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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2005



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



Commission file number: 000-31711



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BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)





|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-1980794                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



323 Prince Street,
P.O. Box 965, Tappahannock, VA 22560

(Address of principal executive offices) (Zip Code)



Registrants telephone number, including area code:
(804) 443-4343



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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



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈No  x



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



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



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



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



Large accelerated filer ̈Accelerated Filer ̈Non-accelerated filer    x



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).Yes ̈No  x



The aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant as of June 30, 2005 was $36,014,272.



There were 1,199,124 shares of common stock outstanding as of February 15, 2006.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 12,
2006 are incorporated by reference in Part III of this report.



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BOE FINANCIAL SERVICES OF VIRGINIA, INC.

FORM 10-KSB



INDEX



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|PART I  
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 2   
|Item 1A. |  | Risk Factors                                                                                                 |  | 6   
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 9   
|Item 2.  |  | Properties                                                                                                   |  | 9   
|Item 3.  |  | Legal Proceedings .                                                                                          |  | 9   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 9   
|        
|PART II 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 10  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 11  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 12  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 30  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 31  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 31  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 31  
|Item 9B. |  | Other Information                                                                                            |  | 32  
|        
|PART III
|         |  |                                                                                                             
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 32  
|Item 11. |  | Executive Compensation                                                                                       |  | 32  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 32  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 32  
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 32  
|        
|PART IV 
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statements Schedules                                                                  |  | 33  



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PART I



ITEM 1. BUSINESS



General



BOE Financial Services of Virginia, Inc. (the Corporation)
owns all of the stock of its sole direct subsidiary, Bank of Essex (the Bank). The Corporation was incorporated under Virginia law in 2000 to become the holding company for the Bank. The headquarters of the Corporation is located in
Tappahannock, Virginia. (References herein to the Corporation include the Bank and its subsidiary unless the context otherwise requires.)



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 and time deposit accounts, commercial and
consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential mortgages. Two offices are located in Tappahannock, one in Central Garage, one in West Point, one in Hanover County and the newest, in
Henrico County, which is located near Virginia Center Commons, one of the largest shopping centers in 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 products through an ownership interest in Bankers Insurance, LLC and investment products through an affiliation with VBA Investments, LLC.



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. 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. The current Main Office will also house the Banks data processing department and loan processing center. It is anticipated the Bank will begin operating from this new location and close the
branch in early June 2006.



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 $94.0 million at the end of 1995 to $261.9 million at December 31, 2005. Net income has grown from $937,000 in 1995 to $3.1 million in 2005. Diluted earnings per share were
$2.58 in 2005 versus $2.42 in 2004. The Corporations return on assets was 1.24% in 2005 and 1.23% in 2004. Return on equity was 12.18% in 2005 and 12.12% in 2004.



Loan growth since the Corporation expanded into Hanover County, Henrico County and Richmond 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.



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Employees



At December 31, 2005, the Corporation had 93 full-time equivalent employees. None of its employees is represented by any collective bargaining unit.
The Corporation considers relations with its employees to be excellent.



SEC
Filings



The Corporation maintains an internet website at
www.bankofessex.com. This website contains information relating to the Corporation and its business. Shareholders of the Corporation and the public may access the Corporations periodic and current reports, including annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, through the
Investors section of the Corporations website. The reports are made available on this website as soon as practicable following the filing of the reports with the SEC. This information is free of charge and may be reviewed,
downloaded and printed from the website at any time.



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 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.



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. The financial services industry remains highly competitive and is constantly evolving.



In Essex County, the Corporation commands 46.0% of the deposits in the market, according to the most recently available survey of deposits by the FDIC
(June 30, 2005). This represents the highest percentage of deposit market share in Essex County. Serving King William County, the branches at Central Garage and West Point have experienced steady growth, reaching 19.8% of the deposits in the King
William County market as of the June 30, 2005 FDIC survey of deposits, while competing with previously established branches. The Corporations office located on Route 360 in eastern Hanover County was $39.8 million in total deposits on
June 30, 2005. In Henrico County the Corporations office located near Virginia Center Commons Mall has experienced strong growth while competing against other community corporations and established offices of statewide corporations in the
vicinity. This office was $33.7 million in total deposits on June 30, 2005.



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Factors such as rates offered on loan and deposit products, types of products offered, the number and
location of branch locations, as well as reputation of institutions in the market, affect competition for loans and deposits. The Corporation emphasizes customer service, establishing long-term relationships with its customers, thereby creating
customer loyalty, and providing adequate product lines for individuals and small-to-medium size business customers.



The Corporation would not be materially or adversely impacted by the loss of a single customer. The Corporation is not dependent upon a single or a few
customers.



Supervision and Regulation



Bank holding companies and banks operate in a highly regulated environment
and are regularly examined by federal and state regulators, including the Board of Governors of the Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (the FDIC) and the Bureau of
Financial Institutions of the Virginia State Corporation Commission (the SCC). 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 generally 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. The Corporation is registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended (the BHCA), and, as a result, is subject to regulation by the Federal Reserve. The Federal Reserve has jurisdiction under the BHCA to 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 that 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. Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve and is required to file periodic reports regarding its
operations and any additional information the Federal Reserve may require.



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.



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The Corporation was required to register in Virginia with the SCC under the financial institution holding
company laws of Virginia. Accordingly, the Corporation is subject to 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 in November 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 created 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 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 repealed 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.



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



Under the Act, federal banking regulators are required to adopt rules that will 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



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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 will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.



USA Patriot Act of 2001. In October 2001 the USA Patriot Act was
enacted to facilitate information sharing among entities within the government and financial institutions to combat terrorist activities and to expose money laundering. The USA Patriot Act is considered a significant piece of banking law with regard
to disclosure of information related to certain customer transactions. Financial institutions are permitted to share information with one another, after notifying the United States Department of the Treasury, in order to better identify and report
to the federal government activities that may involve terrorist activities or money laundering. Under the USA Patriot Act financial institutions are obligated to establish anti-money laundering programs, including the development of a customer
identification program and to review all customers against any list of the government that contains the manes of known or suspected terrorists. The USA Patriot Act does not have a material or adverse impact on the Banks products or service but
compliance with this act creates a cost of compliance and a reporting obligation.



Capital Requirements.The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, the
Corporation and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital
must be composed of Tier 1 Capital, which is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. The remainder may consist of Tier 2 Capital, which is defined as
specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. In addition, each of the federal banking regulatory agencies has established minimum leverage capital
requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an
organizations overall safety and soundness. In sum, the capital measures used by the federal banking regulators are:



| |  |  | Total Capital ratio, which is the total of Tier 1 Capital and Tier 2 Capital;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Tier 1 Capital ratio; and
| | - |  | -------------------------



| |  |  | Leverage ratio.
| | - |  | ---------------



Under these regulations, a bank will be:



| |  |  | Well Capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and is not subject to any written agreement, order, capital
directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adequately Capitalized if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater  or 3%
in certain circumstances  and is not well capitalized;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Undercapitalized if it has a Total Capital ratio of less than 8% or greater, a Tier 1 Capital ratio of less than 4%or 3% in certain circumstances;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Significantly Undercapitalized if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage ratio of less than 3%; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Critically Undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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The risk-based capital standards of the Federal Reserve Board explicitly identify concentrations of
credit risk and the risk arising from non-traditional activities, as well as an institutions ability to manage these risks, as important factors to be taken into account by the agency in assessing an institutions overall capital
adequacy. The capital guidelines also provide that an institutions exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organizations
capital adequacy.



The FDIC may take various corrective actions
against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the FDIC. These powers include, but are not limited to, requiring the institution to be
recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The Bank presently maintains sufficient capital to remain in compliance with these capital requirements.



Payment of Dividends.The Corporation is a legal entity
separate and distinct from the bank. The majority of the Corporations revenues are from dividends paid to the Corporation by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both
the Corporation and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking
organizations should generally pay dividends only if the organizations net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears
consistent with the organizations capital needs, asset quality and overall financial condition. The Corporation does not expect that any of these laws, regulations or policies will materially affect the ability of the Bank to pay dividends.
During the year ended December 31, 2005, the Bank paid $870,000 in dividends to the Corporation.



The FDIC has the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. The FDIC has
indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsound and unsafe banking practice.



Community Reinvestment Act.Under the Community Reinvestment Act (CRA) and related regulations, depository institutions have an affirmative
obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. CRA requires the adoption of a statement for each of its market areas describing the
depository institutions efforts to assist in its communitys credit needs. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a
depository institutions CRA rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even
prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. The Corporation believes it is currently in compliance with CRA.



Fair Lending; Consumer Laws.In addition to CRA, other federal and
state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned
that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers.
Many of these suits have been settled, in some cases for material sums, short of a full trial.



Recently, these governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the
Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a



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prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the
result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be
justified as a business necessity.



Banks and other depository
institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal
Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.



Future Regulatory Uncertainty.Because federal
regulation of financial institutions changes regularly and is the subject of constant legislative debate, the Corporation cannot forecast how federal regulation of financial institutions may change in the future and impact its operations. Although
Congress in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, the Corporation fully expects that the financial institution industry will remain heavily regulated
in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.



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 $350,000 for either secured or unsecured loans. A Loan
Committee compromised 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 Director 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.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------



Our operations are subject to many risks that could adversely impact future financial condition and performance and thus, the market value of our common
stock. The risk factors applicable to us are the following:



Fluctuations in
interest rates may affect profitability.



Our
profitability and cash flows depend substantially upon net interest margin. Net interest margin is the difference between interest earned on loans and investments, and rates paid on deposits and other borrowings. The rates described above are highly
sensitive to many factors not in our control, such as general economic conditions and policies of regulatory and governmental agencies. Changes in interest rates will affect net interest margin and thus profitability and cash flows. We attempt to
manage our interest rate risk but cannot eliminate this risk.



Our
profitability depends upon and may be affected by local economic conditions.



The general economic conditions in the markets in which we operate are a key component to our success. This comes from both the rural Middle Peninsula and urban Richmond markets in which we operate. Changes in the
general economic conditions in these markets, caused by inflation, recession, acts of terrorism, unemployment or other factors beyond our control, may influence the rate of growth experienced for both loans and deposits and negatively affect
financial condition, performance and profitability.



Our future success is
dependent upon our ability to compete effectively in the highly competitive banking industry.



We compete for deposits, loans and other financial services in markets with numerous other banks, thrifts and financial institutions. There are many
financial institutions in these markets that have been in business for many years and are significantly larger, have customer bases well established and have higher lending limits and greater financial resources.



Concentrations in loans secured by real estate may increase credit losses, which would
have a negative affect on our financial results.



Many of
the our loans are secured by real estate (both commercial and residential) in our market area. A variety of loans secured by real estate are offered, including commercial lines of credit, commercial term loans, real estate, construction, home
equity, consumer and other loans. At December 31, 2005, approximately 84.1% of our loans were secured by real estate. A major change in the real estate market, such as deterioration in value of the property, or in the local or national economy,
could adversely affect our customers ability to pay these loans, which in turn could adversely impact us.



If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.



An essential element of our business is to make loans. We maintain an
allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. Experience in the banking industry indicates that some portion of our loans may only be partially repaid or may never be
repaid at all. Loan losses occur for many reasons beyond our control. Although we believe that we maintain our allowance for loan losses at a level adequate to absorb losses in our loan portfolio, estimates of loan losses are subjective and their
accuracy may depend on the outcome of future events. We may be required to make significant and unanticipated increases in the allowance for loan and lease losses during future periods, which could materially affect our financial position, results
of operations and liquidity. Bank regulatory authorities, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. These regulatory authorities may require adjustments to the allowance for
loan losses or may require recognition of additional loan losses or



9



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##### Table of Contents

charge-offs based upon their own judgment. Any change in the allowance for loan losses or charge-offs required by bank regulatory authorities could have an
adverse effect on our financial condition, results of operations and liquidity.



Our profitability and the value of shareholders investments may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.



We are subject to extensive supervision by several governmental regulatory
agencies at the federal and state levels in the financial services area. Recently enacted, proposed and future legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry.
These regulations, which are generally intended to protect depositors and not shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be
expected to influence earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations. Some of these regulations may increase costs and thus place other financial institutions that are not subject to
similar regulation in stronger, more favorable competitive positions.



We
depend on key personnel for success.



Our operating
results and ability to adequately manage our growth and minimize loan and lease losses are highly dependent on the services, managerial abilities and performance of our current executive officers and other key personnel. We have an experienced
management team that the Board of Directors believes is capable of managing and growing our operations. However, losses of or changes in our current executive officers or other key personnel and their responsibilities may disrupt our business and
could adversely affect financial condition, results of operations and liquidity. There can be no assurance that we will be successful in retaining our current executive officers or other key personnel.



If additional capital were needed in the future to continue growth, we may not be able to
obtain it on terms that are favorable. This could negatively affect performance and the value of our common stock.



Our business strategy calls for continued growth. It is anticipated that we will be able to support this growth through the generation of additional
deposits at branch locations as well as investment opportunities. However, we may need to raise additional capital in the future to support continued growth and to maintain capital levels. The ability to raise capital through the sale of additional
securities will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are
unable to raise additional capital as needed.



Changes in accounting
standards could impact reported earnings.



The accounting
standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how
we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.



ITEM 1B. UNRESOLVED STAFF COMMENTS



None.



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##### Table of Contents

ITEM 2. 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 SCC 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 ultimately it may be sold. The new facility is scheduled to open in early June 2006. 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.



There were no matters submitted to the shareholders for their vote during the quarter ended December 31, 2005.



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PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES



Market Information.



The Corporations Common Stock was approved for trading on the NASDAQ Small Cap Market on December 18, 1997 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:





|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2005           |  | High |       | Low
|Fourth Quarter |  | $    | 36.00 |     | $ | 30.01
|Third Quarter  |  |      | 32.00 |     |   | 30.01
|Second Quarter |  |      | 36.00 |     |   | 29.52
|First Quarter  |  |      | 35.80 |     |   | 29.30
|               |  |     
|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



Holders.



At December 31, 2005, there were 1,198,059 shares of
Common Stock of the Corporation outstanding held by approximately 1,100 holders of record.



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 2005 and 2004.



|     |  |                                           |      |                                           |   |                                     |  |   |     
|---- |  | ----------------------------------------- | ---- | ----------------------------------------- | - | ----------------------------------- |  | - | ----
|Year |  | 1st Semi-AnnualDividend PaidPer share (1) |      | 2nd Semi-AnnualDividend Paidper share (1) |   | Total AnnualDividends Paidper share
|2005 |  | $                                         | 0.35 |                                           | $ | 0.38                                |  | $ | 0.73
|2004 |  | $                                         | 0.30 |                                           | $ | 0.33                                |  | $ | 0.63



---

|(1) | The Corporation generally pays its semi-annual dividends in June and December.
|--- | ------------------------------------------------------------------------------



Recent Sales of Unregistered Shares.



None.



Use of Proceeds.



Not Applicable.



Issuer Repurchases of Common Stock.



No shares were repurchased by or on behalf of the Corporation during the fourth quarter of 2005.



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



Selected
Financial Data

(Dollars in thousands, except per share data)



|                                              |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------- |  | ------------------------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                              |  | As of and for the Years ended December 31, |        
|                                              |  | 2005                                       |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|STATEMENT OF INCOME INFORMATION               |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                               |  | $                                          | 14,343  |   |      | $ | 12,875  |      |  | $ | 13,071  |   |  | $    | 13,741  |   |  | $ | 14,749  |  
|Interest expense                              |  |                                            | 4,469   |   |      |   | 3,606   |      |  |   | 4,073   |   |  |      | 5,695   |   |  |   | 7,482   |  
|Net interest income                           |  |                                            | 9,874   |   |      |   | 9,269   |      |  |   | 8,998   |   |  |      | 8,046   |   |  |   | 7,267   |  
|Provision for loan losses                     |  |                                            | 240     |   |      |   | 305     |      |  |   | 700     |   |  |      | 1,208   |   |  |   | 390     |  
|Noninterest income                            |  |                                            | 1,601   |   |      |   | 1,627   |      |  |   | 1,384   |   |  |      | 1,078   |   |  |   | 1,120   |  
|Noninterest expense                           |  |                                            | 7,262   |   |      |   | 6,882   |      |  |   | 6,627   |   |  |      | 5,766   |   |  |   | 5,393   |  
|Income taxes                                  |  |                                            | 872     |   |      |   | 823     |      |  |   | 648     |   |  |      | 368     |   |  |   | 597     |  
|                                              |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                    |  | $                                          | 3,101   |   |      | $ | 2,885   |      |  | $ | 2,407   |   |  | $    | 1,782   |   |  | $ | 2,007   |  
|                                              |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                              |  |                                            |         |   |     
|PERFORMANCE RATIOS                            |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                      |  |                                            | 1.24    | % |      |   | 1.23    | %    |  |   | 1.04    | % |  |      | 0.80    | % |  |   | 1.00    | %
|Return on average equity                      |  |                                            | 12.18   | % |      |   | 12.12   | %    |  |   | 10.80   | % |  |      | 8.87    | % |  |   | 10.97   | %
|Net interest margin                           |  |                                            | 4.55    | % |      |   | 4.54    | %    |  |   | 4.45    | % |  |      | 4.13    | % |  |   | 4.12    | %
|Efficiency ratio (1)                          |  |                                            | 59.36   | % |      |   | 60.02   | %    |  |   | 62.58   | % |  |      | 59.91   | % |  |   | 61.04   | %
|                                              |  |                                            |         |   |     
|PER SHARE DATA                                |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income, basic                             |  | $                                          | 2.60    |   |      | $ | 2.43    |      |  | $ | 2.04    |   |  | $    | 1.52    |   |  | $ | 1.71    |  
|Net income, diluted                           |  |                                            | 2.58    |   |      |   | 2.42    |      |  |   | 2.03    |   |  |      | 1.51    |   |  |   | 1.71    |  
|Cash dividend                                 |  |                                            | 0.73    |   |      |   | 0.63    |      |  |   | 0.56    |   |  |      | 0.53    |   |  |   | 0.50    |  
|Book value at period end                      |  |                                            | 21.90   |   |      |   | 20.76   |      |  |   | 19.37   |   |  |      | 18.12   |   |  |   | 16.22   |  
|Tangible book value at period end             |  |                                            | 21.36   |   |      |   | 20.10   |      |  |   | 18.61   |   |  |      | 17.25   |   |  |   | 15.24   |  
|Market price per share at period end          |  |                                            | 35.40   |   |      |   | 29.50   |      |  |   | 27.25   |   |  |      | 19.26   |   |  |   | 17.35   |  
|Cash dividend payout ratio                    |  |                                            | 28.13   | % |      |   | 25.90   | %    |  |   | 27.45   | % |  |      | 34.96   | % |  |   | 29.18   | %
|                                              |  |                                            |         |   |     
|BALANCE SHEET DATA                            |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                  |  | $                                          | 261,931 |   |      | $ | 237,126 |      |  | $ | 231,840 |   |  | $    | 228,111 |   |  | $ | 217,172 |  
|Loans, net                                    |  |                                            | 180,207 |   |      |   | 157,471 |      |  |   | 158,381 |   |  |      | 161,722 |   |  |   | 151,877 |  
|Securities                                    |  |                                            | 56,581  |   |      |   | 58,788  |      |  |   | 53,147  |   |  |      | 46,568  |   |  |   | 39,613  |  
|Deposits                                      |  |                                            | 223,132 |   |      |   | 206,973 |      |  |   | 203,282 |   |  |      | 201,261 |   |  |   | 188,497 |  
|Stockholders equity                          |  |                                            | 26,235  |   |      |   | 24,681  |      |  |   | 22,922  |   |  |      | 21,346  |   |  |   | 19,047  |  
|                                              |  |                                            |         |   |     
|ASSET QUALITY RATIOS                          |  |                                            |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses to period end loans |  |                                            | 1.23    | % |      |   | 1.31    | %    |  |   | 1.33    | % |  |      | 1.29    | % |  |   | 1.35    | %
|Nonperforming assets to total assets          |  |                                            | 0.10    | % |      |   | 0.14    | %    |  |   | 0.75    | % |  |      | 1.06    | % |  |   | 0.35    | %



|(1) | Efficiency ratio is calculated by dividing noninterest expense into the sum of net interest income plus noninterest income.
|--- | ---------------------------------------------------------------------------------------------------------------------------



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion is intended to assist the readers in understanding and evaluating the financial condition and results of operations of BOE
Financial Services of Virginia, Inc. (the Corporation) or (BOE). 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 within our 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. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In
addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.



Allowance for Loan Losses



The allowance for loan losses is an estimate of the losses that may be
sustained in our 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 estimable 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 our 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



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. (See Part I, Item 1. Business, General for further explanation
on the Corporations strategic plan.)



Year 2005 Compared to Year 2004



On December 31, 2005 the Corporation had total
assets of $261.9 million, total loans of $182.5 million, total deposits of $223.1 million and total stockholders equity of $26.2 million. BOE had net income of $3.1 million in 2005, a $215,000, or 7.5% increase from $2.9 million in net
income in 2004. This resulted in a return on average equity of 12.18% in 2005 compared to 12.12% in 2004. Return on average assets in 2005 was 1.24%, compared to 1.23% in 2004. BOEs total loans increased 14.3%, or $22.9 million, in 2005 over
2004.



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##### Table of Contents

Total loans were $182.5 million at December 31, 2005 compared to $159.6 million at December 31, 2004. Loan increases came from loans secured by
real estate, including loans secured by 1  4 family properties, commercial real estate and construction lending. This is due to continued growth in and around the corridor surrounding Richmond, Virginia, including the area in and around Essex
County. At December 31, 2005, the ratio of non-performing assets to total assets was 0.10% compared to 0.14% at December 31, 2004. Net charge offs to average loans were 0.07% in 2005 compared to 0.21% in 2004. Loans past due 90 days or
more and still accruing interest at December 31, 2005 were $260,000 and $100,000 at December 31, 2004. The Corporations allowance for loan losses to period end loans at December 31, 2005 was 1.23% compared to 1.31% at
December 31, 2004.



Year 2004 Compared to Year 2003



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 stockholders equity of $24.7 million. BOE 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. BOEs total loans declined 0.6%, or $950,000 in 2004 over 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 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.



RESULTS OF OPERATIONS



NET INCOME



Year 2005 Compared to Year 2004



BOE had net income of $3.1 million in 2005 compared to $2.9 million in 2004.
This represented an increase of 7.5%, or $215,000. Diluted earnings per share in 2005 were $2.58, compared to diluted earnings per share in 2004 of $2.42. These earnings per share are based on average shares outstanding of 1,203,725 in 2005 and
1,194,511 in 2004.



BOEs profitability increased in 2005
in comparison to 2004 due to an increase of $605,000, or 6.5%, in net interest income. Net interest income increased from $9.3 million in 2004 to $9.9 million in 2005. Additionally, provision for loan losses decreased by $65,000, or 21.2%, in 2005
compared to 2004. Provision for loan losses was $240,000 in 2005 compared to $305,000 in 2004. Provision for loan losses decreased in 2005 compared to 2004 due to a reduction in net charged-off loans. Net charged-off loans were $80,000 in 2005
compared to $346,000 in 2004. This combination resulted in a net interest income after provision for loan losses increase of $670,000, or 7.5%.



Offsetting these increases in net income was a $380,000, or 5.5% increase for 2005 compared to 2004 in noninterest expenses. Noninterest expenses were
$7.3 million in 2005 and $6.9 million in 2004. Also offsetting net income increases was an increase of $49,000, or 5.9%, in income tax expenses. Income tax expense totaled $872,000 in 2005 and $823,000 in 2004. Noninterest income decreased $26,000,
or 1.6%, and was $1.6 million in 2005 compared to $1.6 million in 2004.



Year 2004 Compared to Year 2003



BOE 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.



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##### Table of Contents

BOE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. Provision for loan losses was $305,000 in
2004 compared to $700,000 in 2003. This combination resulted in a net interest income after provision for loan losses increase of $665,000, or 8.0%. Noninterest income 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%.



Offsetting these increases in net income was a $255,000, or 3.9% increase for 2004 compared to 2003 in noninterest expenses. Noninterest expenses were $6.9 million in 2004 and $6.6 million in 2003. 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.



NET INTEREST INCOME



Year 2005 Compared to Year 2004



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 and short-term borrowings 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 $10.6 million in 2005, 6.7% higher than the $9.9 million reported for 2004. The Corporations level of earning assets increased $14.4 million, or 6.6%, on average, in 2005 to $232.4 million compared to
$218.0 million in 2004. Loans receivable were $172.4 million, on average, in 2005 compared to $162.5 million in 2004, an increase of $9.9 million, or 6.1%. The yield on loans receivable increased from 6.56% in 2004 to 6.93% in 2005. On a fully tax
equivalent basis the yield on loans receivable increased $1.3 million in 2005, to $11.9 million in 2004 from $10.7 million in 2004. This represents an increase of 12.0%. Investment securities and federal funds sold increased, on average, 8.1% in
2005 to $60.1 million, up from $55.5 million, on average, in 2004. The taxable equivalent yield on investment securities, including equity securities and federal funds sold, was 5.15% in 2005 compared to 5.12% in 2004. On a fully taxable
equivalent basis, income on investment securities and federal funds sold income increased 8.7%, or $248,000, from $2.8 million in 2004 to $3.1 million in 2005. This earning asset rate and volume activity resulted in a yield on earning assets of
6.47% in 2005 based on $15.0 million in fully taxable equivalent income compared to 6.19% in 2004 based on $13.5 million in fully taxable equivalent income. This is a $1.5 million increase from 2004 to 2005, or 11.3%. The Corporations
interest-bearing liabilities increased $9.0 million, on average, from $185.4 million in 2004 to $194.4 million in 2005. The cost of interest-bearing liabilities increased from 1.95% in 2004 to 2.30% in 2005, an increase of 18.0%.



The increase in yield on earning assets of 28 basis points coupled with the
increased cost of interest-bearing liabilities of 35 basis points resulted in a net interest margin for the Corporation of 4.55% in 2005 compared to a net interest margin of 4.54% in 2004. 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 increases in interest-bearing liabilities resulted in a decrease in the
interest spread. The Corporations net interest spread decreased 8 basis points from 4.25% in 2004 to 4.17% in 2005. Spread is calculated by subtracting the cost of interest-bearing liabilities from the yield on earning assets.



Year 2004 Compared to Year 2003



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,



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##### Table of Contents

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 taxable 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 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 cost interest-bearing liabilities
resulted in an increase in the interest spread. The Corporations net interest spread increased 9 basis points from 4.16% in 2003 to 4.25% in 2004. BOE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.



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##### Table of Contents

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, 2005, 2004 and 2003. 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.



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



|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|------------------------------------------ |  | -------------- | ------- | - | --------------------- | - | ---------------- | ---- | ---- | ----------------------------------------------- |  | - | --------------------- | - | ---------------- | - | ------ | -------------- | ---- | - | --------------------- | - | ---------------- | - |  | - | ------ |  | ---- | -
|                                           |  |                |         |   |                       |   |                  |      |      | Years Ended December 31, (Dollars in thousands) |  |   |                       |   |                  |   |        |                |     
|                                           |  |                |        
|                                           |  | 2005           |         |   | 2004                  |   |                  | 2003 |     
|                                           |  | AVERAGEBALANCE |         |   | INTERESTINCOMEEXPENSE |   | AVERAGEYIELDRATE |      |      | AVERAGEBALANCE                                  |  |   | INTERESTINCOMEEXPENSE |   | AVERAGEYIELDRATE |   |        | AVERAGEBALANCE |      |   | INTERESTINCOMEEXPENSE |   | AVERAGEYIELDRATE |  
|Earning Assets:                            |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Loans receivable                           |  | $              | 172,367 |   |                       |   | 11,944           |      | 6.93 | %                                               |  | $ | 162,507               |   |                  | $ | 10,664 |                | 6.56 | % |                       | $ | 163,976          |   |  | $ | 10,899 |  | 6.65 | %
|Securities, taxable                        |  |                | 22,714  |   |                       |   | 965              |      | 4.25 | %                                               |  |   | 20,232                |   |                  |   | 890    |                | 4.40 | % |                       |   | 17,925           |   |  |   | 858    |  | 4.79 | %
|Securities, non-taxable (1)                |  |                | 34,849  |   |                       |   | 2,039            |      | 5.85 | %                                               |  |   | 31,448                |   |                  |   | 1,861  |                | 5.92 | % |                       |   | 28,333           |   |  |   | 1,752  |  | 6.18 | %
|Equity securities                          |  |                | 1,039   |   |                       |   | 49               |      | 4.72 | %                                               |  |   | 935                   |   |                  |   | 40     |                | 4.28 | % |                       |   | 1,001            |   |  |   | 44     |  | 4.40 | %
|Federal funds sold                         |  |                | 1,448   |   |                       |   | 39               |      | 2.69 | %                                               |  |   | 2,927                 |   |                  |   | 53     |                | 1.81 | % |                       |   | 2,507            |   |  |   | 27     |  | 1.08 | %
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total earning assets                       |  | $              | 232,417 |   |                       | $ | 15,036           |      | 6.47 | %                                               |  | $ | 218,049               |   |                  | $ | 13,508 |                | 6.19 | % |                       | $ | 213,742          |   |  | $ | 13,580 |  | 6.35 | %
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Non-Earning Assets:                        |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Cash and due from banks                    |  |                | 6,327   |   |                       |   |                  |      |      |                                                 |  |   | 8,964                 |   |                  |   |        |                |      |   |                       |   | 8,409            |   |  |   |        |  |      |  
|Allowance for loan losses                  |  |                | (2,205  | ) |                       |   |                  |      |      |                                                 |  |   | (2,060                | ) |                  |   |        |                |      |   |                       |   | (2,193           | ) |  |   |        |  |      |  
|Other assets                               |  |                | 13,441  |   |                       |   |                  |      |      |                                                 |  |   | 10,689                |   |                  |   |        |                |      |   |                       |   | 10,557           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total non-earning assets                   |  |                | 17,563  |   |                       |   |                  |      |      |                                                 |  |   | 17,593                |   |                  |   |        |                |      |   |                       |   | 16,773           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total assets                               |  | $              | 249,980 |   |                       |   |                  |      |      |                                                 |  | $ | 235,642               |   |                  |   |        |                |      |   |                       | $ | 230,515          |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Deposits:                                  |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Interest-bearing demand (NOW) deposits     |  |                | 28,872  |   |                       |   | 99               |      | 0.34 | %                                               |  | $ | 27,387                |   |                  | $ | 95     |                | 0.35 | % |                       | $ | 24,263           |   |  | $ | 103    |  | 0.42 | %
|Money market deposits                      |  |                | 15,306  |   |                       |   | 154              |      | 1.01 | %                                               |  |   | 17,085                |   |                  |   | 143    |                | 0.84 | % |                       |   | 17,244           |   |  |   | 173    |  | 1.00 | %
|Savings deposits                           |  |                | 23,857  |   |                       |   | 190              |      | 0.80 | %                                               |  |   | 22,767                |   |                  |   | 174    |                | 0.76 | % |                       |   | 20,072           |   |  |   | 180    |  | 0.90 | %
|Time deposits                              |  |                | 116,592 |   |                       |   | 3,542            |      | 3.04 | %                                               |  |   | 112,749               |   |                  |   | 2,987  |                | 2.65 | % |                       |   | 120,118          |   |  |   | 3,511  |  | 2.92 | %
|Federal funds purchased                    |  |                | 2,503   |   |                       |   | 101              |      | 4.03 | %                                               |  |   | 1,405                 |   |                  |   | 20     |                | 1.42 | % |                       |   | 270              |   |  |   | 5      |  | 1.85 | %
|FHLB advances & other borrowings           |  |                | 7,234   |   |                       |   | 382              |      | 5.29 | %                                               |  |   | 4,000                 |   |                  |   | 187    |                | 4.68 | % |                       |   | 3,561            |   |  |   | 101    |  | 2.84 | %
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total interest-bearing liabilities         |  | $              | 194,364 |   |                       | $ | 4,469            |      | 2.30 | %                                               |  | $ | 185,393               |   |                  | $ | 3,606  |                | 1.95 | % |                       | $ | 185,528          |   |  | $ | 4,073  |  | 2.20 | %
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Non-Interest Bearing Liabilities:          |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Demand deposits                            |  |                | 28,730  |   |                       |   |                  |      |      |                                                 |  |   | 25,139                |   |                  |   |        |                |      |   |                       |   | 20,894           |   |  |   |        |  |      |  
|Other liabilities                          |  |                | 1,417   |   |                       |   |                  |      |      |                                                 |  |   | 1,290                 |   |                  |   |        |                |      |   |                       |   | 1,805            |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total non-interest bearing liabilities     |  |                | 30,147  |   |                       |   |                  |      |      |                                                 |  |   | 26,429                |   |                  |   |        |                |      |   |                       |   | 22,699           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total liabilities                          |  |                | 224,511 |   |                       |   |                  |      |      |                                                 |  |   | 211,822               |   |                  |   |        |                |      |   |                       |   | 208,227          |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Stockholders equity                       |  |                | 25,469  |   |                       |   |                  |      |      |                                                 |  |   | 23,820                |   |                  |   |        |                |      |   |                       |   | 22,288           |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Total liabilities and stockholders equity |  | $              | 249,980 |   |                       |   |                  |      |      |                                                 |  | $ | 235,642               |   |                  |   |        |                |      |   |                       | $ | 230,515          |   |  |   |        |  |      |  
|                                           |  |                |         |   |                       |   |                  |      |      |                                                 |  |   |                       |   |                  |   |        |                |      |   |                       |   |                  |   |  |   |        |  |      |  
|Interest spread                            |  |                |         |   |                       |   |                  |      | 4.17 | %                                               |  |   |                       |   |                  |   |        |                | 4.25 | % |                       |   |                  |   |  |   |        |  | 4.16 | %
|Net interest margin                        |  |                |         |   |                       | $ | 10,567           |      | 4.55 | %                                               |  |   |                       |   |                  | $ | 9,902  |                | 4.54 | % |                       |   |                  |   |  | $ | 9,507  |  | 4.45 | %



|(1) | Income and yields are reported on a tax-equivalent basis assuming a federal tax rate of 34%.
|--- | --------------------------------------------------------------------------------------------



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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The following table summarizes changes in net interest income attributable to changes in the volume of
interest-bearing assets and liabilities compared to changes in interest rates.



RATE AND VOLUME ANALYSIS

(Dollars in thousands)



|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|---------------------------------------------------- |  | -------------------------------------------------------------------------------- | --- | - | ---------------------------------------------------------------------------------- | - | ---- | ----- |  | - | ----- | - |  | ------ | ---- | - | ----- | - | ---- | - |  | - | ---- | -
|                                                     |  | Year EndedDecember 31,2005Compared toDecember 31, 2004Increase (Decrease) Due to |     |   | Year Ended December 31,2004Compared to December 31, 2003Increase (Decrease) Due to |  
|                                                     |  | Rate                                                                             |     |   | Volume                                                                             |   |      | Total |  |   | Rate  |   |  | Volume |      |   | Total |  
|Interest Earned On:                                  |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Loans receivable                                     |  | $                                                                                | 614 |   |                                                                                    | $ | 666  |       |  | $ | 1,280 |   |  | $      | (138 | ) |       | $ | (97  | ) |  | $ | (235 | )
|Securities, taxable                                  |  | $                                                                                | (29 | ) |                                                                                    | $ | 104  |       |  | $ | 75    |   |  |        | (54  | ) |       |   | 86   |   |  | $ | 32   |  
|Securities, non-taxable                              |  | $                                                                                | (20 | ) |                                                                                    | $ | 199  |       |  | $ | 179   |   |  |        | (70  | ) |       |   | 179  |   |  | $ | 109  |  
|Equity securities                                    |  | $                                                                                | 4   |   |                                                                                    | $ | 5    |       |  | $ | 9     |   |  |        | (1   | ) |       |   | (3   | ) |  | $ | (4   | )
|Federal funds sold                                   |  | $                                                                                | 382 |   |                                                                                    | $ | (396 | )     |  | $ | (14   | ) |  |        | 21   |   |       |   | 5    |   |  | $ | 26   |  
|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Total interest income                                |  | $                                                                                | 952 |   |                                                                                    | $ | 577  |       |  | $ | 1,529 |   |  | $      | (242 | ) |       | $ | 170  |   |  | $ | (72  | )
|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Interest Paid On:                                    |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Interest bearing demand (NOW) deposits               |  | $                                                                                | (1  | ) |                                                                                    | $ | 5    |       |  | $ | 4     |   |  | $      | (27  | ) |       | $ | 19   |   |  | $ | (8   | )
|Money market deposits                                |  | $                                                                                | 23  |   |                                                                                    | $ | (12  | )     |  | $ | 11    |   |  | $      | (28  | ) |       |   | (2   | ) |  | $ | (30  | )
|Savings deposits                                     |  | $                                                                                | 8   |   |                                                                                    | $ | 9    |       |  | $ | 16    |   |  |        | (66  | ) |       |   | 60   |   |  | $ | (6   | )
|Time deposits                                        |  | $                                                                                | 450 |   |                                                                                    | $ | 105  |       |  | $ | 555   |   |  |        | (317 | ) |       |   | (207 | ) |  | $ | (524 | )
|Federal funds purchased                              |  | $                                                                                | 57  |   |                                                                                    | $ | 24   |       |  | $ | 81    |   |  |        | (1   | ) |       |   | 16   |   |  | $ | 15   |  
|Federal Home Loan Bank advances and other borrowings |  | $                                                                                | 27  |   |                                                                                    | $ | 168  |       |  | $ | 195   |   |  |        | 72   |   |       |   | 14   |   |  | $ | 86   |  
|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Total interest expense                               |  | $                                                                                | 564 |   |                                                                                    | $ | 299  |       |  | $ | 863   |   |  | $      | (367 | ) |       | $ | (100 | ) |  | $ | (467 | )
|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  
|Net interest income                                  |  | $                                                                                | 388 |   |                                                                                    | $ | 278  |       |  | $ | 666   |   |  | $      | 125  |   |       | $ | 270  |   |  | $ | 395  |  
|                                                     |  |                                                                                  |     |   |                                                                                    |   |      |       |  |   |       |   |  |        |      |   |       |   |      |   |  |   |      |  



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##### Table of Contents

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. BOE 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.



INTEREST SENSITIVITY ANALYSIS

December 31, 2005 (Dollars in thousands)



|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ----------- | - | ------- | ----------- |  | - | ------- | - |  | - | -------
|                                                                                |  | Maturing or Repricing In:
|                                                                                |  | < 3 Months                |        |   | 3-12 Months |   |         | Over 1 Year |  |   | Total  
|Interest-sensitive assets:                                                      |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Cash                                                                            |  | $                         | 7,365  |   |             | $ |        |             |  | $ |        |   |  | $ | 7,365  
|Loans                                                                           |  |                           | 72,503 |   |             |   | 30,638  |             |  |   | 79,316  |   |  |   | 182,457
|Securities                                                                      |  |                           | 1,422  |   |             |   | 10,811  |             |  |   | 44,348  |   |  |   | 56,581 
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Total interest-sensitive assets                                                 |  | $                         | 81,290 |   |             | $ | 41,449  |             |  | $ | 123,664 |   |  | $ | 246,403
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Interest-sensitive liabilities:                                                 |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Non-interest bearing deposits                                                   |  | $                         |       |   |             | $ |        |             |  | $ | 30,791  |   |  | $ | 30,791 
|Certificates of deposit                                                         |  |                           | 23,060 |   |             |   | 66,779  |             |  |   | 37,706  |   |  |   | 127,545
|Interest-bearing checking, money market deposits, NOW and savings accounts      |  |                           | 18,929 |   |             |   |        |             |  |   | 45,867  |   |  |   | 64,796 
|Federal funds purchased                                                         |  |                           | 1,810  |   |             |   |        |             |  |   |        |   |  |   | 1,810  
|FHLB advances                                                                   |  |                           |        |   |             |   |         |             |  |   | 5,000   |   |  |   | 5,000  
|Trust Preferred Securities                                                      |  |                           |       |   |             |   |        |             |  |   | 4,124   |   |  |   | 4,124  
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Total interest sensitive liabilities                                            |  | $                         | 43,799 |   |             | $ | 66,779  |             |  | $ | 123,488 |   |  | $ | 234,066
|                                                                                |  |                           |        |   |             |   |         |             |  |   |         |   |  |   |        
|Period gap                                                                      |  |                           | 37,491 |   |             |   | (25,330 | )           |  |   | 176     |   |  |   | 12,337 
|Cumulative gap                                                                  |  |                           | 37,491 |   |             |   | 12,161  |             |  |   | 12,337  |   |  |   |        
|Ratio of cumulative interest sensitive assets to interest sensitive liabilities |  |                           | 185.6  | % |             |   | 111.0   | %           |  |   | 105.3   | % |  |   |        
|Ratio of cumulative gap to interest sensitive assets                            |  |                           | 15.2   | % |             |   | 4.9     | %           |  |   | 5.0     | % |  |   |        



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 $240,000 in 2005, a decrease of $65,000, or
21.1%, compared to the $305,000 in provision for 2004. The provision for loan losses reflects a decrease of $266,000 in net charged-off loans in 2005. Net charged-off loans were $80,000 in 2005 after charging off $158,000 and recovering a total of
$79,000. This compares to $346,000 in net charge-offs in 2004 after charging off $431,000 in loans and recognizing $85,000 in recoveries.



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.



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##### Table of Contents

NON-INTEREST INCOME



Non-interest income in 2005 was $1.6 million, a decrease of $26,000, or 1.6%, from non-interest income of $1.6 million in 2004. Service charges on deposit
accounts decreased $8,000, or 0.8%, to $986,000 in 2005 from $994,000 in 2004. Other income increased 8.8%, or $45,000, in 2005. Other income was $556,000 in 2005 and $511,000 in 2004. Securities gains were $3,000 in 2005, a $63,000 decrease from
securities gains of $66,000 in 2004. Gains on sales of loans were $56,000 in 2005 and $57,000 in 2004, a $1,000 decrease. Net gains/(losses) on sales of other properties decreased $72,000, or 147.2%, from a $49,000 gain in 2004 to a $23,000 loss in
2005.



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 Company closed on the sale of an 1.837 acre
parcel adjoining its Bank of Essex 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 EXPENSE



Non-interest expense was $7.3 million in 2005, a $380,000, or 5.5% increase, over non-interest expense of $6.9 million in 2004. Salaries were $3.1 million in 2005 and were the largest component of this increase, $196,000, or 6.9%, over
salaries of $2.9 million in 2004. This increase was due to an increase in full-time equivalent employees from 88 in 2004 to 93 in 2005. Employee benefits were $982,000, up $178,000, or 22.1% higher than employee benefits in 2004 of $804,000. This
increase was due to the increase in full-time equivalent employees described above and continued increases in health industry costs provided to employees. Data processing expense of $530,000 in 2005 was 12.4%, or $59,000, higher than data processing
expense of $471,000 in 2004. Other operating expenses of $1.4 million were $32,000, or 2.3%, higher than other operating expenses of $1.4 million in 2004. Bank franchise tax increased $7,000, or 3.5%, in 2005 and was $222,000 compared to $214,000 in
2004.



Offsetting these increases in non-interest expenses were
the following. Stationary and printing expenses decreased $42,000, or 23.1%, and were $138,000 in 2005 compared to $180,000 in 2004. This was due in part to better supplies management as a result of consolidating several vendors into one. Furniture
and equipment related expenses were $415,000 in 2005 compared to $437,000 in 2004, a decrease of $22,000, or 5.1%. Decreases in costs associated with product specific support, service contracts and equipment rent accounted for $20,000 of this
change. Postage expense decreased $18,000, or 10.2%, and was $153,000 in 2005 compared to $171,000 in 2004. The reduction in postage expense was attributed to the timing of payments for postage advances. Occupancy expenses decreased $12,000, or
3.5%, and were $330,000 in 2005 compared to $342,000 in 2004. Improvements in occupancy expense were due to lower maintenance and repair costs in 2005.



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 Company 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 addition of trust preferred capital notes into the Bank of Essex capital base 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



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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.



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.



Net loans consist of total loans minus
the allowance for loan losses, unearned discounts and deferred loan fees. The Corporations net loans were $180.2 million at December 31, 2005, representing an increase of 14.4%, or $22.7 million more than net loans of $157.5 million at
December 31, 2004. The average balance of loans as a percentage of average earning assets was 74.2% in 2005, down slightly from 74.5% in 2004.



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, 2005, commitments for standby letters of credit totaled $4.6 million and
commitments to extend credit totaled $40.3 million. Commitments for standby letters of credit totaled $3.9 million at December 31, 2004 and commitments to extend credit totaled $41.9 million.



LOAN PORTFOLIO

(Dollars in thousands)



|                           |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                           |  | December 31, |        
|                           |  | 2005         |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Loans:                     |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                 |  | $            | 22,873  |   |      | $ | 23,534  |      |  | $ | 26,099  |   |  | $    | 33,428  |   |  | $ | 32,714  |  
|Real Estate                |  |              | 121,296 |   |      |   | 103,387 |      |  |   | 106,212 |   |  |      | 121,570 |   |  |   | 110,336 |  
|Real Estate  construction |  |              | 32,084  |   |      |   | 25,924  |      |  |   | 21,505  |   |  |      | 1,465   |   |  |   | 3,505   |  
|Installment & other        |  |              | 6,203   |   |      |   | 6,714   |      |  |   | 6,693   |   |  |      | 7,375   |   |  |   | 7,406   |  
|                           |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans                |  | $            | 182,456 |   |      | $ | 159,559 |      |  | $ | 160,509 |   |  | $    | 163,838 |   |  | $ | 153,961 |  
|Allowance for loan losses  |  |              | (2,249  | ) |      |   | (2,088  | )    |  |   | (2,128  | ) |  |      | (2,116  | ) |  |   | (2,084  | )
|                           |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loans                  |  | $            | 180,207 |   |      | $ | 157,471 |      |  | $ | 158,381 |   |  | $    | 161,722 |   |  | $ | 151,877 |  
|                           |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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Remaining Maturities of Selected Loan Categories



|                  |  |                 |        |                         |   |       
|----------------- |  | --------------- | ------ | ----------------------- | - | ------
|                  |  | Commercial      |        | Real EstateConstruction
|                  |  | ( in thousands)
|Within one year   |  | $               | 14,520 |                         | $ | 30,769
|                  |  |                 |        |                         |   |       
|                  |  |                
|Variable Rate     |  |                 |        |                         |   |       
|One to five years |  | $               | 3,191  |                         | $ | 364   
|After five years  |  | $               | 272    |                         |   |      
|                  |  |                 |        |                         |   |       
|Total             |  | $               | 3,463  |                         | $ | 364   
|                  |  |                 |        |                         |   |       
|                  |  |                
|Fixed Rate        |  |                 |        |                         |   |       
|One to five years |  | $               | 4,036  |                         | $ | 919   
|After five years  |  | $               | 854    |                         | $ | 32    
|                  |  |                 |        |                         |   |       
|Total             |  | $               | 4,890  |                         | $ | 951   
|                  |  |                 |        |                         |   |       
|Total Maturities  |  | $               | 22,873 |                         | $ | 32,084
|                  |  |                 |        |                         |   |       



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, 2005 or 2004.



The Corporations credit policies generally require a
loan-to-value ratio of 85% for secured loans. At December 31, 2005, loans past due 90 days or more and still accruing interest totaled $260,000, of which $139,000 was secured by real estate and the remainder was secured and unsecured commercial
and installment loans. As of December 31, 2004, loans past due 90 days or more and still accruing totaled $100,000, all of which was secured by real estate. Non-accrual loans at December 31, 2005 were $174,000 and at December 31, 2004
non-accrual loans were $340,000.



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NON-PERFORMING ASSETS

(Dollars in thousands)



|                                                  |  |              |      |   |      |   |      |      |  |   |       |   |  |      |       |   |  |   |      |  
|------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ---- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ---- | -
|                                                  |  | December 31, |     
|                                                  |  | 2005         |      |   | 2004 |   |      | 2003 |  |   | 2002  |   |  | 2001 |      
|Nonaccrual and impaired loans                     |  | $            | 174  |   |      | $ | 340  |      |  | $ | 1,737 |   |  | $    | 2,411 |   |  | $ | 760  |  
|Restructured loans                                |  |              |     |   |      |   |     |      |  |   |      |   |  |      |      |   |  |   |     |  
|                                                  |  |              |      |   |      |   |      |      |  |   |       |   |  |      |       |   |  |   |      |  
|Total nonperforming loans                         |  | $            | 174  |   |      | $ | 340  |      |  | $ | 1,737 |   |  | $    | 2,411 |   |  | $ | 760  |  
|Foreclosed assets                                 |  |              |     |   |      |   |     |      |  |   |      |   |  |      |      |   |  |   |     |  
|                                                  |  |              |      |   |      |   |      |      |  |   |       |   |  |      |       |   |  |   |      |  
|Total nonperforming assets                        |  | $            | 174  |   |      | $ | 340  |      |  | $ | 1,737 |   |  | $    | 2,411 |   |  | $ | 760  |  
|                                                  |  |              |      |   |      |   |      |      |  |   |       |   |  |      |       |   |  |   |      |  
|                                                  |  |              |      |   |     
|Loans past due 90 or more days accruing interest  |  | $            | 260  |   |      | $ | 100  |      |  | $ | 285   |   |  | $    | 102   |   |  | $ | 988  |  
|Nonperforming loans to total loans, at period end |  |              | 0.10 | % |      |   | 0.21 | %    |  |   | 1.08  | % |  |      | 1.47  | % |  |   | 0.49 | %
|Nonperforming assets to period end assets         |  |              | 0.07 | % |      |   | 0.14 | %    |  |   | 0.75  | % |  |      | 1.06  | % |  |   | 0.35 | %



The Corporation had
six potential problem loans not included in non-performing loans at December 31, 2005. These relationships total $1.7 million, with $521,000 in reserve. These loans were performing at December 31, 2005 but the Corporation has questions
about their 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 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, 2005, the allowance for loan
losses amounted to $2.2 million, or 1.23% of total loans. The Corporations allowance for loan losses were $2.1 million at December 31, 2004, or 1.31% of total loans.



24



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##### Table of Contents

ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)



|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|-------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - |  | - | ------ | -
|                                                   |  | Years ended December 31, |        
|                                                   |  | 2005                     |         |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |      
|Balance, beginning of period                       |  | $                        | 2,088   |   |      | $ | 2,129  |      |  | $ | 2,116  |   |  | $    | 2,084 |   |  | $ | 1,819  |  
|Less chargeoffs:                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Commercial                                         |  |                          | 35      |   |      |   | 128    |      |  |   | 613    |   |  |      | 943   |   |  |   | 21     |  
|Installment                                        |  |                          | 124     |   |      |   | 265    |      |  |   | 203    |   |  |      | 262   |   |  |   | 150    |  
|Real estate                                        |  |                          | 0       |   |      |   | 38     |      |  |   | 13     |   |  |      | 39    |   |  |   |       |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Total chargeoffs                                   |  |                          | 159     |   |      |   | 431    |      |  |   | 829    |   |  |      | 1,244 |   |  |   | 171    |  
|Plus recoveries:                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Commercial                                         |  |                          | 15      |   |      |   | 24     |      |  |   | 98     |   |  |      | 17    |   |  |   | 3      |  
|Installment                                        |  |                          | 54      |   |      |   | 55     |      |  |   | 44     |   |  |      | 51    |   |  |   | 43     |  
|Real estate                                        |  |                          | 11      |   |      |   | 6      |      |  |   |       |   |  |      |      |   |  |   |       |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Total recoveries                                   |  |                          | 80      |   |      |   | 85     |      |  |   | 142    |   |  |      | 68    |   |  |   | 46     |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Net chargeoffs                                     |  |                          | 79      |   |      |   | 346    |      |  |   | 687    |   |  |      | 1,176 |   |  |   | 125    |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Provision for loan losses                          |  |                          | 240     |   |      |   | 305    |      |  |   | 700    |   |  |      | 1,208 |   |  |   | 390    |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Balance, end of period                             |  | $                        | 2,249   |   |      | $ | 2,088  |      |  | $ | 2,129  |   |  | $    | 2,116 |   |  | $ | 2,084  |  
|                                                   |  |                          |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|                                                   |  |                          |         |   |     
|Allowance for loan losses to period end loans      |  |                          | 1.23    | % |      |   | 1.31   | %    |  |   | 1.33   | % |  |      | 1.29  | % |  |   | 1.35   | %
|                                                   |  |                          |         |   |     
|Allowance for loan losses to non performing assets |  |                          | 1292.53 | % |      |   | 614.12 | %    |  |   | 122.57 | % |  |      | 87.76 | % |  |   | 274.21 | %
|                                                   |  |                          |         |   |     
|Net chargeoffs to average loans                    |  |                          | 0.05    | % |      |   | 0.21   | %    |  |   | 0.42   | % |  |      | 0.74  | % |  |   | 0.08   | %



ALLOCATION OF ALLOWANCE FOR LOAN
LOSSES

(Dollars in thousands)



|            |  |              |       |             |       |   |      |   |             |  |       |      |  |             |       |  |       |   |             |   |       |      |       |             |  |   |       |  |       |  
|----------- |  | ------------ | ----- | ----------- | ----- | - | ---- | - | ----------- |  | ----- | ---- |  | ----------- | ----- |  | ----- | - | ----------- | - | ----- | ---- | ----- | ----------- |  | - | ----- |  | ----- | -
|            |  | December 31, |      
|            |  | 2005         |       | Percent (1) |       |   | 2004 |   | Percent (1) |  |       | 2003 |  | Percent (1) |       |  | 2002  |   | Percent (1) |   |       | 2001 |       | Percent (1) | 
|Commercial  |  | $            | 524   |             | 12.5  | % |      | $ | 428         |  | 14.7  | %    |  | $           | 346   |  | 16.3  | % |             | $ | 432   |      | 20.4  | %           |  | $ | 1,863 |  | 21.2  | %
|Installment |  |              | 141   |             | 3.4   | % |      |   | 180         |  | 4.2   | %    |  |             | 89    |  | 4.2   | % |             |   | 95    |      | 4.5   | %           |  |   | 18    |  | 4.8   | %
|Real Estate |  |              | 1,584 |             | 84.1  | % |      |   | 1,480       |  | 81.1  | %    |  |             | 1,694 |  | 79.6  | % |             |   | 1,589 |      | 75.1  | %           |  |   | 203   |  | 74.0  | %
|            |  |              |       |             |       |   |      |   |             |  |       |      |  |             |       |  |       |   |             |   |       |      |       |             |  |   |       |  |       |  
|            |  | $            | 2,249 |             | 100.0 | % |      | $ | 2,088       |  | 100.0 | %    |  | $           | 2,129 |  | 100.0 | % |             | $ | 2,116 |      | 100.0 | %           |  | $ | 2,084 |  | 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 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 $52.4 million at December 31, 2005, compared to
$55.0 million at December 31, 2004.



The Company 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, 2005 securities available-for-sale
portfolio was $121,000 less than the associated book value of these securities. On December 31, 2004 the market value of securities available-for-sale exceeded their book value by $1.2 million. As of December 31, 2005 the book value of the
investment portfolio decreased $1.2 million, or 2.3%, from $53.8 million at December 31, 2004 to $52.5 million at December 31, 2005. This decrease in BOEs investment portfolio was in response to increased loan account balances
and a competitive environment for deposit funding.



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SECURITIES PORTFOLIO

(Dollars in thousands)



|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|------------------------------------------------------ |  | -------------- | ------ | ---------- | - | -------------- |  | ---------- | ------ | -------------- | - | ---------- |  | - | ------ |  | - | ------
|                                                       |  | 2005           |        | 2004       |   | 2003          
|                                                       |  | 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  |            | $ | 2,933          |  | $          | 3,000  |                | $ | 3,000      |  | $ |       |  | $ |      
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total Held-to-Maturity                                 |  | $              | 3,000  |            | $ | 2,933          |  | $          | 3,000  |                | $ | 3,000      |  | $ |       |  | $ |      
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|                                                       |  |                |       
|                                                       |  |                | 2005   |            |   | 2004           |  |            | 2003  
|                                                       |  | 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 |  | $              | 14,633 |            | $ | 14,233         |  | $          | 17,129 |                | $ | 17,057     |  | $ | 14,049 |  | $ | 14,099
|State, county and municipal                            |  |                | 36,834 |            |   | 36,849         |  |            | 33,720 |                |   | 34,733     |  |   | 31,373 |  |   | 32,868
|Other                                                  |  |                | 1,047  |            |   | 1,311          |  |            | 2,904  |                |   | 3,165      |  |   | 4,803  |  |   | 5,233 
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total Available-for-Sale                               |  | $              | 52,514 |            | $ | 52,393         |  | $          | 53,753 |                | $ | 54,955     |  | $ | 50,225 |  | $ | 52,200
|                                                       |  |                |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       



The following table
summarizes the contractual maturity of securities and their weighted average yields:



SECURITIES PORTFOLIO  MATURITY AND YIELDS

(Dollars in thousands)



|                                                       |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|------------------------------------------------------ |  | ----------------- | ----- | - | ----------- | - | ------ | ------------ |  | - | ------------ | - |  | ----- | ----- | - |  | - | ------ | -
|                                                       |  | December 31, 2005 |      
|                                                       |  | Under 1Year       |       |   | 1 to 5Years |   |        | 5 to 10Years |  |   | Over 10Years |   |  | Total |      
|Maturity Distribution:                                 |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|U.S. Treasury Issue and other U.S. Government agencies |  | $                 | 2,962 |   |             | $ | 11,271 |              |  | $ |             |   |  | $     | 2,933 |   |  | $ | 17,166 |  
|State, county and municipal-tax exempt                 |  |                   | 3,038 |   |             |   | 18,135 |              |  |   | 12,562       |   |  |       | 581   |   |  |   | 34,316 |  
|State, county and municipal-taxable                    |  |                   | 497   |   |             |   | 1,194  |              |  |   | 842          |   |  |       |      |   |  |   | 2,533  |  
|Other                                                  |  |                   | 201   |   |             |   | 810    |              |  |   |             |   |  |       | 300   |   |  |   | 1,311  |  
|                                                       |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|Total Investment Securities                            |  | $                 | 6,698 |   |             | $ | 31,410 |              |  | $ | 13,404       |   |  | $     | 3,814 |   |  | $ | 55,326 |  
|                                                       |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|Weighted Average Yield:                                |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|U.S. Treasury Issue and other U.S. Government agencies |  |                   | 3.29  | % |             |   | 3.67   | %            |  |   | 0.00         | % |  |       | 6.00  | % |  |   | 4.00   | %
|State, county and municipal-tax exempt                 |  |                   | 5.85  | % |             |   | 5.75   | %            |  |   | 5.17         | % |  |       | 5.27  | % |  |   | 5.53   | %
|State, county and municipal-taxable                    |  |                   | 4.59  | % |             |   | 5.24   | %            |  |   | 4.87         | % |  |       | 0.00  | % |  |   | 4.97   | %
|Other                                                  |  |                   | 5.30  | % |             |   | 6.82   | %            |  |   | 0.00         | % |  |       | 3.80  | % |  |   | 5.89   | %
|                                                       |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  
|Weighted Average Yield by Category                     |  |                   | 4.61  | % |             |   | 5.01   | %            |  |   | 5.15         | % |  |       | 5.72  | % |  |   | 5.04   | %
|                                                       |  |                   |       |   |             |   |        |              |  |   |              |   |  |       |       |   |  |   |        |  



DEPOSITS



The Corporation primarily uses deposits to fund its loans and investment
portfolio. In 2005 the Corporations deposits grew $16.2 million, or 7.8%. Total deposits at December 31, 2005 were $223.1 million compared to $207.0 million at December 31, 2004. Certificates of deposit increased $14.2 million, or
12.6%, from $113.4 million at December 31, 2004 to $127.6 million at December 31, 2005. This was the largest component of growth in deposits in 2005. Non-interest bearing demand deposits were the only other deposit



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category experiencing growth in 2005. Non-interest bearing deposits were $30.8 million at December 31, 2005, a $5.2 million, or 20.3%, increase from
$25.6 million at December 31, 2004. Offsetting these increases to deposit growth was a $3.1 million, or 12.5%, decrease in savings deposits. Savings deposits were $25.2 million at December 31, 2004 compared to $22.1 million at
December 31, 2005. NOW accounts decreased $337,000, or 1.2%, from $28.0 million at December 31, 2004 to $27.7 million at December 31, 2005. Money Market Deposit Accounts (MMDA) increased $232,000, or 1.6%, from $14.7 million at
December 31, 2004 to $15.0 million at December 31, 2005.



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 Companys net interest margin and in response to a second consecutive year of declining loan balances. Certificates of deposit increased only $726,000 in 2004, or 0.6%, from $112.7 million at December 31, 2003 to $113.4 million at
December 31, 2004. The largest component of 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 20.32%. 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 $39.9 million at December 31, 2005 and $23.0 million at
December 31, 2004, an increase of $16.9 million, or 73.5%.



The average deposits and rates paid for the past three years and maturities of certificates of deposit of $100,000 and over as December 31, 2005 are as follows:



AVERAGE DEPOSITS AND AVERAGE RATES PAID

(Dollars in thousands)



|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                |  | Year Ended December 31, |        
|                                |  | 2005                    |         |             | 2004 |   |                | 2003 |            
|                                |  | AverageBalance          |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|Interest bearing deposits:      |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|NOW accounts                    |  | $                       | 28,872  |             | 0.34 | % |                | $    | 27,387      |  | 0.35 | %              |  | $           | 24,263  |  | 0.42 | %
|Money market deposits           |  |                         | 15,306  |             | 1.01 | % |                |      | 17,085      |  | 0.84 | %              |  |             | 17,244  |  | 1.00 | %
|Regular savings                 |  |                         | 23,857  |             | 0.80 | % |                |      | 22,767      |  | 0.76 | %              |  |             | 20,072  |  | 0.90 | %
|Certificates of deposit         |  |                         | 116,592 |             | 3.04 | % |                |      | 112,749     |  | 2.65 | %              |  |             | 120,118 |  | 2.92 | %
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest bearing deposits |  | $                       | 184,627 |             | 2.16 | % |                | $    | 179,988     |  | 1.89 | %              |  | $           | 181,697 |  | 2.18 | %
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Noninterest bearing deposits    |  |                         | 28,730  |             |      |   |                |      | 25,139      |  |      |                |  |             | 20,894  |  |      |  
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total deposits                  |  | $                       | 213,357 |             |      |   |                | $    | 205,127     |  |      |                |  | $           | 202,591 |  |      |  
|                                |  |                         |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  



MATURITIES OF CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 2005

(Dollars in thousands)



|                                |  |         |        |         |        |  
|------------------------------- |  | ------- | ------ | ------- | ------ | -
|                                |  | Dollars |        | Percent |       
|Three months or less            |  | $       | 7,572  |         | 18.99  | %
|Over three months to six months |  |         | 5,688  |         | 14.27  | %
|Over six months to one year     |  |         | 16,605 |         | 41.66  | %
|Over one year                   |  |         | 9,999  |         | 25.08  | %
|                                |  |         |        |         |        |  
|                                |  | $       | 39,864 |         | 100.00 | %
|                                |  |         |        |         |        |  



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SHORT-TERM BORROWINGS



BOE occasionally finds it necessary to purchase funds on a short-term basis due to fluctuations in loan and deposit levels. BOE has several arrangements
under which it may purchase funds. Federal Funds guidance facilities are maintained with correspondent banks totaling $19.1 million for the year ending December 31, 2005. $1.8 million was drawn on these facilities at December 31, 2005. As
another means of borrowing funds, BOE may borrow from the Federal Home Loan Bank of Atlanta. Total expense on Federal Home Loan Bank of Atlanta borrowings in 2005 was $119,000 and in 2004 as $0. Total expense on Federal Funds purchased and other
borrowings was $101,000 in 2005 and $20,000 in 2004.



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 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 Company engaged in a trust preferred offering, raising $4.1 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 a weighted average rate of 6.29% during 2005.



The following table shows the Corporations capital ratios:



CAPITAL RATIOS



|                          |  |              |   |  |       |   |  |       |  
|------------------------- |  | ------------ | - |  | ----- | - |  | ----- | -
|                          |  | December 31, |  
|                          |  | 2005         |   |  | 2004  |   |  | 2003  |  
|Tier 1 Risk-based Capital |  | 14.76        | % |  | 15.31 | % |  | 13.70 | %
|Total Risk-based Capital  |  | 15.67        | % |  | 16.49 | % |  | 14.88 | %
|Leverage Ratio            |  | 11.55        | % |  | 11.50 | % |  | 10.80 | %



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.



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As of December 31, 2005, cash, federal funds sold and available-for-sale securities represented
26.37% of deposits and other liabilities compared to 30.85% at December 31, 2004. Managing loan maturities also provides asset liquidity. At December 31, 2005 approximately $103.1 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, |        
|                                                         |  | 2005         |         |   | 2004 |   |         | 2003 | 
|Cash and due from banks                                  |  | $            | 7,365   |   |      | $ | 4,354   |      |  | $ | 8,949   |  
|Federal funds sold                                       |  |              | 0       |   |      |   | 5,064   |      |  |   | 285     |  
|Investment securities                                    |  |              | 0       |   |      |   |        |      |  |   |        |  
|Available for sale securities, at fair value             |  |              | 52,393  |   |      |   | 54,955  |      |  |   | 52,200  |  
|                                                         |  |              |         |   |      |   |         |      |  |   |         |  
|Total liquid assets                                      |  | $            | 59,758  |   |      | $ | 64,373  |      |  | $ | 61,434  |  
|                                                         |  |              |         |   |      |   |         |      |  |   |         |  
|Deposits and other liabilities                           |  | $            | 226,572 |   |      | $ | 208,657 |      |  | $ | 204,795 |  
|Ratio of liquid assets to deposits and other liabilities |  |              | 26.37   | % |      |   | 30.85   | %    |  |   | 30.00   | %



FINANCIAL RATIOS



Financial ratios give investors a way to compare Corporations within
industries to analyze financial performance. 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 1.24% in 2005 and 1.23% in 2004. Return on average equity is net income as a percentage of average shareholders equity. It provides a measure of how productively a Corporations equity has been employed. BOEs return on average
equity was 12.18% in 2005 and 12.12% in 2004. 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. BOE has a
dividend payout ratio of 28.13% in 2005 and 25.90% in 2004. The Corporation utilizes leverage within guidelines prescribed by federal banking regulators as described in the section Capital Requirements in the preceding section. Leverage
is average stockholders equity divided by total quarterly average assets. This ratio was 10.19% in 2005 and 10.11% in 2004.



FINANCIAL RATIOS



|                                      |  |                          |   |  |       |   |  |       |  
|------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                      |  | Years ended December 31, |  
|                                      |  | 2005                     |   |  | 2004  |   |  | 2003  |  
|Return on average assets              |  | 1.24                     | % |  | 1.23  | % |  | 1.04  | %
|Return on average equity              |  | 12.18                    | % |  | 12.12 | % |  | 10.80 | %
|Dividend payout ratio                 |  | 28.13                    | % |  | 25.90 | % |  | 27.45 | %
|Average equity to average asset ratio |  | 10.19                    | % |  | 10.11 | % |  | 9.66  | %



FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND CREDIT RISK AND CONTRACTUAL OBLIGATIONS



The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients and to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and interest rate swaps.



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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 or notional 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 amount of the Banks exposure to
off-balance-sheet risk as of December 31, 2005 and 2004, is as follows:



|                                                                    |  |                |        |      |   |       
|------------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                                    |  | 2005           |        | 2004
|                                                                    |  | (In thousands)
|Financial instruments whose contract amounts represent credit risk: |  |                |        |      |   |       
|Commitments to extend credit                                        |  | $              | 40,381 |      | $ | 41,921
|Standby letters of credit                                           |  |                | 4,602  |      |   | 3,890 



Commitments to extend
credit are agreements to lend to a client 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 client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.



Unfunded commitments
under lines of credit are commitments for possible future extensions of credit to existing clients. Those lines of credit 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 client 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 clients. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is
deemed necessary.



A summary of the Corporations
contractual obligations at December 31, 2005 is as follows:



|                              |  |                       |        |                |   |          |  |          |   |                  |   |   |  |   |      
|----------------------------- |  | --------------------- | ------ | -------------- | - | -------- |  | -------- | - | ---------------- | - | - |  | - | -----
|                              |  | Payment Due by Period
|                              |  | (In thousands)       
|Contractual Obligations       |  | Total                 |        | Lessthan 1Year |   | 1-3years |  | 3-5Years |   | Morethan 5 Years
|Federal Funds Purchased       |  | $                     | 1,810  |                | $ | 1,810    |  | $        |  |                  | $ |  |  | $ |     
|FHLB Advances                 |  |                       | 5,000  |                |   |         |  |          |  |                  |   |  |  |   | 5,000
|Trust Preferred Capital Notes |  |                       | 4,124  |                |   |         |  |          |  |                  |   |  |  |   | 4,124
|                              |  |                       |        |                |   |          |  |          |   |                  |   |   |  |   |      
|Total Obligations             |  | $                     | 10,934 |                | $ | 1,810    |  | $        |  |                  | $ |  |  | $ | 9,124
|                              |  |                       |        |                |   |          |  |          |   |                  |   |   |  |   |      



The Company does not
have any capital lease obligations, as classified under applicable FASB statements, or other purchase or long-term obligations.



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RECENT ACCOUNTING PRONOUNCEMENTS



In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1). The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement
of an impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock. The FSP applies to investments in debt and equity securities and cost-method investments. The application guidance within the FSP includes items to consider in determining whether an investment is impaired, evaluating if an impairment
is other than temporary and recognizing impairment losses equal to the difference between the investments cost and its fair value when an impairment is determined. FSP 115-1 is required for all reporting periods beginning after December 15,
2005. Earlier application is permitted. The Corporation does not anticipate the amendment will have a material effect on its financial statements.



In May 2005, the Financial Accounting Standards Board (FASB) issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of
APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change
in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or
amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a
restatement.  The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not anticipate this revision will have a material effect on its
financial statements.



In December 2004, FASB issued Statement
No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. SFAS No. 123R replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Share-based compensation arrangements include share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS No. 123R requires all share-based payments to employees to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable
vesting period. SFAS No. 123R also amends SFAS No. 95 Statement of Cash Flows requiring the benefits of tax deductions in excess of recognized compensation cost be reported as financing instead of operating cash flows. The Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB No. 107), which expresses the SECs views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. Additionally, SAB No. 107 provides guidance
related to share-based payment transactions for public companies. The Corporation will be required to apply SFAS No. 123R as of the annual reporting period that begins after September 15, 2005. The Corporation does not anticipate this revision will
have a material effect on its financial statements.



In
December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3).
SOP 03-3 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. It includes loans purchased by the Corporation or acquired in business combinations. SOP 03-3 does not apply to loans



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originated by the Corporation. The Corporation adopted the provisions of SOP 03-3 effective January 1, 2005. The initial implementation had no material
effect on the Corporations financial statements.



STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS



This report contains
statements concerning the Corporations expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute forward-looking statements as defined by
federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such
statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: interest rates, general economic conditions, the legislative/regulatory climate,
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand
for financial services in the Corporations market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are
cautioned not to place undue reliance on such statements, which speak only as of the date they are made.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates
and equity prices. The Corporations market risk is composed primarily of interest rate risk. The Corporations Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and
establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by ALCO.



Interest rate risk is monitored through the use of two complimentary modeling tools: earnings simulation modeling and economic value simulation (net
present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude
of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Earnings simulation and economic value models,
which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.



Earnings Simulation Analysis



Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings
estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that management has input, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other
potential analyses.



Assumptions used in the model are derived
from historical trends and managements outlook and include loan and deposit growth rates and projected yields and rates. Such assumptions are monitored and periodically adjusted as appropriate. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning.
Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in
the different rate scenarios.



The Corporation uses its
simulation model to estimate earnings in rate environments where rates ramp up or down around a most likely rate scenario, based on implied forward rates. The analysis assesses the impact on net interest income over a 12 month time
horizon by applying 12-month shock versus the implied forward rates



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of 200 basis points up and down. The following table represents the interest rate sensitivity on net interest income for the Corporation across the rate
paths modeled as of December 31, 2005:



|                          |  |                               |   |  |                  |    
|------------------------- |  | ----------------------------- | - |  | ---------------- | ---
|                          |  | Change in Net Interest Income
|Change in Yield Curve     |  | (Percent)                     |   |  | ($ in thousands)
|+200 basis points         |  | -0.36                         | % |  | $                | -41
|Most likely rate scenario |  | 0.00                          | % |  |                  |   
|-200 basis points         |  | -0.81                         | % |  |                  | -94



Economic Value Simulation



Economic value simulation is used to determine the
estimated fair value of assets and liabilities over different interest rate scenarios. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic
value of all liabilities. The change in net economic value over different rate scenarios is an indication of the longer term earnings sensitivity capability of the balance sheet. The same assumptions are used in the economic value simulation as in
the earnings simulation. The economic value simulation uses simultaneous rate shocks to the balance sheet, whereas the earnings simulation uses rate shock over 12 months. The following chart reflects the estimated change in net economic value over
different rate environments using economic value simulation as of December 31, 2005:



|                          |  |                                    |   |  |                  |        
|------------------------- |  | ---------------------------------- | - |  | ---------------- | -------
|                          |  | Change in Economic Value of Equity
|Change in Yield Curve     |  | (Percent)                          |   |  | ($ in thousands)
|+200 basis points         |  | -12.86                             | % |  |                  | $-4,639
|Most likely rate scenario |  | 0.00                               | % |  |                  |       
|-200 basis points         |  | 4.80                               | % |  |                  | 1,731  



I
TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The following financial statements are filed as a part of this report following ITEM 15. Exhibits, Financial Statement Schedules.



| | 1. | Report of Independent Registered Public Accounting Firm
| | -- | -------------------------------------------------------



| | 2. | Consolidated Balance Sheets as of December 31, 2005 and 2004
| | -- | ------------------------------------------------------------



| | 3. | Consolidated Statements of Income for the three years ended December 31, 2005
| | -- | -----------------------------------------------------------------------------



| | 4. | Consolidated Statements of Changes in Shareholders Equity for the three years ended December 31, 2005
| | -- | ------------------------------------------------------------------------------------------------------



| | 5. | Consolidated Statements of Cash Flows for the three years ended December 31, 2005
| | -- | ---------------------------------------------------------------------------------



| | 6. | Notes to Consolidated Financial Statements
| | -- | ------------------------------------------



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



As of the end of the period to which this report relates, the Corporation has carried out an evaluation, under the supervision and with the participation of the Corporations management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the Corporations disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based upon that evaluation, the



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##### Table of Contents

Corporations Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures are effective
in timely alerting them to material information relating to the Corporations (including its consolidated subsidiaries) required to be included in the Corporations periodic SEC filings. There have been no significant changes in the
Corporations internal controls or in other factors that could significantly affect internal controls subsequent to the date the Corporation carried out its evaluation.



ITEM 9B. OTHER INFORMATION



None.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



All required information is detailed in the Companys 2006 definitive proxy statement for the annual meeting of shareholders (Definitive Proxy Statement), which is expected to be filed with the SEC
within the required time period, and is incorporated herein by reference.



ITEM 11. EXECUTIVE COMPENSATION



Information on executive compensation is provided in the Definitive Proxy Statement and is incorporated herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



Information on security ownership of certain beneficial owners and management and related stockholder matters is provided in the Definitive Proxy
Statement, and is incorporated herein by reference.



The
following table summarizes information, as of December 31, 2005, 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, 2005



|                                                       |  |                                                                 |  |                                                      |  |                                                                 
|------------------------------------------------------ |  | --------------------------------------------------------------- |  | ---------------------------------------------------- |  | ----------------------------------------------------------------
|                                                       |  | Number of shares tobe Issued UponExercise ofOutstanding Options |  | Weighted-AverageExercise Price ofOutstanding Options |  | Number of sharesRemaining Availableof Future IssuanceUnder Plans
|Equity compensation plans approved by shareholders     |  | 37,589                                                          |  | 23.87                                                |  | 53,707                                                          
|Equity compensation plans not approved by shareholders |  |                                                                |  |                                                     |  |                                                                
|Total                                                  |  | 37,589                                                          |  | 23.87                                                |  | 53,707                                                          



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information on certain relationships and related transactions are detailed in the Definitive Proxy Statement and incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES



Information on principal accounting fees and services is provided in the Definitive Proxy Statement and is incorporated herein by reference.



34



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##### Table of Contents

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND SIGNATURES
|-------- | ---------------------------------------------------------



(a) Exhibit Listing



|               |  |                                                                                                                                                                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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).                                                                               
|               | 
|13             |  | The Corporations 2005 Annual Report to Shareholders (filed herewith as financials to the Form 10-K).                                                                                                                                                            
|               | 
|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.)                                                                                                    



35



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##### Table of Contents







BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Tappahannock, Virginia



CONSOLIDATED
FINANCIAL REPORT



DECEMBER 31, 2005



---

##### Table of Contents

C O N T E N T S



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | 1   
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS                       |  |     
|                                                        | 
|Consolidated balance sheets                             |  | 2   
|                                                        | 
|Consolidated statements of income                       |  | 3   
|                                                        | 
|Consolidated statements of stockholders equity         |  | 4   
|                                                        | 
|Consolidated statements of cash flows                   |  | 5   
|                                                        | 
|Notes to consolidated financial statements              |  | 6-29



---

##### 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, 2005 and 2004, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the 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, 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, 2005 and 2004, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.



LOGO

Winchester, Virginia

January 25, 2006



F-1



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Balance Sheets

December 31, 2005 and 2004



|                                                                                                               |  |      |             |   |      |   |            
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|Assets                                                                                                         |  | 2005 |             |   | 2004
|Cash and due from banks                                                                                        |  | $    | 7,365,111   |   |      | $ | 4,353,745  
|Federal funds sold                                                                                             |  |      |            |   |      |   | 5,064,000  
|Securities available for sale, at fair value                                                                   |  |      | 52,392,786  |   |      |   | 54,955,245 
|Securities held to maturity (fair value approximates 2,932,500 in 2005 and 3,000,000 in 2004)                  |  |      | 3,000,000   |   |      |   | 3,000,000  
|Equity securities, restricted, at cost                                                                         |  |      | 1,188,200   |   |      |   | 832,800    
|Loans held for sale                                                                                            |  |      |            |   |      |   | 360,643    
|Loans, net of allowance for loan losses of 2,248,658 in 2005 and 2,088,329 in 2004                             |  |      | 180,207,461 |   |      |   | 157,471,472
|Bank premises and equipment, net                                                                               |  |      | 7,656,421   |   |      |   | 6,447,957  
|Accrued interest receivable                                                                                    |  |      | 1,190,466   |   |      |   | 1,153,594  
|Intangible assets, net                                                                                         |  |      | 650,086     |   |      |   | 775,909    
|Other assets                                                                                                   |  |      | 8,280,231   |   |      |   | 2,710,198  
|                                                                                                               |  |      |             |   |      |   |            
|Total assets                                                                                                   |  | $    | 261,930,762 |   |      | $ | 237,125,563
|                                                                                                               |  |      |             |   |      |   |            
|Liabilities and Stockholders' Equity                                                                           |  |      |             |   |      |   |            
|Liabilities                                                                                                    |  |      |             |   |      |   |            
|Deposits:                                                                                                      |  |      |             |   |      |   |            
|Noninterest-bearing                                                                                            |  | $    | 30,790,902  |   |      | $ | 25,605,135 
|Interest-bearing                                                                                               |  |      | 192,340,804 |   |      | $ | 181,367,584
|                                                                                                               |  |      |             |   |      |   |            
|Total deposits                                                                                                 |  | $    | 223,131,706 |   |      |   | 206,972,719
|Federal funds purchased                                                                                        |  |      | 1,810,000   |   |      |   |           
|Federal Home Loan Bank advances                                                                                |  |      | 5,000,000   |   |      |   |           
|Trust preferred capital notes                                                                                  |  |      | 4,124,000   |   |      |   | 4,124,000  
|Accrued interest payable                                                                                       |  |      | 526,095     |   |      |   | 319,401    
|Other liabilities                                                                                              |  |      | 1,104,324   |   |      |   | 1,028,687  
|                                                                                                               |  |      |             |   |      |   |            
|Total liabilities                                                                                              |  | $    | 235,696,125 |   |      | $ | 212,444,807
|                                                                                                               |  |      |             |   |      |   |            
|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 1,198,059 and 1,188,951 shares |  |      | 5,990,295   |   |      |   | 5,944,755  
|Additional paid-in capital                                                                                     |  |      | 5,264,250   |   |      |   | 5,110,776  
|Retained earnings                                                                                              |  |      | 15,059,873  |   |      |   | 12,831,641 
|Accumulated other comprehensive income (loss), net                                                             |  |      | (79,781     | ) |      |   | 793,584    
|                                                                                                               |  |      |             |   |      |   |            
|Total stockholders equity                                                                                     |  | $    | 26,234,637  |   |      | $ | 24,680,756 
|                                                                                                               |  |      |             |   |      |   |            
|Total liabilities and stockholders equity                                                                     |  | $    | 261,930,762 |   |      | $ | 237,125,563
|                                                                                                               |  |      |             |   |      |   |            



See Notes to
Consolidated Financial Statements.



F-2



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Income

Three Years Ended December 31, 2005



|                                                    |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2005 |            | 2004 |   | 2003      
|Interest and Dividend Income                        |  |      |            |      |   |            |  |   |           
|Interest and fees on loans                          |  | $    | 11,943,617 |      | $ | 10,663,837 |  | $ | 10,899,057
|Interest and dividends on securities:               |  |      |            |      |   |            |  |   |           
|U.S. Treasury                                       |  |      | 59,996     |      |   | 45,349     |  |   | 5,692     
|U.S. Government agencies                            |  |      | 677,013    |      |   | 436,010    |  |   | 301,771   
|State and political subdivisions, nontaxable        |  |      | 1,346,092  |      |   | 1,228,077  |  |   | 1,156,581 
|State and political subdivisions, taxable           |  |      | 126,483    |      |   | 127,425    |  |   | 183,442   
|Other securities                                    |  |      | 150,215    |      |   | 321,596    |  |   | 498,301   
|Interest on federal funds sold                      |  |      | 39,103     |      |   | 52,737     |  |   | 26,553    
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest and dividend income                  |  | $    | 14,342,519 |      | $ | 12,875,031 |  | $ | 13,071,397
|                                                    |  |      |            |      |   |            |  |   |           
|Interest Expense                                    |  |      |            |      |   |            |  |   |           
|Interest on deposits                                |  | $    | 3,985,067  |      | $ | 3,399,013  |  | $ | 3,967,250 
|Interest on borrowings                              |  |      | 483,444    |      |   | 207,224    |  |   | 105,708   
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest expense                              |  | $    | 4,468,511  |      | $ | 3,606,237  |  | $ | 4,072,958 
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income                                 |  | $    | 9,874,008  |      | $ | 9,268,794  |  | $ | 8,998,439 
|Provision for Loan Losses                           |  |      | 240,400    |      |   | 305,000    |  |   | 700,000   
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income after provision for loan losses |  | $    | 9,633,608  |      | $ | 8,963,794  |  | $ | 8,298,439 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest Income                                  |  |      |            |      |   |            |  |   |           
|Service charge income                               |  | $    | 986,268    |      | $ | 993,880    |  | $ | 864,499   
|Net security gains                                  |  |      | 2,625      |      |   | 65,606     |  |   | 30,603    
|Net gains on sales of loans                         |  |      | 55,774     |      |   | 56,981     |  |   | 63,400    
|Other income                                        |  |      | 556,136    |      |   | 510,703    |  |   | 425,113   
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest income                            |  | $    | 1,600,803  |      | $ | 1,627,170  |  | $ | 1,383,615 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest Expenses                                |  |      |            |      |   |            |  |   |           
|Salaries                                            |  | $    | 3,053,914  |      | $ | 2,857,580  |  | $ | 2,696,853 
|Employee benefits and costs                         |  |      | 982,274    |      |   | 804,201    |  |   | 788,271   
|Occupancy expenses                                  |  |      | 330,219    |      |   | 342,340    |  |   | 321,163   
|Furniture and equipment related expenses            |  |      | 415,150    |      |   | 437,259    |  |   | 441,168   
|Data processing                                     |  |      | 530,033    |      |   | 471,357    |  |   | 365,601   
|Stationery and printing                             |  |      | 138,403    |      |   | 180,004    |  |   | 160,512   
|Postage                                             |  |      | 153,265    |      |   | 170,695    |  |   | 166,258   
|Bank franchise tax                                  |  |      | 221,950    |      |   | 214,457    |  |   | 164,254   
|Other operating expenses                            |  |      | 1,436,547  |      |   | 1,404,262  |  |   | 1,523,191 
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest expenses                          |  | $    | 7,261,755  |      | $ | 6,882,155  |  | $ | 6,627,271 
|                                                    |  |      |            |      |   |            |  |   |           
|Net income before income taxes                      |  |      | 3,972,656  |      |   | 3,708,809  |  |   | 3,054,783 
|Income Taxes                                        |  |      | 871,890    |      |   | 823,314    |  |   | 647,731   
|                                                    |  |      |            |      |   |            |  |   |           
|Net income                                          |  | $    | 3,100,766  |      | $ | 2,885,495  |  | $ | 2,407,052 
|                                                    |  |      |            |      |   |            |  |   |           
|Earnings Per Share, basic                           |  | $    | 2.60       |      | $ | 2.43       |  | $ | 2.04      
|                                                    |  |      |            |      |   |            |  |   |           
|Earnings Per Share, diluted                         |  | $    | 2.58       |      | $ | 2.42       |  | $ | 2.03      
|                                                    |  |      |            |      |   |            |  |   |           



See Notes to
Consolidated Financial Statements.



F-3



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Stockholders Equity

Three Years Ended December 31, 2005



|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | ----------- | --------- | ------------------------ | - | ---------------- |  | - | ------------------------------------------- | - |  | ------------------- | --------- | - | ----- | - | --------- | - |  | - | ---------- | -
|                                                                                    |  | CommonStock |           | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensive Income (Loss) |   |  | ComprehensiveIncome |           |   | Total |  
|Balance, December 31, 2002                                                          |  | $           | 5,889,245 |                          | $ | 4,931,233        |  | $ | 8,947,358                                   |   |  | $                   | 1,577,824 |   |       |   |           |   |  | $ | 21,345,660 |  
|Comprehensive income:                                                               |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Net income2003                                                                     |  |             |          |                          |   |                 |  |   | 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2004                                                                     |  |             |          |                          |   |                 |  |   | 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 |  
|Comprehensive income:                                                               |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Net income2005                                                                     |  |             |          |                          |   |                 |  |   | 3,100,766                                   |   |  |                     |          |   |       | $ | 3,100,766 |   |  |   | 3,100,766  |  
|Other comprehensive loss, net of tax:                                               |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Unrealized loss on securities available for sale, net of deferred taxes of $449,023 |  |             |          |                          |   |                 |  |   |                                            |   |  |                     |          |   |       |   | (871,632  | ) |  |   |           |  
|Less reclassification adjustment, net of taxes of $892                              |  |             |          |                          |   |                 |  |   |                                            |   |  |                     |          |   |       |   | (1,733    | ) |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Other comprehensive loss, net of tax                                                |  |             |          |                          |   |                 |  |   |                                            |   |  |                     | (873,365  | ) |       | $ | (873,365  | ) |  |   | (873,365   | )
|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Total comprehensive income                                                          |  |             |          |                          |   |                 |  |   |                                            |   |  |                     |          |   |       | $ | 2,227,401 |   |  |   |           |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Cash dividends,$ 0. 73 per share                                                    |  |             |          |                          |   |                 |  |   | (872,371                                    | ) |  |                     |          |   |       |   |           |   |  |   | (872,371   | )
|Fractional shares purchased under dividend reinvestment plan                        |  |             |          |                          |   |                 |  |   | (163                                        | ) |  |                     |          |   |       |   |           |   |  |   | (163       | )
|Issuance of common stock under dividend reinvestment plan                           |  |             | 14,980    |                          |   | 80,074           |  |   |                                            |   |  |                     |          |   |       |   |           |   |  |   | 95,054     |  
|Exercise of stock options                                                           |  |             | 30,560    |                          |   | 73,400           |  |   |                                            |   |  |                     |          |   |       |   |           |   |  |   | 103,960    |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  
|Balance, December 31, 2005                                                          |  | $           | 5,990,295 |                          | $ | 5,264,250        |  | $ | 15,059,873                                  |   |  | $                   | (79,781   | ) |       |   |           |   |  | $ | 26,234,637 |  
|                                                                                    |  |             |           |                          |   |                  |  |   |                                             |   |  |                     |           |   |       |   |           |   |  |   |            |  



See Notes to
Consolidated Financial Statements.



F-4



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Three Years Ended December 31, 2005



|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                 |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Cash Flows from Operating Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                       |  | $    | 3,100,766   |   |      | $ | 2,885,495   |      |  | $ | 2,407,052   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                                    |  |      | 507,708     |   |      |   | 507,201     |      |  |   | 497,329     |  
|Origination of loans available for sale                                                          |  |      | (5,626,948  | ) |      |   | (7,059,823  | )    |  |   | (10,062,762 | )
|Proceeds from sale of loans available for sale                                                   |  |      | 6,043,365   |   |      |   | 6,756,161   |      |  |   | 11,257,085  |  
|Provision for loan losses                                                                        |  |      | 240,400     |   |      |   | 305,000     |      |  |   | 700,000     |  
|(Gain) on sale of securities                                                                     |  |      | (2,625      | ) |      |   | (65,606     | )    |  |   | (30,603     | )
|(Gain) loss on disposal of premises and equipment                                                |  |      | 23,017      |   |      |   | (48,783     | )    |  |   |            |  
|(Gain) on sale of loans                                                                          |  |      | (55,774     | ) |      |   | (56,981     | )    |  |   | (63,400     | )
|Deferred income tax (benefit) expense                                                            |  |      | (126,218    | ) |      |   | 124,848     |      |  |   | 199,857     |  
|Amortization of premiums on securities                                                           |  |      | 218,296     |   |      |   | 238,840     |      |  |   | 250,149     |  
|Accretion of discounts on securities                                                             |  |      | (20,990     | ) |      |   | (24,244     | )    |  |   | (34,841     | )
|(Increase) decrease in accrued interest receivable and other assets                              |  |      | 168,975     |   |      |   | (213,122    | )    |  |   | (530,829    | )
|Increase (decrease) in accrued expenses and other liabilities                                    |  |      | 582,584     |   |      |   | (26,976     | )    |  |   | (50,172     | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                                        |  | $    | 5,052,556   |   |      | $ | 3,322,010   |      |  | $ | 4,538,865   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash Flows from Investing Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Proceeds from sales, principal repayments, calls and maturities of securities available for sale |  | $    | 9,556,053   |   |      | $ | 11,658,025  |      |  | $ | 9,037,375   |  
|(Purchase) redemption of restricted equity securities                                            |  |      | (355,400    | ) |      |   | 114,100     |      |  |   | 133,200     |  
|Purchase of securities available for sale                                                        |  |      | (8,511,555  | ) |      |   | (15,335,053 | )    |  |   | (16,349,679 | )
|Purchase of securities held to maturity                                                          |  |      |            |   |      |   | (3,000,000  | )    |  |   |            |  
|Net (increase) decrease in loans to customers                                                    |  |      | (22,976,389 | ) |      |   | 604,930     |      |  |   | 2,640,965   |  
|(Increase) decrease in federal funds sold                                                        |  |      | 5,064,000   |   |      |   | (4,779,000  | )    |  |   | 2,020,000   |  
|Purchase of bank-owned life insurance                                                            |  |      | (5,500,000  | ) |      |   |            |      |  |   |            |  
|Purchases of premises and equipment                                                              |  |      | (1,613,366  | ) |      |   | (675,219    | )    |  |   | (262,864    | )
|Proceeds from disposal of premises and equipment                                                 |  |      |            |   |      |   | 420,594     |      |  |   |            |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash (used in) investing activities                                                          |  | $    | (24,336,657 | ) |      | $ | (10,991,623 | )    |  | $ | (2,781,003  | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash Flows from Financing Activities                                                             |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in deposits                                                                         |  | $    | 16,158,987  |   |      | $ | 3,691,151   |      |  | $ | 2,020,669   |  
|Proceeds from issuance of trust preferred capital notes                                          |  |      |            |   |      |   |            |      |  |   | 4,124,000   |  
|Increase in federal funds purchased                                                              |  |      | 1,810,000   |   |      |   |            |      |  |   |            |  
|Increase (decrease) in Federal Home Loan Bank advances                                           |  |      | 5,000,000   |   |      |   |            |      |  |   | (4,000,000  | )
|Dividends paid                                                                                   |  |      | (872,371    | ) |      |   | (747,240    | )    |  |   | (660,940    | )
|Net proceeds from issuance of common stock                                                       |  |      | 199,014     |   |      |   | 130,943     |      |  |   | 104,110     |  
|Cash paid for fractional shares                                                                  |  |      | (163        | ) |      |   | (78         | )    |  |   | (6          | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                        |  | $    | 22,295,467  |   |      | $ | 3,074,776   |      |  | $ | 1,587,833   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                             |  | $    | 3,011,366   |   |      | $ | (4,594,837  | )    |  | $ | 3,345,695   |  
|Cash and Cash Equivalents                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Beginning of year                                                                                |  |      | 4,353,745   |   |      |   | 8,948,582   |      |  |   | 5,602,887   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|End of year                                                                                      |  | $    | 7,365,111   |   |      | $ | 4,353,745   |      |  | $ | 8,948,582   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental Disclosure of Cash Flow Information                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Cash paid during year:                                                                           |  |      |             |   |      |   |             |      |  |   |             |  
|Interest                                                                                         |  | $    | 4,261,817   |   |      | $ | 3,616,769   |      |  | $ | 4,235,545   |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Income taxes                                                                                     |  | $    | 481,000     |   |      | $ | 880,000     |      |  | $ | 629,508     |  
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Noncash Investing Activities,                                                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Unrealized (loss) on securities available for sale                                               |  | $    | (1,323,280  | ) |      | $ | (772,897    | )    |  | $ | (415,345    | )
|                                                                                                 |  |      |             |   |      |   |             |      |  |   |             |  



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 eliminate through consolidation the equity investment in BOE Statutory Trust I, which approximated $124,000 at December 31, 2005 and 2004. 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



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



allowance 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 120 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. For 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 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



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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 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
Corporation had no other real estate at December 31, 2005 or 2004.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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, 2005, the Corporation had two
stock-based compensation plans, which are described more fully in Note 9. The Corporation accounts for the plans 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 plans 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 compensation.



|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                                  |  | Years Ended December 31, |          
|                                                                                                                                  |  | 2005                     |           |   | 2004 |   |           | 2003 | 
|Net income, as reported                                                                                                           |  | $                        | 3,100,766 |   |      | $ | 2,885,495 |      |  | $ | 2,407,052 |  
|Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of tax
effect |  |                          | (202,201  | ) |      |   | (64,943   | )    |  |   | (45,722   | )
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Pro forma net income                                                                                                              |  | $                        | 2,898,565 |   |      | $ | 2,820,552 |      |  | $ | 2,361,330 |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Earnings per share:                                                                                                               |  |                          |           |   |      |   |           |      |  |   |           |  
|Basicas reported                                                                                                                 |  | $                        | 2.60      |   |      | $ | 2.43      |      |  | $ | 2.04      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Basicpro forma                                                                                                                   |  | $                        | 2.43      |   |      | $ | 2.38      |      |  | $ | 2.00      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Dilutedas reported                                                                                                               |  | $                        | 2.58      |   |      | $ | 2.42      |      |  | $ | 2.03      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  
|Dilutedpro forma                                                                                                                 |  | $                        | 2.41      |   |      | $ | 2.36      |      |  | $ | 1.99      |  
|                                                                                                                                  |  |                          |           |   |      |   |           |      |  |   |           |  



Effective
December 22, 2005, the Compensation Committee of the Board of Directors approved the acceleration of the vesting of all unvested stock options under the Corporations employee incentive stock compensation plan and director stock
compensation plan. The Committee determined to accelerate the vesting of these options in order to eliminate recognition of compensation expense under SFAS No. 123R, which will apply to the Corporation beginning in the first quarter of 2006.



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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 2005,
2004 and 2003 was $78,330, $93,578 and $62,903, 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.



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, 2005 and 2004, are as follows:



|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|----------------------------------------------- |  | ------------- | ---------- | -------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ----------
|                                                |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealized(Losses) |  |   | Fair Value
|                                                |  | 2005         
|U.S. Treasury securities                        |  | $             | 1,748,174  |                      | $ |                        |  | $ | (37,999    | ) |  | $ | 1,710,175 
|U.S. Agency and mortgage-backed securities      |  |               | 12,885,090 |                      |   | 5,490                   |  |   | (367,764   | ) |  |   | 12,522,816
|Obligations of state and political subdivisions |  |               | 36,833,547 |                      |   | 363,291                 |  |   | (347,462   | ) |  |   | 36,849,376
|Corporate debt securities                       |  |               | 982,199    |                      |   | 28,634                  |  |   |           |   |  |   | 1,010,833 
|Other equity securities                         |  |               | 64,656     |                      |   | 234,930                 |  |   |           |   |  |   | 299,586   
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                |  | $             | 52,513,666 |                      | $ | 632,345                 |  | $ | (753,225   | ) |  | $ | 52,392,786
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           
|                                                | 
|                                                |  | 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
|                                                |  |               |            |                      |   |                         |  |   |            |   |  |   |           



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, 2005, 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                |  | $             | 6,718,602  |            | $ | 6,697,777 
|Due after one year through five years  |  |               | 31,603,975 |            |   | 31,410,269
|Due after five years through ten years |  |               | 13,527,646 |            |   | 13,404,288
|Due after ten years                    |  |               | 598,787    |            |   | 580,866   
|Other equity securities                |  |               | 64,656     |            |   | 299,586   
|                                       |  |               |            |            |   |           
|                                       |  | $             | 52,513,666 |            | $ | 52,392,786
|                                       |  |               |            |            |   |           



At December 31,
2005 and 2004, the Corporation owned one U.S. Government Agency bond in the held to maturity classification with a book value of $3,000,000. The market value of the bond was $2,932,500 and $3,000,000 at December 31, 2005 and 2004, respectively.
The bond has been in an unrealized loss position for less than 12 months and matures in 2024.



Proceeds from sales, principal repayments, calls and maturities of securities available for sale during 2005, 2004 and 2003 were $9,566,053, $11,658,025 and $9,037,375, respectively. Gross realized gains of $11,960,
$101,138 and $30,603 and gross realized losses of $9,335, $35,532 and $0 were recognized on those sales for the years ended December 31, 2005, 2004 and 2003, respectively. The tax provision applicable to these net realized gains amounted to
$892, $22,306 and $10,405, respectively.



Securities with
amortized costs of $8,422,978 and $4,031,802 at December 31, 2005 and 2004 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, 2005 and 2004 follows:



|                                                |  |                                 |            |                     |                   |          |            |  |                     |            |  |   |          |  
|----------------------------------------------- |  | ------------------------------- | ---------- | ------------------- | ----------------- | -------- | ---------- |  | ------------------- | ---------- |  | - | -------- | -
|                                                |  | Duration of the Unrealized Loss |           
|                                                |  | Less Than 12 Months             |            |                     | 12 Months or More |         
|                                                |  | Fair Value                      |            | Unrealized (Losses) |                   |          | Fair Value |  | Unrealized (Losses) |           
|2005                                            |  |                                 |            |                     |                   |          |            |  |                     |            |  |   |          |  
|U.S. Treasury securities                        |  | $                               |           |                     | $                 |         |            |  | $                   | 1,710,175  |  | $ | (37,999  | )
|U.S. Agency and mortgage-backed securities      |  |                                 | 6,452,591  |                     |                   | (159,992 | )          |  |                     | 5,876,641  |  |   | (207,772 | )
|Obligations of state and political subdivisions |  |                                 | 9,992,617  |                     |                   | (160,577 | )          |  |                     | 5,940,175  |  |   | (186,885 | )
|                                                |  |                                 |            |                     |                   |          |            |  |                     |            |  |   |          |  
|Total temporarily impaired securities           |  | $                               | 16,445,208 |                     | $                 | (320,569 | )          |  | $                   | 13,526,991 |  | $ | (432,656 | )
|                                                |  |                                 |            |                     |                   |          |            |  |                     |            |  |   |          |  
|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  | )
|                                                |  |                                 |            |                     |                   |          |            |  |                     |            |  |   |          |  



F-11



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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, 2005, are generally a
result of market fluctuations that occur daily. The unrealized losses are from 107 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,  
|                                |  | 2005           |         | 2004
|                                |  | (in thousands)
|Mortgage loans on real estate:  |  |                |         |      |   |        
|Residential 1-4 family          |  | $              | 48,898  |      | $ | 41,468 
|Commercial                      |  |                | 62,580  |      |   | 51,087 
|Construction                    |  |                | 32,084  |      |   | 25,924 
|Equity lines of credit          |  |                | 9,818   |      |   | 10,832 
|Commercial loans                |  |                | 22,873  |      |   | 23,534 
|Consumer installment loans:     |  |                |         |      |   |        
|Personal                        |  |                | 5,276   |      |   | 5,772  
|Credit cards                    |  |                | 927     |      |   | 942    
|                                |  |                |         |      |   |        
|                                |  | $              | 182,456 |      | $ | 159,559
|Less: Allowance for loan losses |  |                | 2,249   |      |   | 2,088  
|                                |  |                |         |      |   |        
|Loans, net                      |  | $              | 180,207 |      | $ | 157,471
|                                |  |                |         |      |   |        



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



|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                           |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Balance, beginning of year                 |  | $    | 2,088,329 |   |      | $ | 2,128,254 |      |  | $ | 2,115,611 |  
|Provision for loan losses                  |  |      | 240,400   |   |      |   | 305,000   |      |  |   | 700,000   |  
|Loans charged off                          |  |      | (158,810  | ) |      |   | (429,781  | )    |  |   | (828,994  | )
|Recoveries of loans previously charged off |  |      | 78,739    |   |      |   | 84,856    |      |  |   | 141,637   |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, end of year                       |  | $    | 2,248,658 |   |      | $ | 2,088,329 |      |  | $ | 2,128,254 |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |  



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, |   |          
|                                                             |  | 2005 |           | 2004         |   | 2003     
|Impaired loans with a valuation allowance                    |  | $    | 1,517,800 |              | $ | 2,823,700 |  | $ | 1,519,200
|Impaired loans without a valuation allowance                 |  |      | 223,200   |              |   |          |  |   |         
|                                                             |  |      |           |              |   |           |  |   |          
|Total impaired loans                                         |  | $    | 1,741,000 |              | $ | 2,823,700 |  | $ | 1,519,200
|                                                             |  |      |           |              |   |           |  |   |          
|Valuation allowance related to impaired loans                |  | $    | 536,300   |              | $ | 606,345   |  | $ | 262,530  
|                                                             |  |      |           |              |   |           |  |   |          
|                                                             |  |      |          
|                                                             |  | 2005 |           | 2004         |   | 2003     
|Nonaccrual loans                                             |  | $    | 150,418   |              | $ | 240,935   |  | $ | 218,070  
|Loans past due ninety days or more and still accruing        |  |      | 259,500   |              |   | 100,236   |  |   | 285,050  
|Average balance of impaired loans                            |  |      | 2,394,350 |              |   | 2,610,500 |  |   | 1,754,385
|Interest income recognized on impaired loans                 |  |      | 195,899   |              |   | 168,359   |  |   |         
|Interest income recognized on a cash basis on impaired loans |  |      | 195,899   |              |   | 168,359   |  |   |         



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, 2005 and 2004 follows:



|                         |  |      |            |      |   |           
|------------------------ |  | ---- | ---------- | ---- | - | ----------
|                         |  | 2005 |            | 2004
|Land                     |  | $    | 2,729,218  |      | $ | 2,729,218 
|Buildings                |  |      | 3,940,808  |      |   | 3,893,844 
|Furniture and fixtures   |  |      | 4,278,944  |      |   | 4,169,645 
|Construction in progress |  |      | 1,317,470  |      |   |          
|                         |  |      |            |      |   |           
|                         |  | $    | 12,266,440 |      | $ | 10,792,707
|Accumulated depreciation |  |      | 4,610,019  |      |   | 4,344,750 
|                         |  |      |            |      |   |           
|                         |  | $    | 7,656,421  |      | $ | 6,447,957 
|                         |  |      |            |      |   |           



Depreciation expense
for the years ended December 31, 2005, 2004 and 2003, amounted to $381,885, $381,377 and $371,506, respectively.



In August 2005, the Corporation began construction of a new main office and administrative offices in Tappahannock, Virginia. The building is expected to
be complete in June 2006. The total cost of the project is expected to be approximately $4 million. At December 31, 2005, total capital outlays for the building were $1,317,470.



F-13



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



Note 5. Deposits



The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was $39,864,361 and $22,976,912,
respectively.



The scheduled maturities of time deposits at
December 31, 2005 are as follows:



|           |  |   |            
|---------- |  | - | -----------
|2006       |  | $ | 89,316,362 
|2007       |  |   | 20,263,087 
|2008       |  |   | 12,700,289 
|2009       |  |   | 2,844,514  
|2010       |  |   | 2,404,830  
|Thereafter |  |   | 16,005     
|           |  |   |            
|           |  | $ | 127,545,087
|           |  |   |            



At December 31,
2005 and 2004, overdraft demand deposits reclassified to loans totaled $71,186 and $65,264, 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:



|                                                 |  |      |         |      |   |           |  
|------------------------------------------------ |  | ---- | ------- | ---- | - | --------- | -
|                                                 |  | 2005 |         | 2004 |  
|Deferred tax assets:                             |  |      |         |      |   |           |  
|Allowance for loan losses                        |  | $    | 594,442 |      | $ | 560,133   |  
|Deferred compensation                            |  |      | 163,578 |      |   | 168,258   |  
|Nonaccrual loan interest                         |  |      | 5,168   |      |   | 5,196     |  
|Unrealized loss on securities available for sale |  |      | 41,099  |      |   |          |  
|Organizational costs                             |  |      |        |      |   | 3,340     |  
|                                                 |  |      |         |      |   |           |  
|                                                 |  | $    | 804,287 |      | $ | 736,927   |  
|                                                 |  |      |         |      |   |           |  
|Deferred tax liabilities:                        |  |      |         |      |   |           |  
|Depreciation                                     |  | $    | 300,430 |      | $ | 333,304   |  
|Discount accretion on securities                 |  |      | 19,173  |      |   | 20,973    |  
|Partnership losses                               |  |      | 57,599  |      |   | 55,225    |  
|Prepaid pension                                  |  |      | 129,222 |      |   | 196,879   |  
|Unrealized gain on securities available for sale |  |      |        |      |   | 408,816   |  
|Other                                            |  |      | 21,983  |      |   | 21,983    |  
|                                                 |  |      |         |      |   |           |  
|                                                 |  | $    | 528,407 |      | $ | 1,037,180 |  
|                                                 |  |      |         |      |   |           |  
|Net deferred tax assets (liabilities)            |  | $    | 275,880 |      | $ | (300,253  | )
|                                                 |  |      |         |      |   |           |  



F-14



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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



|                               |  |      |          |   |      |   |         |  |   |        
|------------------------------ |  | ---- | -------- | - | ---- | - | ------- |  | - | -------
|                               |  | 2005 |          |   | 2004 |   | 2003   
|Current tax provision          |  | $    | 998,108  |   |      | $ | 698,466 |  | $ | 447,874
|Deferred tax (benefit) expense |  |      | (126,218 | ) |      |   | 124,848 |  |   | 199,857
|                               |  |      |          |   |      |   |         |  |   |        
|                               |  | $    | 871,890  |   |      | $ | 823,314 |  | $ | 647,731
|                               |  |      |          |   |      |   |         |  |   |        



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



|                                     |  |       |   |  |       |   |  |       |  
|------------------------------------ |  | ----- | - |  | ----- | - |  | ----- | -
|                                     |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Statutory Federal income tax rate    |  | 34.0  | % |  | 34.0  | % |  | 34.0  | %
|(Reduction) in taxes resulting from: |  |       |   |  |       |   |  |       |  
|Municipal interest                   |  | (10.6 | ) |  | (10.5 | ) |  | (12.2 | )
|Other, net                           |  | (1.5  | ) |  | (1.3  | ) |  | (0.6  | )
|                                     |  |       |   |  |       |   |  |       |  
|Effective income tax rate            |  | 21.9  | % |  | 22.2  | % |  | 21.2  | %
|                                     |  |       |   |  |       |   |  |       |  



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



The Corporation had advances
on lines of credit with the Federal Home Loan Bank of Atlanta that totaled $5,000,000 at December 31, 2005. The Corporation had no advances at December 31, 2004. The interest rate on this fixed rate advance was 3.78%. The borrowing matures
in May 2015. Advances on the lines are secured by all of the Corporations first lien loans on one-to-four unit single-family dwellings. As of December 31, 2005, the book value of these loans totaled approximately $35,000,000. 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 has unsecured lines of credit with correspondent banks available for overnight borrowing totaling
approximately $19,117,000. At December 31, 2005, $1,810,000 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.



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 tables provide a reconciliation of the changes in the plans benefit obligations
and fair value of assets over the years ending December 31, 2005, 2004 and 2003, computed as of October 1, 2005, 2004 and 2003, respectively:



|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                          |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Change in Benefit Obligation              |  |      |            |   |      |   |            |      |  |   |            |  
|Benefit obligation, beginning             |  | $    | 3,561,978  |   |      | $ | 3,066,325  |      |  | $ | 2,413,139  |  
|Service cost                              |  |      | 308,269    |   |      |   | 245,785    |      |  |   | 200,871    |  
|Interest cost                             |  |      | 212,894    |   |      |   | 198,503    |      |  |   | 168,750    |  
|Actuarial loss                            |  |      | 233,774    |   |      |   | 460,162    |      |  |   | 306,696    |  
|Benefits paid                             |  |      | (27,896    | ) |      |   | (408,797   | )    |  |   | (23,131    | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Benefit obligation, ending                |  | $    | 4,289,019  |   |      | $ | 3,561,978  |      |  | $ | 3,066,325  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Change in Plan Assets                     |  |      |            |   |      |   |            |      |  |   |            |  
|Fair value of plan assets, beginning      |  | $    | 2,545,270  |   |      | $ | 1,921,202  |      |  | $ | 1,365,307  |  
|Actual return on plan assets              |  |      | 342,457    |   |      |   | 241,058    |      |  |   | 314,955    |  
|Employer contributions                    |  |      | 211,510    |   |      |   | 791,807    |      |  |   | 264,071    |  
|Benefits paid                             |  |      | (27,896    | ) |      |   | (408,797   | )    |  |   | (23,131    | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Fair value of plan assets, ending         |  | $    | 3,071,341  |   |      | $ | 2,545,270  |      |  | $ | 1,921,202  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Funded status                             |  | $    | (1,217,678 | ) |      | $ | (1,016,708 | )    |  | $ | (1,145,123 | )
|Unrecognized net actuarial loss           |  |      | 1,428,442  |   |      |   | 1,378,746  |      |  |   | 985,126    |  
|Unrecognized net obligation at transition |  |      | (19,208    | ) |      |   | (22,408    | )    |  |   | (25,608    | )
|Unrecognized prior service cost           |  |      | 20,595     |   |      |   | 24,026     |      |  |   | 27,457     |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Accrued benefit cost at October 1         |  | $    | 212,151    |   |      | $ | 363,656    |      |  | $ | (158,148   | )
|Contributions made in December            |  |      | 167,914    |   |      |   | 211,510    |      |  |   | 791,807    |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|Prepaid benefit cost at December 31       |  | $    | 380,065    |   |      | $ | 575,166    |      |  | $ | 633,659    |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  



The accumulated
benefit obligation for the defined benefit pension plan was $2,416,644, $1,945,342 and $1,855,455 at September 30, 2005, 2004 and 2003, respectively.



The following table provides the components of net periodic benefit cost for the plan for the years ended December 31, 2005, 2004 and 2003:



|                                             |  |      |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                             |  | 2005 |          |   | 2004 |   |          | 2003 | 
|Components of Net Periodic Benefit Cost      |  |      |          |   |      |   |          |      |  |   |          |  
|Service cost                                 |  | $    | 308,269  |   |      | $ | 245,785  |      |  | $ | 200,871  |  
|Interest cost                                |  |      | 212,894  |   |      |   | 198,503  |      |  |   | 168,750  |  
|Expected return on plan assets               |  |      | (215,187 | ) |      |   | (212,210 | )    |  |   | (132,417 | )
|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                |  |      | 56,808   |   |      |   | 37,694   |      |  |   | 36,450   |  
|                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Net periodic benefit cost                    |  | $    | 363,015  |   |      | $ | 270,003  |      |  | $ | 273,885  |  
|                                             |  |      |          |   |      |   |          |      |  |   |          |  



F-16



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Discount rate                  |  | 5.75 | % |  | 6.00 | % |  | 6.50 | %
|Expected return on plan assets |  | 8.50 | % |  | 8.50 | % |  | 8.50 | %
|Rate of compensation increase  |  | 5.00 | % |  | 5.00 | % |  | 5.00 | %



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



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2005 |   |  | 2004 |   |  | 2003 |  
|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 | %



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).



Asset Allocation



The pension plans weighted-average asset allocations at September 30, 2005 and 2004, by asset category are as follows:



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|                            |  | 2005 |   |  | 2004 |  
|Asset Category              |  |      |   |  |      |  
|Mutual funds - fixed income |  | 34   | % |  | 35   | %
|Mutual funds - equity       |  | 66   | % |  | 65   | %
|                            |  |      |   |  |      |  
|                            |  | 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.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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 $177,000 to its pension
plan in 2006.



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



|          |  |   |        
|--------- |  | - | -------
|2006      |  | $ | 27,896 
|2007      |  |   | 38,570 
|2008      |  |   | 60,386 
|2009      |  |   | 64,906 
|2010      |  |   | 85,004 
|2011-2015 |  |   | 899,794



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, 2005, 2004 and 2003 were $47,963, $44,085 and
$47,589, 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 $56,593, $3,612 and $48,604 for the years ended December 31, 2005, 2004 and 2003, respectively.



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 $475,438 and $429,343 representing cash
surrender value of these policies for the years ended December 31, 2005 and 2004, respectively.



Note 9. Stock Option Plans



Employee Incentive Stock Plan



During
the year ended 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.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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



|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|-------------------------------------------------------------- |  | --------------- | - | ---- | ---------------------------- | ----- | --------------- | ------ | - | ---------------------------- | - | --------------- |  | ------ | ---------------------------- |  | - | -----
|                                                               |  | 2005            |   | 2004 |                              | 2003 
|                                                               |  | Numberof Shares |   |      | WeightedAverageExercisePrice |       | Numberof Shares |        |   | WeightedAverageExercisePrice |   | Numberof Shares |  |        | WeightedAverageExercisePrice
|Outstanding at beginning of year                               |  | 42,625          |   |      | $                            | 22.95 |                 | 30,120 |   |                              | $ | 19.29           |  | 24,475 |                              |  | $ | 16.34
|Granted                                                        |  |                |   |      |                              |      |                 | 15,444 |   |                              |   | 28.51           |  | 9,396  |                              |  |   | 25.00
|Exercised                                                      |  | (6,112          | ) |      |                              | 14.76 |                 | (2,256 | ) |                              |   | 14.63           |  | (2,422 | )                            |  |   | 12.78
|Forfeited                                                      |  | (2,145          | ) |      |                              | 26.85 |                 | (683   | ) |                              |   | 14.67           |  | (1,329 | )                            |  |   | 17.33
|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|Outstanding at year end                                        |  | 34,368          |   |      |                              | 24.16 |                 | 42,625 |   |                              |   | 22.95           |  | 30,120 |                              |  |   | 19.29
|                                                               |  |                 |   |      |                              |       |                 |        |   |                              |   |                 |  |        |                              |  |   |      
|Exercisable at year end                                        |  | 34,368          |   |      |                              | 24.16 |                 | 13,534 |   |                              |   | 17.63           |  | 7,937  |                              |  |   | 15.15
|Weighted average fair value of options granted during the year |  |                 |   |      |                              |      |                 |        |   |                              |   | 8.24            |  |        |                              |  |   | 7.17 



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     |  
|Dividend yield          |  | 2.64                     | % |  | 2.74     | %
|Expected life           |  | 9.7 years                |   |  | 10 years |  
|Expected volatility     |  | 25.86                    | % |  | 26.43    | %
|Risk-free interest rate |  | 4.45                     | % |  | 4.31     | %



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:



|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |       |                              |  |   |      
|-------------------------------------------------------------- |  | --------------- | - | ---- | ---------------------------- | ----- | --------------- | ----- | - | ---------------------------- | - | --------------- |  | ----- | ---------------------------- |  | - | -----
|                                                               |  | 2005            |   | 2004 |                              | 2003 
|                                                               |  | Numberof Shares |   |      | WeightedAverageExercisePrice |       | Numberof Shares |       |   | WeightedAverageExercisePrice |   | Numberof Shares |  |       | WeightedAverageExercisePrice
|Outstanding at beginning of year                               |  | 3,296           |   |      | $                            | 20.99 |                 | 3,070 |   |                              | $ | 17.69           |  | 2,810 |                              |  | $ | 15.25
|Granted                                                        |  |                |   |      |                              |      |                 | 750   |   |                              |   | 28.75           |  | 800   |                              |  |   | 25.00
|Exercised                                                      |  |                |   |      |                              |      |                 | (524  | ) |                              |   | 12.75           |  | (20   | )                            |  |   | 12.25
|Forfeited                                                      |  | (75             | ) |      |                              | 29.25 |                 |      |   |                              |   |                |  | (520  | )                            |  |   | 15.99
|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |       |                              |  |   |      
|Outstanding at year end                                        |  | 3,221           |   |      |                              | 20.80 |                 | 3,296 |   |                              |   | 20.99           |  | 3,070 |                              |  |   | 17.69
|                                                               |  |                 |   |      |                              |       |                 |       |   |                              |   |                 |  |       |                              |  |   |      
|Exercisable at year end                                        |  | 3,221           |   |      |                              | 20.80 |                 | 1,356 |   |                              |   | 16.43           |  | 975   |                              |  |   | 13.92
|Weighted average fair value of options granted during the year |  |                 |   |      |                              |      |                 |       |   |                              |   | 7.80            |  |       |                              |  |   | 7.17 



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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     |  
|Dividend yield          |  | 2.64                     | % |  | 2.74     | %
|Expected life           |  | 8 years                  |   |  | 10 years |  
|Expected volatility     |  | 25.83                    | % |  | 26.43    | %
|Risk-free interest rate |  | 4.41                     | % |  | 4.31     | %



Information pertaining
to options outstanding at December 31, 2005 is as follows:



|                        |  |                            |  |                     |  |                                 |       |                    |   |                                 |  |   |      
|----------------------- |  | -------------------------- |  | ------------------- |  | ------------------------------- | ----- | ------------------ | - | ------------------------------- |  | - | -----
|                        |  |                            |  | Options Outstanding |  | Options Exercisable            
|Range of Exercise Price |  | Remaining Contractual Life |  | Number Outstanding  |  | Weighted Average Exercise Price |       | Number Exercisable |   | Weighted Average Exercise Price
|$12.25                  |  | 5 years                    |  | 5,367               |  | $                               | 12.25 |                    | $ | 5,367                           |  | $ | 12.25
|16.55-19.00             |  | 6 years                    |  | 1,188               |  |                                 | 18.61 |                    |   | 1,188                           |  |   | 18.61
|22.40                   |  | 6.5 years                  |  | 6,972               |  |                                 | 22.40 |                    |   | 6,972                           |  |   | 22.40
|25.00                   |  | 7.8 years                  |  | 9,223               |  |                                 | 25.00 |                    |   | 9,223                           |  |   | 25.00
|25.70-28.70             |  | 8.8 years                  |  | 14,839              |  |                                 | 28.50 |                    |   | 14,839                          |  |   | 28.50



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.



|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|-------------------------------- |  | --------- |  | --------- | ---- | ----- | --------- | --------- | - | ------ |  | --------- |  | - | ----
|                                 |  | 2005      |  | 2004      |      | 2003 
|                                 |  | Shares    |  | Per Share |      | Share |           | Per Share |   | Shares |  | Per Share
|Basic earnings per share         |  | 1,193,467 |  | $         | 2.60 |       | 1,185,952 |           | $ | 2.43   |  | 1,179,640 |  | $ | 2.04
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|Effect of dilutive stock options |  | 10,258    |  |           |      |       | 8,559     |           |   |        |  | 7,999     |  |   |     
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     
|Diluted earnings per share       |  | 1,203,725 |  | $         | 2.58 |       | 1,194,511 |           | $ | 2.42   |  | 1,187,639 |  | $ | 2.03
|                                 |  |           |  |           |      |       |           |           |   |        |  |           |  |   |     



The Company has
granted options to employees and directors to purchase 3,797 shares and 2,422 shares on average during the years ended December 31, 2004 and 2003, 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. No options were excluded from the computation for the year ended December 31, 2005.



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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:



|                                 |  |      |            |   |      |   |           |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                 |  | 2005 |            |   | 2004 |  
|Balance, beginning of year       |  | $    | 2,007,294  |   |      | $ | 1,322,437 |  
|Principal additions              |  |      | 2,005,289  |   |      |   | 1,104,088 |  
|Repayments and reclassifications |  |      | (1,335,481 | ) |      |   | (419,231  | )
|                                 |  |      |            |   |      |   |           |  
|Balance, end of year             |  | $    | 2,677,102  |   |      | $ | 2,007,294 |  
|                                 |  |      |            |   |      |   |           |  



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, 2005 and 2004, the aggregate amount of daily average required balances were approximately $995,000 and $1,644,000, respectively.



The Bank is required to maintain certain required reserve balances with a correspondent bank. Those required balances were $250,000 at
December 31, 2005 and 2004.



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, 2005, the aggregate amount of unrestricted funds, which could be transferred from the
banking subsidiary to the parent corporation, without prior regulatory approval, totaled $6,423,399 (24.5% of net assets).



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 $1,978,000 and $1,259,000 at December 31, 2005 and 2004, respectively.



F-21



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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, 2005 and 2004, is as follows:



|                                                                   |  |      |            |      |   |           
|------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                                                                   |  | 2005 |            | 2004
|Financial instruments whose contract amounts representcredit risk: |  |      |            |      |   |           
|Commitments to extend credit                                       |  | $    | 40,381,000 |      | $ | 41,921,000
|Standby letters of credit                                          |  |      | 4,602,000  |      |   | 3,890,000 



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.



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



F-22



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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, 2005 and 2004, that the Corporation and Bank met all capital adequacy requirements to which they are subject.



As of December 31, 2005, 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.



The Corporations and the Banks actual capital amounts and ratios as of December 31, 2005 and 2004, are also presented in the table.



|                                                      |  |                        |        |       |                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|----------------------------------------------------- |  | ---------------------- | ------ | ----- | -------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                                      |  | Actual                 |        |       | Minimum CapitalRequirement |   |        | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |       
|                                                      |  | Amount                 |        | Ratio |                            |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|                                                      |  | (dollars in thousands) |       
|As of December 31, 2005:                              |  |                        |        |       |                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets) Consolidated  |  | $                      | 31,788 |       | 15.7                       | % |        | $                                                                    | 16,224 |  | 8.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 31,141 |       | 15.4                       | % |        | $                                                                    | 16,205 |  | 8.00 | %      |  | $     | 20,256 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) Consolidated |  | $                      | 29,944 |       | 14.8                       | % |        | $                                                                    | 8,112  |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 29,297 |       | 14.5                       | % |        | $                                                                    | 8,102  |  | 4.00 | %      |  | $     | 12,154 |  | 6.00  | %
|Tier 1 Capital (to Average Assets)Consolidated        |  | $                      | 29,944 |       | 11.6                       | % |        | $                                                                    | 10,369 |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 29,297 |       | 11.3                       | % |        | $                                                                    | 10,369 |  | 4.00 | %      |  | $     | 12,961 |  | 5.00  | %
|As of December 31, 2004:                              |  |                        |        |       |                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets) Consolidated  |  | $                      | 29,312 |       | 16.50                      | % |        | $                                                                    | 14,217 |  | 8.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 28,846 |       | 16.30                      | % |        | $                                                                    | 14,195 |  | 8.00 | %      |  | $     | 17,744 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) Consolidated |  | $                      | 27,224 |       | 15.30                      | % |        | $                                                                    | 7,109  |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 26,758 |       | 15.10                      | % |        | $                                                                    | 7,098  |  | 4.00 | %      |  | $     | 10,646 |  | 6.00  | %
|Tier 1 Capital (to Average Assets)Consolidated        |  | $                      | 27,224 |       | 11.50                      | % |        | $                                                                    | 9,470  |  | 4.00 | %      |  |       | N/A    |  | N/A   |  
|Bank of Essex                                         |  | $                      | 26,758 |       | 11.30                      | % |        | $                                                                    | 9,470  |  | 4.00 | %      |  | $     | 11,838 |  | 5.00  | %



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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.



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.



F-24



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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, 2005 and 2004, the fair values of loan commitments and
stand-by letters of credit were deemed to be immaterial.



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



|                               |  |                |         |                     |   |                |  |                     |         |  |   |        
|------------------------------ |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                               |  | 2005           |         | 2004               
|                               |  | CarryingAmount |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|                               |  | (in thousands)
|Financial assets:              |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and short-terminvestments |  | $              | 7,365   |                     | $ | 7,365          |  | $                   | 4,354   |  | $ | 4,354  
|Federal funds sold             |  |                |        |                     |   |               |  |                     | 5,064   |  |   | 5,064  
|Securities                     |  |                | 55,393  |                     |   | 55,325         |  |                     | 57,955  |  |   | 57,955 
|Restricted securities          |  |                | 1,188   |                     |   | 1,188          |  |                     | 833     |  |   | 833    
|Loans held for sale            |  |                |        |                     |   |               |  |                     | 361     |  |   | 361    
|Loans, net of allowance        |  |                | 180,207 |                     |   | 182,006        |  |                     | 157,471 |  |   | 161,087
|Accrued interest receivable    |  |                | 1,190   |                     |   | 1,190          |  |                     | 1,154   |  |   | 1,154  
|                               |  |                |         |                    
|Financial liabilities:         |  |                |         |                     |   |                |  |                     |         |  |   |        
|Deposits                       |  | $              | 223,132 |                     | $ | 222,479        |  | $                   | 206,973 |  | $ | 207,383
|Federal funds purchased        |  |                | 1,810   |                     |   | 1,810          |  |                     |        |  |   |       
|Federal Home Loan Bank         |  |                |         |                     |   |                |  |                     |         |  |   |        
|Bank advances                  |  |                | 5,000   |                     |   | 4,647          |  |                     |        |  |   |       
|Trust preferred capital notes  |  |                | 4,124   |                     |   | 4,161          |  |                     | 4,124   |  |   | 4,159  
|Accrued interest payable       |  |                | 526     |                     |   | 526            |  |                     | 319     |  |   | 319    



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.



F-25



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##### Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



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 years ended
December 31, 2005 and 2004, the weighted-average interest rate was 6.29% and 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 notes 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. At December 31, 2005 and 2004, all trust preferred notes were included in Tier 1 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.



F-26



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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,
2005 and 2004



|                                             |  |      |            |      |   |           
|-------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                             |  | 2005 |            | 2004
|Assets                                       |  |      |            |      |   |           
|Cash                                         |  | $    | 137,129    |      | $ | 139,533   
|Investment in subsidiaries                   |  |      | 29,710,691 |      |   | 28,215,386
|Securities available for sale, at fair value |  |      | 299,586    |      |   | 235,389   
|Other assets                                 |  |      | 302,051    |      |   | 284,550   
|                                             |  |      |            |      |   |           
|Total assets                                 |  | $    | 30,449,457 |      | $ | 28,874,858
|                                             |  |      |            |      |   |           
|Liabilities and Stockholders Equity         |  |      |            |      |   |           
|Trust preferred capital notes                |  | $    | 4,124,000  |      | $ | 4,124,000 
|Other liabilities                            |  |      | 90,820     |      |   | 70,102    
|Stockholders equity                         |  |      | 26,234,637 |      |   | 24,680,756
|                                             |  |      |            |      |   |           
|Total liabilities and stockholders equity   |  | $    | 30,449,457 |      | $ | 28,874,858
|                                             |  |      |            |      |   |           



F-27



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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, 2005



|                                                                                     |  |      |           |      |   |           |  |   |           |  
|------------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                                                                                     |  | 2005 |           | 2004 |   | 2003      | 
|Income:                                                                              |  |      |           |      |   |           |  |   |           |  
|Dividends from subsidiary                                                            |  | $    | 870,000   |      | $ | 755,743   |  | $ | 668,000   |  
|Dividends on other securities                                                        |  |      | 11,399    |      |   | 7,481     |  |   | 2,428     |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Total income                                                                         |  | $    | 881,399   |      | $ | 763,224   |  | $ | 670,428   |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Expenses:                                                                            |  |      |           |      |   |           |  |   |           |  
|Interest expense                                                                     |  | $    | 263,223   |      | $ | 187,004   |  | $ | 9,076     |  
|Other                                                                                |  |      | 23,000    |      |   | 31,015    |  |   |          |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Total expenses                                                                       |  | $    | 286,223   |      | $ | 218,019   |  | $ | 9,076     |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Income before allocated tax benefit (expense) and undistributed income of subsidiary |  | $    | 595,176   |      | $ | 545,205   |  | $ | 661,352   |  
|                                                                                     |  |      |          
|Allocated income tax benefit (expense)                                               |  |      | 93,441    |      |   | 74,855    |  |   | (115      | )
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Income before equity in undistributed income of subsidiary                           |  | $    | 688,617   |      | $ | 620,060   |  | $ | 661,237   |  
|                                                                                     |  |      |          
|Equity in undistributed income of subsidiary                                         |  |      | 2,412,149 |      |   | 2,265,435 |  |   | 1,745,815 |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  
|Net income                                                                           |  | $    | 3,100,766 |      | $ | 2,885,495 |  | $ | 2,407,052 |  
|                                                                                     |  |      |           |      |   |           |  |   |           |  



F-28



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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, 2005



|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                  |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Cash Flows from Operating Activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                        |  | $    | 3,100,766  |   |      | $ | 2,885,495  |      |  | $ | 2,407,052  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|(Increase) in other assets                                                        |  |      | (41,559    | ) |      |   | (45,277    | )    |  |   | (234,168   | )
|Deferred tax provision                                                            |  |      | 3,340      |   |      |   | 6,683      |      |  |   | 6,682      |  
|Undistributed earnings of subsidiary                                              |  |      | (2,412,149 | ) |      |   | (2,265,435 | )    |  |   | (1,745,815 | )
|Increase (decrease) in liabilities                                                |  |      | 20,718     |   |      |   | (7,987     | )    |  |   | 1,123      |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                         |  | $    | 671,116    |   |      | $ | 573,479    |      |  | $ | 434,874    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|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                                                               |  |      | (872,371   | ) |      |   | (747,240   | )    |  |   | (660,940   | )
|Net proceeds from issuance of common stock                                        |  |      | 199,014    |   |      |   | 130,943    |      |  |   | 104,110    |  
|Cash paid for fractional shares                                                   |  |      | (163       | ) |      |   | (78        | )    |  |   | (6         | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                               |  | $    | (673,520   | ) |      | $ | (616,375   | )    |  | $ | 3,567,164  |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents                                  |  | $    | (2,404     | ) |      | $ | (42,896    | )    |  | $ | 2,038      |  
|Cash and Cash Equivalents                                                         |  |      |            |   |      |   |            |      |  |   |            |  
|Beginning                                                                         |  |      | 139,533    |   |      |   | 182,429    |      |  |   | 180,391    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Ending                                                                            |  | $    | 137,129    |   |      | $ | 139,533    |      |  | $ | 182,429    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  



F-29



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##### Table of Contents

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, 2006.



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



Date: March 30, 2006



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 E.
HUGHESPage E.
Hughes                       |  | Director                                                                                                           
|                                                          | 
|/S/    PAGE EMERSON
HUGHESPage Emerson
Hughes             |  | Director                                                                                                           
|                                                          | 
|/S/    PHILIP T.
MINORPhilip T.
Minor                     |  | Director                                                                                                           



1