ended December 31, 2004



|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                 |  | 2004 |             |   | 2003 |   |             | 2002 | 
|Cash Flows from Operating Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                       |  | $    | 2,885,495   |   |      | $ | 2,407,052   |      |  | $ | 1,781,690   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                                    |  |      | 507,201     |   |      |   | 497,329     |      |  |   | 510,283     |  
|Origination of loans available for sale                                                          |  |      | (7,059,823  | ) |      |   | (10,062,762 | )    |  |   | (5,279,400  | )
|Proceeds from sale of loans available for sale                                                   |  |      | 6,756,161   |   |      |   | 11,257,085  |      |  |   | 5,058,068   |  
|Provision for loan losses                                                                        |  |      | 305,000     |   |      |   | 700,000     |      |  |   | 1,208,000   |  
|(Gain) loss on sale of securities                                                                |  |      | (65,606     | ) |      |   | (30,603     | )    |  |   | 1,371       |  
|(Gain) on sale of premises and equipment                                                         |  |      | (48,783     | ) |      |   |            |      |  |   |            |  
|(Gain) on sale of loans                                                                          |  |      | (56,981     | ) |      |   | (63,400     | )    |  |   | (3,291      | )
|Deferred income tax expense                                                                      |  |      | 124,848     |   |      |   | 199,857     |      |  |   | 39,480      |  
|Amortization of premiums on securities                                                           |  |      | 238,840     |   |      |   | 250,149     |      |  |   | 164,683     |  
|Accretion of discounts on securities                                                             |  |      | (24,244     | ) |      |   | (34,841     | )    |  |   | (35,649     | )
|(Increase) in accrued interest receivable and other assets                                       |  |      | (213,122    | ) |      |   | (406,829    | )    |  |   | (445,063    | )
|(Decrease) in accrued expenses and other liabilities                                             |  |      | (26,976     | ) |      |   | (50,172     | )    |  |   | (237,334    | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                                        |  | $    | 3,322,010   |   |      | $ | 4,662,865   |      |  | $ | 2,762,838   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash Flows from Investing Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Proceeds from sales, principal repayments, calls and maturities of securities available for sale |  | $    | 11,658,025  |   |      | $ | 9,037,375   |      |  | $ | 7,620,836   |  
|Proceeds from redemption of restricted equity securities                                         |  |      | 114,100     |   |      |   | 133,200     |      |  |   | 264,900     |  
|Purchase of securities available for sale                                                        |  |      | (15,335,053 | ) |      |   | (16,349,679 | )    |  |   | (13,358,565 | )
|Purchase of securities held to maturity                                                          |  |      | (3,000,000  | ) |      |   |            |      |  |   |            |  
|Net decrease (increase) in loans to customers                                                    |  |      | 604,930     |   |      |   | 2,640,965   |      |  |   | (11,053,710 | )
|(Increase) decrease in federal funds sold                                                        |  |      | (4,779,000  | ) |      |   | 2,020,000   |      |  |   | 5,312,000   |  
|Purchases of premises and equipment                                                              |  |      | (675,219    | ) |      |   | (262,864    | )    |  |   | (255,166    | )
|Proceeds from sale of premises and equipment                                                     |  |      | 420,594     |   |      |   |            |      |  |   |            |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash (used in) investing activities                                                          |  | $    | (10,991,623 | ) |      | $ | (2,781,003  | )    |  | $ | (11,469,705 | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash Flows from Financing Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in deposits                                                                         |  | $    | 3,691,151   |   |      | $ | 2,020,669   |      |  | $ | 12,763,741  |  
|Proceeds from issuance of trust preferred capital notes                                          |  |      |            |   |      |   | 4,000,000   |      |  |   |            |  
|(Decrease) in Federal Home Loan Bank advances                                                    |  |      |            |   |      |   | (4,000,000  | )    |  |   | (4,000,000  | )
|Dividends paid                                                                                   |  |      | (747,240    | ) |      |   | (660,940    | )    |  |   | (622,716    | )
|Net proceeds from issuance of common stock                                                       |  |      | 130,943     |   |      |   | 104,110     |      |  |   | 75,336      |  
|Cash paid for fractional shares                                                                  |  |      | (78         | ) |      |   | (6          | )    |  |   | (83         | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                        |  | $    | 3,074,776   |   |      | $ | 1,463,833   |      |  | $ | 8,216,278   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                             |  | $    | (4,594,837  | ) |      | $ | 3,345,695   |      |  | $ | (490,589    | )
|Cash and Cash Equivalents                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Beginning of year                                                                                |  |      | 8,948,582   |   |      |   | 5,602,887   |      |  |   | 6,093,476   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|End of year                                                                                      |  | $    | 4,353,745   |   |      | $ | 8,948,582   |      |  | $ | 5,602,887   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental Disclosure of Cash Flow Information                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash paid during year:                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|Interest                                                                                         |  | $    | 3,616,769   |   |      | $ | 4,235,545   |      |  | $ | 5,813,134   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Income taxes                                                                                     |  | $    | 880,000     |   |      | $ | 629,508     |      |  | $ | 575,000     |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Noncash Investing Activities,                                                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Unrealized (loss) gain on securities available for sale                                          |  | $    | (772,897    | ) |      | $ | (415,345    | )    |  | $ | 1,612,051   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  



See Notes to
Consolidated Financial Statements.



F-5



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements



Note 1. Nature of Banking Activities and Significant Accounting Policies



BOE Financial Services of Virginia, Inc. (the Corporation) is a bank
holding company, which owns all of the stock of its sole subsidiaries, Bank of Essex (the Bank) and BOE Statutory Trust I (the Trust). The Bank provides commercial, residential and consumer loans, and a variety of deposit products to its customers
in the Northern Neck and Richmond regions of Virginia.



Essex
Services, Inc. is a wholly-owned subsidiary of the Bank and was formed to sell title insurance to the Banks mortgage loan customers. Essex Services, Inc. also offers insurance and investment products through affiliations with two limited
liability companies.



Principles of Consolidation



The accompanying consolidated financial statements
include the accounts of BOE Financial Services of Virginia, Inc. and its wholly-owned subsidiary, Bank of Essex. All material intercompany balances and transactions have been eliminated in consolidation. FASB Interpretation No. 46 (R) requires that
the Corporation no longer consolidate BOE Statutory Trust I. The subordinated debt of the Trust is reflected as a liability of the Corporation.



Securities



Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at
amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income.



Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses
on the sale of securities are recorded on the trade date and are determined using the specific identification method.



Restricted Securities



The Corporation is required to maintain an investment in the capital stock of certain correspondent banks. The Corporations investment in these
securities is recorded at cost.



Loans



The Bank grants mortgage, commercial and consumer
loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Banks debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Banks
market area.



Loans that management has the intent and ability
to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance



F-6



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net
of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.



The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and
in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.



All interest accrued but not collected for loans that are
placed on nonaccrual or charged-off is reversed against interest income. The interest on these 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 of
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.



Allowance for Loan Losses



The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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.



The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically
identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers ability to pay. This evaluation does not include the effects
of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance
may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses, and may require the Bank to
make additions to the allowance based on their judgment about information available to them at the time of their examinations.



The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful or
substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.



A loan is considered impaired when, based on current information and events,
it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as



F-7



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.



Large
groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.



Loans Held for Sale



Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are generally sold with the mortgage servicing rights released
by the Corporation.



The Corporation enters into commitments to
originate certain mortgage loans whereby the interest rate on the loans is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time
between issuance of a loan commitment and closing and the sale of the loan generally ranges from thirty to ninety days. The Corporation protects itself from changes in interest rates through the use of best efforts forward delivery commitments,
whereby the Corporation commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Corporation is not exposed to losses nor will it realize
significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. Because of this high correlation, no gain
or loss occurs on the rate lock commitments.



Bank
Premises and Equipment



Bank premises and equipment
are stated at cost less accumulated depreciation. Land is carried at cost. Depreciation of bank premises and equipment is computed on the straight-line method over estimated useful lives of 10 to 50 years for premises and 5 to 20 years for
equipment, furniture and fixtures.



Costs of maintenance and
repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or retirement of depreciable properties, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is
included in the determination of income.



Intangibles



Intangible assets consist of core deposit premiums
from a branch acquisition. Intangible assets are being amortized on a straight-line basis over 15 years.



Other Real Estate



Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the lower of the loan balance or the fair
value at the date of foreclosure net of estimated disposal costs, establishing a



F-8



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount
or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the
property while costs to maintain a property in salable condition are expensed as incurred. The Bank had no other real estate at December 31, 2004 or 2003.



Income Taxes



Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.



Earnings Per Share



Basic earnings per share (EPS) is computed based on the weighted average
number of shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is computed in a manner similar to basic EPS, except for certain adjustments to the numerator and the
denominator. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using
the treasury stock method.



Stock-Based Compensation



At December 31, 2004, the Corporation had a
stock-based employee compensation plan, which is described more fully in Note 9. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.



The following table illustrates the effect on net income and earnings per
share as if the Corporation had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                                  |  | Years Ended December 31, |          
|                                                                                                                                  |  | 2004                     |           |   | 2003 |   |           | 2002 | 
|Net income, as reported                                                                                                           |  | $                        | 2,885,495 |   |      | $ | 2,407,052 |      |  | $ | 1,781,690 |  
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of tax
effect |  |                          | (64,943   | ) |      |   | (45,722   | )    |  |   | (32,451   | )
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Pro forma net income                                                                                                              |  | $                        | 2,820,552 |   |      | $ | 2,361,330 |      |  | $ | 1,749,239 |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Earnings per share:                                                                                                               |  |                          |           |   |      |   |           |      |  |   |           |  
|Basic - as reported                                                                                                               |  | $                        | 2.43      |   |      | $ | 2.04      |      |  | $ | 1.52      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Basic - pro forma                                                                                                                 |  | $                        | 2.38      |   |      | $ | 2.00      |      |  | $ | 1.49      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Diluted - as reported                                                                                                             |  | $                        | 2.42      |   |      | $ | 2.03      |      |  | $ | 1.51      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Diluted - pro forma                                                                                                               |  | $                        | 2.36      |   |      | $ | 1.99      |      |  | $ | 1.48      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  



F-9



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Cash and Cash Equivalents



For purposes of the consolidated statements of cash flows, the Corporation
has defined cash equivalents as those amounts included in the balance sheet caption Cash and due from banks.



Advertising Costs



The Corporation follows the policy of charging the costs of production of advertising to expense as incurred. Total advertising expense incurred for 2004,
2003 and 2002 was $93,578, $62,903 and $62,557, respectively.



Use of Estimates



The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management estimates that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate and deferred taxes.



Reclassifications



Certain reclassifications have been made to prior period balances to conform to the current year provisions.



Note 2. Securities



The amortized cost and fair value of securities available for sale as of December 31, 2004 and 2003, are as follows:



|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|----------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ----------
|                                                |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|                                                |  | 2004         
|U.S. Treasury securities                        |  | $             | 2,496,727  |                      | $ |                        |  | $ | (20,623    | ) |  | $ | 2,476,104 
|U.S. Agency and mortgage-backed securities      |  |               | 14,631,659 |                      |   | 42,438                  |  |   | (92,823    | ) |  |   | 14,581,274
|Obligations of state and political subdivisions |  |               | 33,720,428 |                      |   | 1,088,673               |  |   | (76,793    | ) |  |   | 34,732,308
|Corporate debt securities                       |  |               | 2,839,376  |                      |   | 90,794                  |  |   |           |   |  |   | 2,930,170 
|Other equity securities                         |  |               | 64,656     |                      |   | 170,733                 |  |   |           |   |  |   | 235,389   
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                |  | $             | 53,752,846 |                      | $ | 1,392,638               |  | $ | (190,239   | ) |  | $ | 54,955,245
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                | 
|                                                |  | 2003         
|U.S. Treasury securities                        |  | $             | 1,498,818  |                      | $ | 1,706                   |  | $ | (56        | ) |  | $ | 1,500,468 
|U.S. Agency and mortgage-backed securities      |  |               | 12,549,316 |                      |   | 107,674                 |  |   | (59,731    | ) |  |   | 12,597,259
|Obligations of state and political subdivisions |  |               | 31,372,934 |                      |   | 1,528,315               |  |   | (32,415    | ) |  |   | 32,868,834
|Corporate debt securities                       |  |               | 4,739,084  |                      |   | 329,890                 |  |   |           |   |  |   | 5,068,974 
|Other equity securities                         |  |               | 64,656     |                      |   | 99,913                  |  |   |           |   |  |   | 164,569   
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                |  | $             | 50,224,808 |                      | $ | 2,067,498               |  | $ | (92,202    | ) |  | $ | 52,200,104
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           



F-10



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The amortized cost and fair value of securities available for sale as of December 31, 2004, by
contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.



|                                       |  |               |            |            |   |           
|-------------------------------------- |  | ------------- | ---------- | ---------- | - | ----------
|                                       |  | AmortizedCost |            | Fair Value
|Due in one year or less                |  | $             | 5,384,530  |            | $ | 5,419,087 
|Due after one year through five years  |  |               | 36,661,773 |            |   | 37,354,978
|Due after five years through ten years |  |               | 11,316,887 |            |   | 11,629,024
|Due after ten years                    |  |               | 325,000    |            |   | 316,767   
|Other equity securities                |  |               | 64,656     |            |   | 235,389   
|                                       |  |               |            |            |   |           
|                                       |  | $             | 53,752,846 |            | $ | 54,955,245
|                                       |  |               |            |            |   |           



At December 31, 2004,
the Corporation held one U.S. Government Agency bond in the held to maturity classification with a book value and market value of $3,000,000. The bond matures in 2024.



Proceeds from sales, principal repayments, calls and maturities of securities available for sale during 2004, 2003 and 2002
were $11,658,025, $9,037,375 and $7,620,836, respectively. Gross realized gains of $101,138, $30,603, $7,561 and gross realized losses of $35,532, $0 and $8,932 were recognized on those sales for the years ended December 31, 2004, 2003 and 2002,
respectively. The tax provision (benefit) applicable to these net realized gains (losses) amounted to $22,306, $10,405 and $(466), respectively.



Securities with amortized costs of $4,031,802 and $3,911,455 at December 31, 2004 and 2003 were pledged to secure public deposits and for other purposes
required or permitted by law.



A summary of investments in an
unrealized loss position at December 31, 2004 and 2003 follows:



|                                                |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|----------------------------------------------- |  | ------------------------------- | ---------- | ------------------ | ----------------- | -------- | ---------- |  | ------------------ | --------- |  | - | ------- | -
|                                                |  | Duration of the Unrealized Loss |           
|                                                |  | Less Than 12 Months             |            |                    | 12 Months or More |         
|                                                |  | Fair Value                      |            | Unrealized(Losses) |                   |          | Fair Value |  | Unrealized(Losses) |          
|2004                                            |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|U.S. Treasury securities                        |  | $                               | 2,476,104  |                    | $                 | (20,623  | )          |  | $                  |          |  | $ |        |  
|U.S. Agency and mortgage-backed securities      |  |                                 | 7,135,326  |                    |                   | (52,710  | )          |  |                    | 1,852,003 |  |   | (40,113 | )
|Obligations of state and political subdivisions |  |                                 | 6,113,306  |                    |                   | (71,945  | )          |  |                    | 251,777   |  |   | (4,848  | )
|                                                |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|Total temporarily impaired securities           |  | $                               | 15,724,736 |                    | $                 | (145,278 | )          |  | $                  | 2,103,780 |  | $ | (44,961 | )
|                                                |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|2003                                            |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|U.S. Treasury securities                        |  | $                               | 498,438    |                    | $                 | (56      | )          |  | $                  |          |  | $ |        |  
|U.S. Agency and mortgage-backed securities      |  |                                 | 5,291,694  |                    |                   | (59,731  | )          |  |                    |          |  |   |        |  
|Obligations of state and political subdivisions |  |                                 | 2,943,886  |                    |                   | (30,276  | )          |  |                    | 178,482   |  |   | (2,139  | )
|                                                |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  
|Total temporarily impaired securities           |  | $                               | 8,734,018  |                    | $                 | (90,063  | )          |  | $                  | 178,482   |  | $ | (2,139  | )
|                                                |  |                                 |            |                    |                   |          |            |  |                    |           |  |   |         |  



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The unrealized losses in the investment portfolio as of December 31, 2004, are generally a result of
market fluctuations that occur daily. The unrealized losses are from 54 securities that are all of investment grade, backed by insurance, U.S. government agency guarantees, or the full faith and credit of local municipalities throughout the United
States. The Corporation has the ability and intent to hold these securities to maturity. Market prices are affected by conditions beyond the control of the Corporation. Investment decisions are made by the management group of the Corporation and
reflect the overall liquidity and strategic asset/liability objectives of the Corporation. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Corporations income
statement and balance sheet.



Note 3. Loans



Major classifications of loans are summarized as follows:



|                                |  |                |         |      |   |        
|------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                |  | December 31,  
|                                |  | 2004           |         | 2003
|                                |  | (in thousands)
|Mortgage loans on real estate:  |  |                |         |      |   |        
|Residential 1-4 family          |  | $              | 41,468  |      | $ | 35,047 
|Commercial                      |  |                | 51,087  |      |   | 61,604 
|Construction                    |  |                | 25,924  |      |   | 21,505 
|Equity lines of credit          |  |                | 10,832  |      |   | 9,561  
|Commercial loans                |  |                | 23,534  |      |   | 26,099 
|Consumer installment loans:     |  |                |         |      |   |        
|Personal                        |  |                | 5,772   |      |   | 5,821  
|Credit cards                    |  |                | 942     |      |   | 872    
|                                |  |                |         |      |   |        
|                                |  | $              | 159,559 |      | $ | 160,509
|Less: Allowance for loan losses |  |                | 2,088   |      |   | 2,128  
|                                |  |                |         |      |   |        
|Loans, net                      |  | $              | 157,471 |      | $ | 158,381
|                                |  |                |         |      |   |        



A summary of the
transactions affecting the allowance for loan losses is as follows:



|                                           |  |      |           |   |      |   |           |      |  |   |            |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                           |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Balance, beginning of year                 |  | $    | 2,128,254 |   |      | $ | 2,115,611 |      |  | $ | 2,084,091  |  
|Provision for loan losses                  |  |      | 305,000   |   |      |   | 700,000   |      |  |   | 1,208,000  |  
|Loans charged off                          |  |      | (429,781  | ) |      |   | (828,994  | )    |  |   | (1,244,173 | )
|Recoveries of loans previously charged off |  |      | 84,856    |   |      |   | 141,637   |      |  |   | 67,693     |  
|                                           |  |      |           |   |      |   |           |      |  |   |            |  
|Balance, end of year                       |  | $    | 2,088,329 |   |      | $ | 2,128,254 |      |  | $ | 2,115,611  |  
|                                           |  |      |           |   |      |   |           |      |  |   |            |  



F-12



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The following is a summary of information pertaining to impaired loans:



|                                                             |  |              |           |      |   |           |  |   |          
|------------------------------------------------------------ |  | ------------ | --------- | ---- | - | --------- |  | - | ---------
|                                                             |  | December 31,
|                                                             |  | 2004         |           | 2003 |   | 2002     
|Impaired loans with a valuation allowance                    |  | $            | 2,823,700 |      | $ | 1,519,200 |  | $ | 2,011,425
|Impaired loans without a valuation allowance                 |  |              |          |      |   |          |  |   |         
|                                                             |  |              |           |      |   |           |  |   |          
|Total impaired loans                                         |  | $            | 2,823,700 |      | $ | 1,519,200 |  | $ | 2,011,425
|                                                             |  |              |           |      |   |           |  |   |          
|Valuation allowance related to impaired loans                |  | $            | 606,345   |      | $ | 262,530   |  | $ | 721,448  
|                                                             |  |              |           |      |   |           |  |   |          
|                                                             |  |              |          
|                                                             |  | 2004         |           | 2003 |   | 2002     
|Nonaccrual loans                                             |  | $            | 240,935   |      | $ | 218,070   |  | $ | 399,088  
|Loans past due ninety days or more and still accruing        |  |              | 100,236   |      |   | 285,050   |  |   | 102,000  
|Average balance of impaired loans                            |  |              | 2,610,500 |      |   | 1,754,385 |  |   | 724,556  
|Interest income recognized on impaired loans                 |  |              | 168,359   |      |   |          |  |   | 10,333   
|Interest income recognized on a cash basis on impaired loans |  |              | 168,359   |      |   |          |  |   | 10,333   



The Corporation has
not committed to lend additional funds to these debtors.



Note 4. Premises
and Equipment



A summary of the cost and accumulated
depreciation of bank premises and equipment at December 31, 2004 and 2003 follows:



|                         |  |      |            |      |   |           
|------------------------ |  | ---- | ---------- | ---- | - | ----------
|                         |  | 2004 |            | 2003
|Land                     |  | $    | 2,729,218  |      | $ | 2,622,565 
|Buildings                |  |      | 3,893,844  |      |   | 3,891,317 
|Furniture and fixtures   |  |      | 4,169,645  |      |   | 4,000,952 
|                         |  |      |            |      |   |           
|                         |  | $    | 10,792,707 |      | $ | 10,514,834
|Accumulated depreciation |  |      | 4,344,750  |      |   | 3,988,908 
|                         |  |      |            |      |   |           
|                         |  | $    | 6,447,957  |      | $ | 6,525,926 
|                         |  |      |            |      |   |           



Depreciation expense
for the years ended December 31, 2004, 2003 and 2002, amounted to $381,377, $371,506 and $384,460, respectively.



Note 5. Deposits



The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2004 and 2003 was $22,976,912 and $21,681,028, respectively.



The scheduled maturities of time deposits at December 31, 2004
are as follows:



|           |  |   |            
|---------- |  | - | -----------
|2005       |  | $ | 63,222,076 
|2006       |  |   | 28,862,672 
|2007       |  |   | 9,427,193  
|2008       |  |   | 9,096,451  
|2009       |  |   | 2,570,931  
|Thereafter |  |   | 122,606    
|           |  |   |            
|           |  | $ | 113,301,929
|           |  |   |            



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



At December 31, 2004 and 2003, overdraft demand deposits reclassified to loans totaled $65,264 and
$98,952, respectively.



Note 6. Income Taxes



The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities follows:



|                                                 |  |      |           |   |      |   |           |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                 |  | 2004 |           |   | 2003 |  
|Deferred tax assets:                             |  |      |           |   |      |   |           |  
|Allowance for loan losses                        |  | $    | 546,235   |   |      | $ | 561,072   |  
|Deferred compensation                            |  |      | 168,258   |   |      |   | 185,591   |  
|Nonaccrual loan interest                         |  |      | 5,196     |   |      |   | 54,601    |  
|Alternative minimum tax credit                   |  |      |          |   |      |   | 35,362    |  
|Allowance for deposit losses                     |  |      | 13,898    |   |      |   | 13,600    |  
|Organizational costs                             |  |      | 3,340     |   |      |   | 10,023    |  
|                                                 |  |      |           |   |      |   |           |  
|                                                 |  | $    | 736,927   |   |      | $ | 860,249   |  
|                                                 |  |      |           |   |      |   |           |  
|Deferred tax liabilities:                        |  |      |           |   |      |   |           |  
|Depreciation                                     |  | $    | 333,304   |   |      | $ | 319,110   |  
|Discount accretion on securities                 |  |      | 20,973    |   |      |   | 29,611    |  
|Partnership losses                               |  |      | 55,225    |   |      |   | 39,367    |  
|Accrued pension liability                        |  |      | 196,879   |   |      |   | 216,767   |  
|Unrealized gain on securities available for sale |  |      | 408,816   |   |      |   | 671,601   |  
|Other                                            |  |      | 21,983    |   |      |   | 21,983    |  
|                                                 |  |      |           |   |      |   |           |  
|                                                 |  | $    | 1,037,180 |   |      | $ | 1,298,439 |  
|                                                 |  |      |           |   |      |   |           |  
|Net deferred tax (liabilities)                   |  | $    | (300,253  | ) |      | $ | (438,190  | )
|                                                 |  |      |           |   |      |   |           |  



Allocation of the
income tax expense between current and deferred portions is as follows:



|                      |  |      |         |      |   |         |  |   |        
|--------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                      |  | 2004 |         | 2003 |   | 2002   
|Current tax provision |  | $    | 698,466 |      | $ | 447,874 |  | $ | 329,013
|Deferred tax expense  |  |      | 124,848 |      |   | 199,857 |  |   | 39,480 
|                      |  |      |         |      |   |         |  |   |        
|                      |  | $    | 823,314 |      | $ | 647,731 |  | $ | 368,493
|                      |  |      |         |      |   |         |  |   |        



The following is a
reconciliation of the expected income tax expense with the reported expense for each year:



|                                     |  |       |   |  |       |   |  |       |  
|------------------------------------ |  | ----- | - |  | ----- | - |  | ----- | -
|                                     |  | 2004  |   |  | 2003  |   |  | 2002  |  
|Statutory Federal income tax rate    |  | 34.0  | % |  | 34.0  | % |  | 34.0  | %
|(Reduction) in taxes resulting from: |  |       |   |  |       |   |  |       |  
|Municipal interest                   |  | (10.5 | ) |  | (12.2 | ) |  | (16.5 | )
|Other, net                           |  | (1.3  | ) |  | (0.6  | ) |  | (0.4  | )
|                                     |  |       |   |  |       |   |  |       |  
|Effective income tax rate            |  | 22.2  | % |  | 21.2  | % |  | 17.1  | %
|                                     |  |       |   |  |       |   |  |       |  



F-14



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Note 7. Federal Home Loan Bank Advances and Lines of Credit



The Corporation has available lines of credit with the Federal Home Loan
Bank of Atlanta secured by all of the Corporations first lien loans on one-to-four unit single-family dwellings. As of December 31, 2004, the book value of these loans totaled approximately $38,388,000. The amount of available credit is
limited to seventy-five percent of qualifying collateral. Any borrowings in excess of the qualifying collateral require pledging of additional assets. The Corporation had no advances on these lines of credit at December 31, 2004 and 2003.



The Corporation has unsecured lines of credit with
correspondent banks available for overnight borrowing totaling approximately $19,107,000. At December 31, 2004 and 2003, no amounts had been drawn on these lines of credit.



Note 8. Employee Benefit Plans



The Corporation has a noncontributory, defined benefit pension plan for all full-time employees over 21 years of age. Benefits are generally based upon
years of service and the employees compensation. The Corporation funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.



The following tables provide a reconciliation of the changes in the plans benefit obligations and fair value of assets
over the years ending December 31, 2004, 2003 and 2002, computed as of October 1, 2004, 2003 and 2002, respectively:



|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                          |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Change in Benefit Obligation              |  |      |            |   |      |   |            |      |  |   |            |  
|Benefit obligation, beginning             |  | $    | 3,066,325  |   |      | $ | 2,413,139  |      |  | $ | 1,814,197  |  
|Service cost                              |  |      | 245,785    |   |      |   | 200,871    |      |  |   | 144,992    |  
|Interest cost                             |  |      | 198,503    |   |      |   | 168,750    |      |  |   | 135,883    |  
|Actuarial loss                            |  |      | 460,162    |   |      |   | 306,696    |      |  |   | 392,367    |  
|Benefits paid                             |  |      | (408,797   | ) |      |   | (23,131    | )    |  |   | (74,300    | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Benefit obligation, ending                |  | $    | 3,561,978  |   |      | $ | 3,066,325  |      |  | $ | 2,413,139  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Change in Plan Assets                     |  |      |            |   |      |   |            |      |  |   |            |  
|Fair value of plan assets, beginning      |  | $    | 1,921,202  |   |      | $ | 1,365,307  |      |  | $ | 1,405,336  |  
|Actual return (loss) on plan assets       |  |      | 241,058    |   |      |   | 314,955    |      |  |   | (110,561   | )
|Employer contributions                    |  |      | 791,807    |   |      |   | 264,071    |      |  |   | 144,832    |  
|Benefits paid                             |  |      | (408,797   | ) |      |   | (23,131    | )    |  |   | (74,300    | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Fair value of plan assets, ending         |  | $    | 2,545,270  |   |      | $ | 1,921,202  |      |  | $ | 1,365,307  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Funded status                             |  | $    | (1,016,708 | ) |      | $ | (1,145,123 | )    |  | $ | (1,047,832 | )
|Unrecognized net actuarial loss           |  |      | 1,378,746  |   |      |   | 985,126    |      |  |   | 897,418    |  
|Unrecognized net obligation at transition |  |      | (22,408    | ) |      |   | (25,608    | )    |  |   | (28,808    | )
|Unrecognized prior service cost           |  |      | 24,026     |   |      |   | 27,457     |      |  |   | 30,888     |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Accrued benefit cost at October 1         |  | $    | 363,656    |   |      | $ | (158,148   | )    |  | $ | (148,334   | )
|Contributions made in December            |  |      | 211,510    |   |      |   | 791,807    |      |  |   | 267,961    |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Prepaid benefit cost at December 31       |  | $    | 575,166    |   |      | $ | 633,659    |      |  | $ | 119,627    |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  



The accumulated
benefit obligation for the defined benefit pension plan was $1,945,342, $1,855,455 and $1,412,338 at September 30, 2004, 2003 and 2002, respectively.



F-15



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The following table provides the components of net periodic benefit cost for the plan for the years
ended December 31, 2004, 2003 and 2002:



|                                             |  |      |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                             |  | 2004 |          |   | 2003 |   |          | 2002 | 
|Components of Net Periodic Benefit Cost      |  |      |          |   |      |   |          |      |  |   |          |  
|Service cost                                 |  | $    | 245,785  |   |      | $ | 200,871  |      |  | $ | 144,992  |  
|Interest cost                                |  |      | 198,503  |   |      |   | 168,750  |      |  |   | 135,883  |  
|Expected return on plan assets               |  |      | (212,210 | ) |      |   | (132,417 | )    |  |   | (132,839 | )
|Amortization of prior service cost           |  |      | 3,431    |   |      |   | 3,431    |      |  |   | 3,431    |  
|Amortization of net obligation at transition |  |      | (3,200   | ) |      |   | (3,200   | )    |  |   | (3,200   | )
|Recognized net actuarial loss                |  |      | 37,694   |   |      |   | 36,450   |      |  |   | 4,720    |  
|                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Net periodic benefit cost                    |  | $    | 270,003  |   |      | $ | 273,885  |      |  | $ | 152,987  |  
|                                             |  |      |          |   |      |   |          |      |  |   |          |  



The weighted-average
assumptions used in the measurement of the Corporations benefit obligation are shown in the following table:



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                  |  | 6.00 | % |  | 6.50 | % |  | 7.00 | %
|Expected return on plan assets |  | 8.50 | % |  | 8.50 | % |  | 9.00 | %
|Rate of compensation increase  |  | 5.00 | % |  | 5.00 | % |  | 5.00 | %



The weighted-average
assumptions used in the measurement of the Corporations net periodic benefit cost are shown in the following table:



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                  |  | 6.50 | % |  | 7.00 | % |  | 7.00 | %
|Expected return on plan assets |  | 8.50 | % |  | 9.00 | % |  | 9.00 | %
|Rate of compensation increase  |  | 5.00 | % |  | 5.00 | % |  | 5.00 | %



Long-Term Rate
of Return



The plan sponsor selects the expected
long-term rate of return on assets assumption in consultation with their investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan
benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent
experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.



Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to
continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both
investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).



F-16



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Asset Allocation



The pension plans weighted-average asset allocations at September 30, 2004 and 2003, by asset category are as follows:



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|                            |  | 2004 |   |  | 2003 |  
|Asset Category              |  |      |   |  |      |  
|Mutual funds - fixed income |  | 35   | % |  | 40   | %
|Mutual funds - equity       |  | 65   | % |  | 60   | %
|                            |  |      |   |  |      |  
|                            |  | 100  | % |  | 100  | %
|                            |  |      |   |  |      |  



The trust fund is
sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equities. The investment manager selects investment fund managers with demonstrated
experience and expertise, and funds with demonstrated historical performance, for the implementation of the plans investment strategy. The investment manager will consider both actively and passively managed investment strategies and will
allocate funds across the asset classes to develop an efficient investment structure.



It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and
custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the trust.



The Corporation expects to contribute approximately $212,000 to its pension plan in 2005.



Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:



|          |  |   |        
|--------- |  | - | -------
|2005      |  | $ | 27,896 
|2006      |  |   | 27,654 
|2007      |  |   | 38,200 
|2008      |  |   | 60,076 
|2009      |  |   | 66,177 
|2010-2014 |  |   | 715,422



401(k) Plan



The Corporation has also adopted a contributory
401(k) profit sharing plan which covers substantially all employees. The employee may contribute up to 15% of compensation, subject to statutory limitations. The Corporation matches 50% of employee contributions up to 4% of compensation. The plan
also provides for an additional discretionary contribution to be made by the Corporation as determined each year. The amounts charged to expense under this plan for the years ended December 31, 2004, 2003 and 2002 were $44,085, $47,589 and $39,156,
respectively.



Deferred Compensation Agreements



The Corporation has a nonqualified deferred
compensation program which permits key employees and the Board of Directors to defer a portion of their compensation for their retirement. The retirement benefit to be provided is fixed based upon the amount of compensation earned and deferred.
Deferred compensation expense amounted to $3,612, $48,604 and $49,544 for the years ended December 31, 2004, 2003 and 2002, respectively.



F-17



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Concurrent with the establishment of the deferred compensation plan, the Corporation purchased life
insurance policies on this key management group, with the Corporation named as owner and beneficiary. These life insurance policies are intended to be utilized as a source for funding the deferred compensation plan. The Corporation has recorded in
other assets $322,033 and $294,969 representing cash surrender value of these policies for the years ended December 31, 2004 and 2003, respectively.



Note 9. Stock Option Plans



Employee Incentive Stock Plan



During the year ending December 31, 2000, the Corporation adopted a stock incentive plan for all employees, which is accounted for in accordance with
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. The plan provides that 100,000 shares of the Corporations common stock will be reserved for both incentive and
non-statutory stock options to purchase common stock of the Corporation. The exercise price per share for incentive stock options and non-statutory stock options shall not be less than the fair market value of a share of common stock on the date of
grant, and may be exercised at such times as may be specified by the Board of Directors in the participants stock option agreement. Each incentive and non-statutory stock option shall expire not more than ten years from the date the option is
granted. The options vest at the rate of one quarter per year from the grant date.



A summary of the status of the employee incentive stock plan follows:



|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|-------------------------------------------------------------- |  | --------------- | - | ---- | ---------------------------- | ----- | --------------- | ------ | - | ---------------------------- | - | --------------- |  | ------ | ---------------------------- |  | - | -----
|                                                               |  | 2004            |   | 2003 |                              | 2002 
|                                                               |  | Numberof Shares |   |      | WeightedAverageExercisePrice |       | Numberof Shares |        |   | WeightedAverageExercisePrice |   | Numberof Shares |  |        | WeightedAverageExercisePrice
|Outstanding at beginning of year                               |  | 30,120          |   |      | $                            | 19.29 |                 | 24,475 |   |                              | $ | 16.34           |  | 14,912 |                              |  | $ | 12.25
|Granted                                                        |  | 15,444          |   |      |                              | 28.51 |                 | 9,396  |   |                              |   | 25.00           |  | 10,805 |                              |  |   | 21.68
|Exercised                                                      |  | (2,256          | ) |      |                              | 14.63 |                 | (2,422 | ) |                              |   | 12.78           |  | (203   | )                            |  |   | 12.25
|Forfeited                                                      |  | (683            | ) |      |                              | 14.67 |                 | (1,329 | ) |                              |   | 17.33           |  | (1,039 | )                            |  |   | 13.89
|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|Outstanding at year end                                        |  | 42,625          |   |      |                              | 22.95 |                 | 30,120 |   |                              |   | 19.29           |  | 24,475 |                              |  |   | 16.34
|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|Exercisable at year end                                        |  | 13,534          |   |      |                              | 17.63 |                 | 7,937  |   |                              |   | 15.15           |  | 3,460  |                              |  |   | 12.25
|                                                               |  |                 |   |      |                              |      
|Weighted average fair value of options granted during the year |  |                 |   |      |                              | 8.24  |                 |        |   |                              |   | 7.17            |  |        |                              |  |   | 6.74 



The fair value of each
employee option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |                          |   |  |          |   |  |          |  
|----------------------- |  | ------------------------ | - |  | -------- | - |  | -------- | -
|                        |  | Years Ended December 31, |  
|                        |  | 2004                     |   |  | 2003     |   |  | 2002     |  
|Dividend yield          |  | 2.64                     | % |  | 2.74     | % |  | 2.85     | %
|Expected life           |  | 9.7 years                |   |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 25.86                    | % |  | 26.43    | % |  | 27.56    | %
|Risk-free interest rate |  | 4.45                     | % |  | 4.31     | % |  | 4.92     | %



F-18



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Director Incentive Stock Plan



During the year ended December 31, 2000, the Corporation adopted a stock
option plan for outside directors. The Corporation applies APB Opinion 25 and related interpretations in accounting for the stock option plan. The plan provides that 10,000 shares of the Corporations common stock will be reserved for
non-statutory stock options to purchase common stock of the Corporation. The exercise price per share for each non-statutory stock option shall not be less than the fair market value of a share of common stock on the date of grant, and may be
exercised at such times as may be specified by the Board of Directors in the participants stock option agreement. Each non-statutory stock option shall expire not more than ten years from the date the option is granted. The options vest at a
rate of one quarter per year from the grant date.



A summary of
the director incentive stock plan follows:



|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |                              |  |   |      
|-------------------------------------------------------------- |  | --------------- | - | ---- | ---------------------------- | ----- | --------------- | ----- | - | ---------------------------- | - | --------------- |  | ---------------------------- |  | - | -----
|                                                               |  | 2004            |   | 2003 |                              | 2002 
|                                                               |  | Numberof Shares |   |      | WeightedAverageExercisePrice |       | Numberof Shares |       |   | WeightedAverageExercisePrice |   | Numberof Shares |  | WeightedAverageExercisePrice
|Outstanding at beginning of year                               |  | 3,070           |   |      | $                            | 17.69 |                 | 2,810 |   |                              | $ | 15.25           |  | 2,010                        |  | $ | 12.41
|Granted                                                        |  | 750             |   |      |                              | 28.75 |                 | 800   |   |                              |   | 25.00           |  | 800                          |  |   | 22.40
|Exercised                                                      |  | (524            | ) |      |                              | 12.75 |                 | (20   | ) |                              |   | 12.25           |  |                             |  |   |     
|Forfeited                                                      |  |                |   |      |                              |      |                 | (520  | ) |                              |   | 15.99           |  |                             |  |   |     
|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |                              |  |   |      
|Outstanding at year end                                        |  | 3,296           |   |      |                              | 20.99 |                 | 3,070 |   |                              |   | 17.69           |  | 2,810                        |  |   | 15.25
|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |                              |  |   |      
|Exercisable at year end                                        |  | 1,356           |   |      |                              | 16.43 |                 | 975   |   |                              |   | 13.92           |  | 503                          |  |   | 12.41
|Weighted average fair value of options granted during the year |  |                 |   |      |                              | 7.80  |                 |       |   |                              |   | 7.17            |  |                              |  |   | 6.87 



The fair value of each
director option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |                          |   |  |          |   |  |          |  
|----------------------- |  | ------------------------ | - |  | -------- | - |  | -------- | -
|                        |  | Years Ended December 31, |  
|                        |  | 2004                     |   |  | 2003     |   |  | 2002     |  
|Dividend yield          |  | 2.64                     | % |  | 2.74     | % |  | 2.85     | %
|Expected life           |  | 8 years                  |   |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 25.83                    | % |  | 26.43    | % |  | 27.56    | %
|Risk-free interest rate |  | 4.41                     | % |  | 4.31     | % |  | 4.92     | %



Information pertaining
to options outstanding at December 31, 2004 is as follows:



|                      |  |                          |  |                               |  |                     |       |                               |   |       |  |   |      
|--------------------- |  | ------------------------ |  | ----------------------------- |  | ------------------- | ----- | ----------------------------- | - | ----- |  | - | -----
|Range ofExercisePrice |  | RemainingContractualLife |  | Options Outstanding           |  | Options Exercisable
|                      |  | NumberOutstanding        |  | WeightedAverageExercise Price |  | NumberExercisable   |       | WeightedAverageExercise Price
|$12.25                |  | 6 years                  |  | 9,976                         |  | $                   | 12.25 |                               | $ | 7,482 |  | $ | 12.25
|$16.55-$19.00         |  | 7 years                  |  | 1,375                         |  |                     | 18.33 |                               |   | 781   |  |   | 18.33
|$22.40                |  | 7.5 years                |  | 8,129                         |  |                     | 22.40 |                               |   | 4,065 |  |   | 22.40
|$25.00                |  | 8.8 years                |  | 10,247                        |  |                     | 25.00 |                               |   | 2,562 |  |   | 25.00
|$25.70-$29.25         |  | 9.8 years                |  | 16,194                        |  |                     | 28.52 |                               |   |      |  |   |     



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Note 10. Earnings Per Share



The following shows the weighted average number of shares used in computing earnings per share and the effect on the
weighted average number of shares of diluted potential stock. Potential dilutive common stock had no effect on income available to common stockholders.



|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|-------------------------------- |  | --------- |  | --------- | ---- | ----- | --------- | --------- | - | ------ |  | --------- |  | - | ----
|                                 |  | 2004      |  | 2003      |      | 2002 
|                                 |  | Shares    |  | Per Share |      | Share |           | Per Share |   | Shares |  | Per Share
|Basic earnings per share         |  | 1,185,952 |  | $         | 2.43 |       | 1,179,640 |           | $ | 2.04   |  | 1,175,018 |  | $ | 1.52
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|Effect of dilutive stock options |  | 8,559     |  |           |      |       | 7,999     |           |   |        |  | 6,540     |  |   |     
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|Diluted earnings per share       |  | 1,194,511 |  | $         | 2.42 |       | 1,187,639 |           | $ | 2.03   |  | 1,181,558 |  | $ | 1.51
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     



The Company has
granted options to employees and directors to purchase 3,797 shares, 2,422 shares and 7,328 shares on average during the years ended December 31, 2004, 2003 and 2002, respectively. Those options were not included in the computation of diluted
earnings per share because the exercise price of those options exceeded the average market price of the common shares during the year.



Note 11. Related Party Transactions



In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its executive officers,
directors, and their affiliates. All such loans are made on substantially the same terms as those prevailing at the time for comparable loans to unrelated persons. Loans to such borrowers are summarized as follows:



|                                 |  |      |           |   |      |   |            |  
|-------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | -
|                                 |  | 2004 |           |   | 2003 |  
|Balance, beginning of year       |  | $    | 1,322,437 |   |      | $ | 4,848,000  |  
|Principal additions              |  |      | 1,104,088 |   |      |   | 452,256    |  
|Repayments and reclassifications |  |      | (419,231  | ) |      |   | (3,977,819 | )
|                                 |  |      |           |   |      |   |            |  
|Balance, end of year             |  | $    | 2,007,294 |   |      | $ | 1,322,437  |  
|                                 |  |      |           |   |      |   |            |  



Note 12. Commitments and Contingent
Liabilities



In the normal course of business, there are
outstanding various commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying consolidated financial statements. The Bank does not anticipate losses as a result of
these transactions. See Note 15 with respect to financial instruments with off-balance-sheet risk.



As members of the Federal Reserve System, the Bank is required to maintain certain average reserve balances. For the final weekly reporting period in the
years ended December 31, 2004 and 2003, the aggregate amount of daily average required balances were approximately $1,644,000 and $1,090,000, respectively.



The Bank is required to maintain certain required reserve balances with a correspondent bank. Those required balances were $250,000 and $5,200,000 at
December 31, 2004 and 2003, respectively.



Note 13. Dividend Limitations on
Affiliate Bank



Transfers of funds from the banking
subsidiary to the parent corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 2004, the aggregate



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



amount of unrestricted funds, which could be transferred from the banking subsidiary to the parent corporation, without prior regulatory approval, totaled
$5,171,164.



Note 14. Concentration of Credit Risk



The Bank has a diversified loan portfolio consisting of commercial, real
estate and consumer (installment) loans. Substantially all of the Banks customers are residents or operate business ventures in its market area consisting of Essex, King William, Hanover, Henrico and adjacent counties. Therefore, a substantial
portion of its debtors ability to honor their contracts and the Banks ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions in this market area.



The Bank maintains a portion of its cash balances with several financial
institutions located in its market area. Accounts at each institution are secured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured balances were approximately $1,259,000 and $6,538,000 at December 31, 2004 and 2003,
respectively.



Note 15. Financial Instruments With Off-Balance-Sheet Risk



The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.



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



A
summary of the contract amounts of the Banks exposure to off-balance-sheet risk as of December 31, 2004 and 2003, is as follows:



|                                                                    |  |      |            |      |   |           
|------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                                    |  | 2004 |            | 2003
|Financial instruments whose contract amounts represent credit risk: |  |      |            |      |   |           
|Commitments to extend credit                                        |  | $    | 41,921,000 |      | $ | 33,053,000
|Standby letters of credit                                           |  |      | 3,890,000  |      |   | 3,866,000 



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Unfunded commitments under commercial lines-of credit, revolving credit lines and overdraft
protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit are generally uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total
extent to which the Bank is committed.



Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on managements evaluation of the counterparty. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.



Note 16. Minimum Regulatory Capital Requirements



The Corporation (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporations and Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies



Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004 and
2003, that the Corporation and Bank met all capital adequacy requirements to which they are subject.



As of December 31, 2004, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the Banks category.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The Corporations and the Banks actual capital amounts and ratios as of December 31, 2004
and 2003, are also presented in the table.



|                                                      |  |                        |        |       |                           |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|----------------------------------------------------- |  | ---------------------- | ------ | ----- | ------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                                      |  | Actual                 |        |       | MinimumCapitalRequirement |   |        | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |       
|                                                      |  | Amount                 |        | Ratio |                           |   | Amount |                                                                      | Ratio  |  |     | Amount |  | Ratio |       
|                                                      |  | (dollars in thousands) |       
|As of December 31, 2004:                              |  |                        |        |       |                           |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital (to Risk Weighted Assets) Consolidated  |  | $                      | 29,312 |       | 16.5                      | % |        | $                                                                    | 14,217 |  | 8.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 28,846 |       | 16.3                      | % |        | $                                                                    | 14,195 |  | 8.0 | %      |  | $     | 17,744 |  | 10.0 | %
|Tier 1 Capital (to Risk Weighted Assets) Consolidated |  | $                      | 27,224 |       | 15.3                      | % |        | $                                                                    | 7,109  |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 26,758 |       | 15.1                      | % |        | $                                                                    | 7,098  |  | 4.0 | %      |  | $     | 10,646 |  | 6.0  | %
|Tier 1 Capital (to Average Assets)Consolidated        |  | $                      | 27,224 |       | 11.5                      | % |        | $                                                                    | 9,470  |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 26,758 |       | 11.3                      | % |        | $                                                                    | 9,470  |  | 4.0 | %      |  | $     | 11,838 |  | 5.0  | %
|As of December 31, 2003:                              |  |                        |        |       |                           |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital (to Risk Weighted Assets) Consolidated  |  | $                      | 26,910 |       | 14.9                      | % |        | $                                                                    | 14,470 |  | 8.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 26,495 |       | 14.7                      | % |        | $                                                                    | 14,437 |  | 8.0 | %      |  | $     | 18,046 |  | 10.0 | %
|Tier 1 Capital (to Risk Weighted Assets) Consolidated |  | $                      | 24,782 |       | 13.7                      | % |        | $                                                                    | 7,235  |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 24,367 |       | 13.5                      | % |        | $                                                                    | 7,219  |  | 4.0 | %      |  | $     | 10,828 |  | 6.0  | %
|Tier 1 Capital (to Average Assets)Consolidated        |  | $                      | 24,782 |       | 10.8                      | % |        | $                                                                    | 9,179  |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Bank of Essex                                         |  | $                      | 24,367 |       | 10.6                      | % |        | $                                                                    | 9,179  |  | 4.0 | %      |  | $     | 11,474 |  | 5.0  | %



Note 17. Fair Value of Financial
Instruments and Interest Rate Risk



The fair value of a
financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market
prices for the Corporations various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.



The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that value:



Cash and Short-Term Investments



For those short-term instruments, the carrying amount is a reasonable estimate of fair value.



Securities



For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Restricted Securities



The carrying value of restricted securities approximates their fair value based on the redemption provisions of the
respective entity.



Loans Held for Sale



Fair value of loans held for sale is based on
commitments on hand from investors or prevailing market prices.



Loans Receivable



For certain
homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair
value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.



Deposit Liabilities



The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.



Long-Term Borrowings



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



Accrued Interest



The carrying amounts of accrued interest approximate fair value.



Off-Balance-Sheet Financial Instruments



The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.



The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.



At December 31, 2004 and 2003, the fair values of loan commitments and stand-by letters of credit were deemed to be immaterial.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



The carrying amounts and estimated fair values of the Corporations financial instruments are as
follows:



|                                |  |                |         |                     |   |                |  |                     |         |  |   |        
|------------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                |  | 2004           |         | 2003               
|                                |  | CarryingAmount |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|                                |  | (in thousands)
|Financial assets:               |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and short-term investments |  | $              | 4,354   |                     | $ | 4,354          |  | $                   | 8,949   |  | $ | 8,949  
|Federal funds sold              |  |                | 5,064   |                     |   | 5,064          |  |                     | 285     |  |   | 285    
|Securities                      |  |                | 57,955  |                     |   | 57,955         |  |                     | 52,200  |  |   | 52,200 
|Restricted securities           |  |                | 833     |                     |   | 833            |  |                     | 947     |  |   | 947    
|Loans held for sale             |  |                | 361     |                     |   | 361            |  |                     |        |  |   |       
|Loans, net of allowance         |  |                | 157,471 |                     |   | 161,087        |  |                     | 158,381 |  |   | 162,937
|Accrued interest receivable     |  |                | 1,154   |                     |   | 1,154          |  |                     | 1,186   |  |   | 1,186  
|                                |  |                |         |                    
|Financial liabilities:          |  |                |         |                     |   |                |  |                     |         |  |   |        
|Deposits                        |  | $              | 206,973 |                     | $ | 207,383        |  | $                   | 203,282 |  | $ | 205,143
|Trust preferred capital notes   |  |                | 4,124   |                     |   | 4,159          |  |                     | 4,124   |  |   | 4,124  
|Accrued interest payable        |  |                | 319     |                     |   | 319            |  |                     | 330     |  |   | 330    



The Corporation
assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporations financial instruments will change when interest rate levels change and
that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations
are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and
less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms
that mitigate the Corporations overall interest rate risk.



Note 18.
Trust Preferred Capital Notes



On December 12, 2003, BOE
Statutory Trust I, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing redeemable Capital Securities. On December 12, 2003, $4.1 million of trust preferred securities were issued through a direct placement. The
securities have a LIBOR-indexed floating rate of interest. During the year ended December 31, 2004, the weighted-average interest rate was 4.68%. The securities have a mandatory redemption date of December 12, 2033, and are subject to varying call
provisions beginning December 12, 2008. The principal asset of the Trust is $4.1 million of the Corporations junior subordinated debt securities with the like maturities and like interest rates to the Capital Securities.



The Trust Preferred Securities may be included in Tier 1 capital for
regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the Trust Preferred not considered as Tier 1 capital may be included in Tier 2 capital.



The obligations of the Corporation with respect to the issuance of the
Capital Securities constitute a full and unconditional guarantee by the Corporation of the Trusts obligations with respect to the Capital Securities.



Subject to certain exceptions and limitations, the Corporation may elect from time to time to defer interest payments on the junior subordinated debt
securities, which would result in a deferral of distribution payments on the related Capital Securities.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Note 19. Parent Corporation Only Financial Statements



BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Parent Corporation Only)



Balance Sheets (Condensed)

December 31,
2004 and 2003



|                                                                   |  |      |            |      |   |           
|------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                                                                   |  | 2004 |            | 2003
|Assets                                                             |  |      |            |      |   |           
|                                                                   |  |     
|Cash                                                               |  | $    | 139,533    |      | $ | 182,429   
|Investment in subsidiaries, at cost, plus undistributed net income |  |      | 28,215,386 |      |   | 26,506,531
|Securities available for sale, at fair value                       |  |      | 235,389    |      |   | 164,569   
|Other assets                                                       |  |      | 284,550    |      |   | 239,273   
|                                                                   |  |      |            |      |   |           
|Total assets                                                       |  | $    | 28,874,858 |      | $ | 27,092,802
|                                                                   |  |      |            |      |   |           
|Liabilities and Stockholders Equity                               |  |      |            |      |   |           
|Trust preferred capital notes                                      |  | $    | 4,124,000  |      | $ | 4,124,000 
|Other liabilities                                                  |  |      | 70,102     |      |   | 47,054    
|Stockholders equity                                               |  |      | 24,680,756 |      |   | 22,921,748
|                                                                   |  |      |            |      |   |           
|Total liabilities and stockholders equity                         |  | $    | 28,874,858 |      | $ | 27,092,802
|                                                                   |  |      |            |      |   |           



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Parent Corporation Only)



Statements of Income (Condensed)

Three
Years Ended December 31, 2004



|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                     |  | 2004 |           | 2003 |   |           | 2002 | 
|Income:                                                                              |  |      |           |      |   |           |      |  |   |           |  
|Dividends from subsidiary                                                            |  | $    | 755,743   |      | $ | 668,000   |      |  | $ | 623,000   |  
|Dividends on other securities                                                        |  |      | 7,481     |      |   | 2,428     |      |  |   | 1,658     |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Total income                                                                         |  | $    | 763,224   |      | $ | 670,428   |      |  | $ | 624,658   |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Expenses:                                                                            |  |      |           |      |   |           |      |  |   |           |  
|Interest expense                                                                     |  | $    | 187,004   |      | $ | 9,076     |      |  | $ |          |  
|Other                                                                                |  |      | 31,015    |      |   |          |      |  |   | 73        |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Total expenses                                                                       |  | $    | 218,019   |      | $ | 9,076     |      |  | $ | 73        |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Income before allocated tax benefit (expense) and undistributed income of subsidiary |  | $    | 545,205   |      | $ | 661,352   |      |  | $ | 624,585   |  
|                                                                                     |  |      |          
|Allocated income tax benefit (expense)                                               |  |      | 74,855    |      |   | (115      | )    |  |   | (2,809    | )
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Income before equity in undistributed income of subsidiary                           |  | $    | 620,060   |      | $ | 661,237   |      |  | $ | 621,776   |  
|                                                                                     |  |      |          
|Equity in undistributed income of subsidiary                                         |  |      | 2,265,435 |      |   | 1,745,815 |      |  |   | 1,159,914 |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  
|Net income                                                                           |  | $    | 2,885,495 |      | $ | 2,407,052 |      |  | $ | 1,781,690 |  
|                                                                                     |  |      |           |      |   |           |      |  |   |           |  



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Parent Corporation Only)



Statements of Cash Flows (Condensed)

Three Years Ended December 31, 2004



|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                  |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Cash Flows from Operating Activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                        |  | $    | 2,885,495  |   |      | $ | 2,407,052  |      |  | $ | 1,781,690  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|(Increase) decrease in other assets                                               |  |      | (45,277    | ) |      |   | (234,168   | )    |  |   | 1,785      |  
|Deferred tax provision                                                            |  |      | 6,683      |   |      |   | 6,682      |      |  |   | 6,680      |  
|Undistributed earnings of subsidiary                                              |  |      | (2,265,435 | ) |      |   | (1,745,815 | )    |  |   | (1,159,914 | )
|Increase (decrease) in liabilities                                                |  |      | (7,987     | ) |      |   | 1,123      |      |  |   |           |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                         |  | $    | 573,479    |   |      | $ | 434,874    |      |  | $ | 630,241    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash Flows from Investing Activities,                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Investment in subsidiary                                                          |  | $    |           |   |      | $ | (4,000,000 | )    |  | $ |           |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash Flows from Financing Activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from issuance of trust preferred capital notes                           |  | $    |           |   |      | $ | 4,124,000  |      |  | $ |           |  
|Cash dividends paid                                                               |  |      | (747,240   | ) |      |   | (660,940   | )    |  |   | (622,716   | )
|Net proceeds from issuance of common stock                                        |  |      | 130,943    |   |      |   | 104,110    |      |  |   | 75,336     |  
|Cash paid for fractional shares                                                   |  |      | (78        | ) |      |   | (6         | )    |  |   | (83        | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                               |  | $    | (616,375   | ) |      | $ | 3,567,164  |      |  | $ | (547,463   | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents                                  |  | $    | (42,896    | ) |      | $ | 2,038      |      |  | $ | 82,778     |  
|Cash and Cash Equivalents                                                         |  |      |            |   |      |   |            |      |  |   |            |  
|Beginning                                                                         |  |      | 182,429    |   |      |   | 180,391    |      |  |   | 97,613     |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Ending                                                                            |  | $    | 139,533    |   |      | $ | 182,429    |      |  | $ | 180,391    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  



F-28