Exhibit 13.0

COMMUNITY FIRST FINANCIAL CORPORATION

Exhibit A

2005Annual report to Stockholders

(See Attached)



35



---

Consolidated Balance Sheets

December 31, 2005 and 2004



|                                                                                                                    |  |      |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                    |  | 2005 |             |   | 2004 |  
|Assets                                                                                                              |  |      |             |   |      |   |             |  
|Cash and due from banks                                                                                             |  | $    | 7,714,729   |   |      | $ | 7,236,913   |  
|Interest-bearing deposits with banks                                                                                |  |      | 250,407     |   |      |   | 223,332     |  
|Investment securities available-for-sale                                                                            |  |      | 7,415,355   |   |      |   | 10,507,984  |  
|Restricted equity securities                                                                                        |  |      | 878,736     |   |      |   | 885,636     |  
|Loans, net of allowance for loan losses of                                                                          |  |      |             |   |      |   |             |  
|$1,385,524 in 2005 and $1,392,127 in 2004                                                                           |  |      | 137,034,526 |   |      |   | 129,141,958 |  
|Loans held-for-sale                                                                                                 |  |      | 522,700     |   |      |   |            |  
|Property and equipment, net                                                                                         |  |      | 4,031,326   |   |      |   | 4,277,253   |  
|Foreclosed assets                                                                                                   |  |      | 41,600      |   |      |   |            |  
|Accrued income                                                                                                      |  |      | 672,030     |   |      |   | 545,824     |  
|Other assets                                                                                                        |  |      | 3,918,436   |   |      |   | 3,719,240   |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Total assets                                                                                                        |  | $    | 162,479,845 |   |      | $ | 156,538,140 |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Liabilities and Stockholders Equity                                                                                |  |      |             |   |      |   |             |  
|                                                                                                                    |  |     
|Liabilities                                                                                                         |  |      |             |   |      |   |             |  
|Noninterest-bearing deposits                                                                                        |  | $    | 18,709,301  |   |      | $ | 17,615,739  |  
|Interest-bearing deposits                                                                                           |  |      | 120,242,455 |   |      |   | 121,824,321 |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Total deposits                                                                                                      |  |      | 138,951,756 |   |      |   | 139,440,060 |  
|                                                                                                                    |  |     
|Federal funds purchased                                                                                             |  |      | 5,878,000   |   |      |   | 275,000     |  
|Subordinated debt                                                                                                   |  |      | 2,500,000   |   |      |   | 2,500,000   |  
|Accrued interest payable                                                                                            |  |      | 324,805     |   |      |   | 309,031     |  
|Other liabilities                                                                                                   |  |      | 305,300     |   |      |   | 166,208     |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                   |  |      | 147,959,861 |   |      |   | 142,690,299 |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Commitments and contingencies                                                                                       |  |      |            |   |      |   |            |  
|                                                                                                                    |  |     
|Stockholders equity                                                                                                |  |      |             |   |      |   |             |  
|Preferred stock, $10 par value; 1,000,000 shares authorized; 300,000 shares issued and outstanding in 2005 and 2004 |  |      | 2,970,989   |   |      |   | 2,970,989   |  
|Common stock, no par value; 10,000,000 shares authorized; 1,162,326 shares issued and outstanding in 2005 and 2004  |  |      | 9,650,323   |   |      |   | 9,650,323   |  
|                                                                                                                    |  |     
|Retained earnings                                                                                                   |  |      | 2,005,358   |   |      |   | 1,268,482   |  
|Accumulated other comprehensive income (loss)                                                                       |  |      | (106,686    | ) |      |   | (41,953     | )
|                                                                                                                    |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                          |  |      | 14,519,984  |   |      |   | 13,847,841  |  
|                                                                                                                    |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                          |  | $    | 162,479,845 |   |      | $ | 156,538,140 |  
|                                                                                                                    |  |      |             |   |      |   |             |  

See Notes to Consolidated Financial Statements



36



---

Consolidated Statements of Income

Years ended December 31, 2005, 2004 and 2003



|                                                              |  |      |           |   |      |   |           |      |  |   |          
|------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                              |  | 2005 |           |   | 2004 |   |           | 2003
|Interest income                                               |  |      |           |   |      |   |           |      |  |   |          
|Loans and fees on loans                                       |  | $    | 9,473,275 |   |      | $ | 8,464,133 |      |  | $ | 9,128,708
|Federal funds sold                                            |  |      | 18,457    |   |      |   | 48,788    |      |  |   | 38,056   
|Investment securities, taxable                                |  |      | 298,771   |   |      |   | 242,847   |      |  |   | 139,627  
|Deposits with banks                                           |  |      | 7,073     |   |      |   | 714       |      |  |   | 185      
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Total interest income                                         |  |      | 9,797,576 |   |      |   | 8,756,482 |      |  |   | 9,306,576
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Interest expense                                              |  |      |           |   |      |   |           |      |  |   |          
|Deposits                                                      |  |      | 3,658,377 |   |      |   | 3,032,266 |      |  |   | 3,843,583
|Other borrowings                                              |  |      | 184,086   |   |      |   | 104,053   |      |  |   | 37,415   
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Total interest expense                                        |  |      | 3,842,463 |   |      |   | 3,136,319 |      |  |   | 3,880,998
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Net interest income                                           |  |      | 5,955,113 |   |      |   | 5,620,163 |      |  |   | 5,425,578
|Provision for loan losses                                     |  |      | 401,847   |   |      |   | 485,044   |      |  |   | 903,000  
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Net interest income after provision for loan losses           |  |      | 5,553,266 |   |      |   | 5,135,119 |      |  |   | 4,522,578
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Noninterest income                                            |  |      |           |   |      |   |           |      |  |   |          
|Service charges on deposit accounts                           |  |      | 301,071   |   |      |   | 287,386   |      |  |   | 224,966  
|Mortgage loan origination fees                                |  |      | 154,127   |   |      |   | 43,536    |      |  |   | 730,393  
|Other income                                                  |  |      | 118,470   |   |      |   | 79,512    |      |  |   | 63,101   
|Increase in cash surrender value of bank owned life insurance |  |      | 156,531   |   |      |   | 12,145    |      |  |   |         
|Gain on sales of securities                                   |  |      |          |   |      |   | 157,500   |      |  |   |         
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Total noninterest income                                      |  |      | 730,199   |   |      |   | 580,079   |      |  |   | 1,018,460
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Noninterest expense                                           |  |      |           |   |      |   |           |      |  |   |          
|Salaries and employee benefits                                |  |      | 2,503,987 |   |      |   | 2,129,353 |      |  |   | 2,390,436
|Occupancy and equipment expense                               |  |      | 600,961   |   |      |   | 683,434   |      |  |   | 582,478  
|Data processing                                               |  |      | 150,326   |   |      |   | 135,945   |      |  |   | 127,952  
|Other expense                                                 |  |      | 1,752,087 |   |      |   | 1,452,506 |      |  |   | 1,129,115
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Total noninterest expense                                     |  |      | 5,007,361 |   |      |   | 4,401,238 |      |  |   | 4,229,981
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Income before income taxes                                    |  |      | 1,276,104 |   |      |   | 1,313,960 |      |  |   | 1,311,057
|Income tax expense                                            |  |      | 389,228   |   |      |   | 452,662   |      |  |   | 294,255  
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Net income                                                    |  |      | 886,876   |   |      |   | 861,298   |      |  |   | 1,016,802
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Preferred stock dividends                                     |  |      | (150,000  | ) |      |   | (150,000  | )    |  |   |         
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Net income available to common stockholders                   |  | $    | 736,876   |   |      | $ | 711,298   |      |  | $ | 1,016,802
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Basic earnings per share(1)                                   |  | $    | .63       |   |      | $ | .61       |      |  | $ | .87      
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Diluted earnings per share(1)                                 |  | $    | .55       |   |      | $ | .55       |      |  | $ | .66      
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding                    |  |      | 1,162,326 |   |      |   | 1,162,334 |      |  |   | 1,162,336
|                                                              |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding, diluted           |  |      | 1,614,134 |   |      |   | 1,563,408 |      |  |   | 1,535,735
|                                                              |  |      |           |   |      |   |           |      |  |   |          

---

|(1) | Adjusted for 6 for 5 split in 2004.
|--- | -----------------------------------

See Notes to Consolidated Financial Statements



37



---

Consolidated Statements of Changes in Stockholders Equity

Years ended December 31, 2005, 2004 and 2003



|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ------ | --------------------------- | --------- | - | -------------------------------------------- | - | --------- | ----- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                                            |  | Stock     |           |        | Retained Earnings (Deficit) |           |   | AccumulatedOther Comprehensive Income
(Loss) |   |           | Total | 
|                                                                                                                            |  | Preferred |           | Common |                             |           |   |                                             
|Balance, December 31, 2002                                                                                                  |  |           | 2,621,989 |        | $                           | 9,650,427 |   |                                              | $ | (459,618  | )     |  | $ | 2,659    |   |  | $ | 11,815,457 |  
|                                                                                                                            |  |           |           |        |                            
|Shares sold                                                                                                                 |  |           | 349,000   |        |                             |          |   |                                              |   |          |       |  |   |         |   |  |   | 349,000    |  
|                                                                                                                            |  |           |           |        |                            
|Comprehensive income                                                                                                        |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Net income                                                                                                                  |  |           |          |        |                             |          |   |                                              |   | 1,016,802 |       |  |   |         |   |  |   | 1,016,802  |  
|Net change in unrealized appreciation (depreciation) on investment securities available-for-sale, net of taxes of $2,483    |  |           |          |        |                             |          |   |                                              |   |          |       |  |   | (4,820   | ) |  |   | (4,820     | )
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                                  |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   | 1,011,982  |  
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2003                                                                                                  |  |           | 2,970,989 |        |                             | 9,650,427 |   |                                              |   | 557,184   |       |  |   | (2,161   | ) |  |   | 13,176,439 |  
|                                                                                                                            |  |           |           |        |                            
|Fractional shares purchased                                                                                                 |  |           |          |        |                             | (104      | ) |                                              |   |          |       |  |   |         |   |  |   | (104       | )
|                                                                                                                            |  |           |           |        |                            
|Comprehensive income                                                                                                        |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Net income                                                                                                                  |  |           |           |        |                             |           |   |                                              |   | 861,298   |       |  |   |          |   |  |   | 861,298    |  
|Net change in unrealized appreciation (depreciation) on investment securities available-for-sale, net of taxes of $33,051   |  |           |          |        |                             |          |   |                                              |   |          |       |  |   | 64,158   |   |  |   | 64,158     |  
|Reclassify realized gains on sales of securities, net of taxes of $(53,550)                                                 |  |           |          |        |                             |          |   |                                              |   |          |       |  |   | (103,950 | ) |  |   | (103,950   | )
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                                  |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   | 821,506    |  
|Dividends declared on Convertible preferred stock ($.50 per share)                                                          |  |           |           |        |                             |           |   |                                              |   | (150,000  | )     |  |   |          |   |  |   | (150,000   | )
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2004                                                                                                  |  |           | 2,970,989 |        |                             | 9,650,323 |   |                                              |   | 1,268,482 |       |  |   | (41,953  | ) |  |   | 13,847,841 |  
|                                                                                                                            |  |           |           |        |                            
|Comprehensive income                                                                                                        |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Net income                                                                                                                  |  |           |           |        |                             |           |   |                                              |   | 886,876   |       |  |   |          |   |  |   | 886,876    |  
|Net change in unrealized appreciation (depreciation) on investment securities available-for-sale, net of taxes of $(33,346) |  |           |           |        |                             |           |   |                                              |   |           |       |  |   | (64,733  | ) |  |   | (64,733    | )
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                                  |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   | 822,143    |  
|Dividends declared on convertible preferred stock ($.50 per share)                                                          |  |           |           |        |                             |           |   |                                              |   | (150,000  | )     |  |   |          |   |  |   | (150,000   | )
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  
|Balance, December 31, 2005                                                                                                  |  | $         | 2,970,989 |        | $                           | 9,650,323 |   |                                              | $ | 2,005,358 |       |  | $ | (106,686 | ) |  | $ | 14,519,984 |  
|                                                                                                                            |  |           |           |        |                             |           |   |                                              |   |           |       |  |   |          |   |  |   |            |  

See Notes to Consolidated Financial Statements



38



---

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003



|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | 2005 |            |   | 2004 |   |             | 2003 | 
|Cash flows from operating activities                                    |  |      |            |   |      |   |             |      |  |   |             |  
|Net income                                                              |  | $    | 886,876    |   |      | $ | 861,298     |      |  | $ | 1,016,802   |  
|Adjustments to reconcile net income to net cash provided by operations: |  |      |            |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                           |  |      | 298,276    |   |      |   | 369,055     |      |  |   | 315,618     |  
|Deferred taxes                                                          |  |      | (15,260    | ) |      |   | 338,017     |      |  |   | (362,389    | )
|Accretion of discount on securities net of amortization of premiums     |  |      | (5,450     | ) |      |   | (10,686     | )    |  |   | (40,784     | )
|Provision for loan losses                                               |  |      | 401,847    |   |      |   | 485,044     |      |  |   | 903,000     |  
|Gain on sales of investment securities                                  |  |      |           |   |      |   | (157,500    | )    |  |   |            |  
|Gain on sales of premises and equipment                                 |  |      | (5,674     | ) |      |   |            |      |  |   |            |  
|Changes in assets and liabilities:                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Loans held-for-sale                                                     |  |      | (522,700   | ) |      |   | 202,000     |      |  |   | 8,026,574   |  
|Accrued income                                                          |  |      | (126,206   | ) |      |   | (67,377     | )    |  |   | 2,017       |  
|Other assets                                                            |  |      | (150,590   | ) |      |   | (8,714      | )    |  |   | (71,811     | )
|Accrued interest payable                                                |  |      | 15,774     |   |      |   | 9,516       |      |  |   | (8,005      | )
|Other liabilities                                                       |  |      | 139,092    |   |      |   | (489,009    | )    |  |   | 348,027     |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash provided (used) by operating activities                        |  |      | 915,985    |   |      |   | 1,531,644   |      |  |   | 10,129,049  |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                    |  |      |            |   |      |   |             |      |  |   |             |  
|Net (increase) decrease in federal funds sold                           |  |      |           |   |      |   | 2,146,000   |      |  |   | (2,146,000  | )
|Purchases of investment securities                                      |  |      |           |   |      |   | (15,008,303 | )    |  |   | (15,245,912 | )
|Maturities of investment securities                                     |  |      | 3,000,000  |   |      |   | 14,015,000  |      |  |   | 8,834,000   |  
|Redemptions of restricted equity securities                             |  |      | 6,900      |   |      |   | 183,400     |      |  |   |            |  
|Proceeds from sales of investment securities                            |  |      |           |   |      |   | 507,500     |      |  |   |            |  
|Proceeds from sales of premises and equipment                           |  |      | 7,402      |   |      |   |            |      |  |   |            |  
|Net (increase) decrease in loans                                        |  |      | (8,336,015 | ) |      |   | 3,977,553   |      |  |   | (13,876,084 | )
|Purchases of property and equipment                                     |  |      | (54,077    | ) |      |   | (440,209    | )    |  |   | (1,699,780  | )
|Purchase of bank owned life insurance                                   |  |      |           |   |      |   | (3,250,000  | )    |  |   |            |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash (used in) provided by investing activities                     |  |      | (5,375,790 | ) |      |   | 2,130,941   |      |  |   | (24,133,776 | )
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities                                    |  |      |            |   |      |   |             |      |  |   |             |  
|Net increase in noninterest-bearing deposits                            |  |      | 1,093,562  |   |      |   | 5,407,067   |      |  |   | 3,706,085   |  
|Net increase (decrease) in interest-bearing deposits                    |  |      | (1,581,866 | ) |      |   | (9,234,422  | )    |  |   | 17,063,495  |  
|Net increase (decrease) in federal funds purchased                      |  |      | 5,603,000  |   |      |   | 275,000     |      |  |   | (4,824,000  | )
|Proceeds from issuance of subordinated debt                             |  |      |           |   |      |   |            |      |  |   | 2,500,000   |  
|Issuance of preferred stock, net of costs                               |  |      |           |   |      |   |            |      |  |   | 349,000     |  
|Fractional shares purchased                                             |  |      |           |   |      |   | (104        | )    |  |   |            |  
|Dividends paid on preferred stock                                       |  |      | (150,000   | ) |      |   | (150,000    | )    |  |   |            |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) financing activities                     |  |      | 4,964,696  |   |      |   | (3,702,459  | )    |  |   | 18,794,580  |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                    |  |      | 504,891    |   |      |   | (39,874     | )    |  |   | 4,789,853   |  
|                                                                        |  |      |           
|Cash and cash equivalents, beginning                                    |  |      | 7,460,245  |   |      |   | 7,500,119   |      |  |   | 2,710,266   |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, ending                                       |  | $    | 7,965,136  |   |      | $ | 7,460,245   |      |  | $ | 7,500,119   |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of cash flow information                        |  |      |            |   |      |   |             |      |  |   |             |  
|Interest paid                                                           |  | $    | 3,826,689  |   |      | $ | 3,126,803   |      |  | $ | 3,889,003   |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Taxes paid                                                              |  | $    | 269,115    |   |      | $ | 509,530     |      |  | $ | 311,601     |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Non-cash investing activities                                           |  |      |            |   |      |   |             |      |  |   |             |  
|Loans transferred to foreclosed assets                                  |  | $    | 41,600     |   |      | $ |            |      |  | $ |            |  
|                                                                        |  |      |            |   |      |   |             |      |  |   |             |  

See Notes to Consolidated Financial Statements



39



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies

Organization

Community First Financial Corporation (the
Corporation) is a bank holding company that was organized under Virginia law during 2002. It is the parent company of Community First Bank (the Bank), and its primary business activity is its investment in and managing the business of the Bank.

The directors of the Bank organized the Corporation for the sole purpose of becoming the Banks parent holding Company. On July 1, 2002, the
Corporation and the Bank completed a tax-free share exchange in which each outstanding share of the Banks common stock was exchanged for one share of the Corporations common stock. The Banks shareholders became the shareholders of
the Corporation and the Bank became the Corporations wholly owned subsidiary. The Banks shareholders had approved this reorganization at its annual meeting held on May 13, 2002.

The Banks operations are primarily retail oriented and directed toward individuals and small and medium sized businesses located in its banking market. The Bank
currently serves Bedford County, Nelson County, the City of Lynchburg, Virginia and surrounding areas through four banking offices. As a state chartered Federal Reserve member, the Bank is subject to regulation by the Virginia Bureau of Financial
Institutions and the Federal Reserve.

The accounting and reporting policies of the Company follow generally accepted accounting principles and general
practices within the financial services industry. Following is a summary of the more significant policies.

Critical accounting policies

The notes to our audited consolidated financial statements contain a summary of our significant accounting policies. We believe our policies with
respect to the methodology for our determination of the allowance for loan losses, and asset impairment judgments, including the recoverability of intangible assets involve a higher degree of complexity and require management to make difficult and
subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application
are periodically reviewed with the Audit Committee and our Board of Directors.

Business segments

The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers the materiality of the
potential segment and components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.

Principles of consolidation

The consolidated financial statements include the accounts of Community First
Financial Corporation and its wholly owned subsidiary, Community First Bank, hereinafter referred to as the Company. All significant inter-company accounts and transactions have been eliminated.

Use of estimates

The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.



40



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Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued

Use of estimates, continued

Substantially all of the
Corporations loan portfolio consists of loans in its market area. Accordingly, the ultimate collectibility of a substantial portion of the Corporations loan portfolio and the recovery of a substantial portion of the carrying amount of
foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the educational, manufacturing, and retail segments.

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in
local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Corporations allowances for loan and foreclosed real estate losses. Such agencies may require the Corporation
to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate
losses may change materially in the near term.

Cash and cash equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption cash and due from banks and
interest-bearing deposits in banks.

Trading securities

The Corporation does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

Securities held-to-maturity

Bonds, notes, and debentures for which the Corporation has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. All securities held by the Bank at December 31, 2005 and 2004 were
classified as available-for-sale.

Securities available-for-sale

Available-for-sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as held-to-maturity securities.

Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of stockholders equity.
Realized gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call
dates.

Declines in the fair value of individual held-to-maturity and available-for-sale securities below cost that are other than temporary are reflected
as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.

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 value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.



41



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Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued

Loans receivable

Loans receivable that management has the
intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and recognized as an
adjustment of the yield of the related loan. Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in managements opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower
has regained the ability to service the debt, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

A loan is considered impaired when, based on
current information and events, it is probable that the Company 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 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 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.



42



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Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued

Property and equipment

Company premises, furniture and
equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:



|                           |  |      
|-------------------------- |  | -----
|                           |  | Years
|Buildings and improvements |  | 39-40
|Furniture and equipment    |  | 5-10 

For assets recorded under the terms of capital leases, the present value of future minimum lease payments is
treated as cost.

Stock-based compensation

The
Company accounts for its stock-based compensation using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based Compensation (issued in October 1995), but complies with the disclosure requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting had been applied.

Transfers of financial assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising expense

The Company expenses advertising costs as they are incurred. Advertising expense for the years presented are not material.

Income taxes

Provision for income taxes is based on amounts
reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities (assets). Such unrealized
appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is also recorded as an
adjustment to equity.

Basic earnings per share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.



43



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Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued

Diluted earnings per share

The computation of
diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had
been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.

Foreclosed properties

Real estate properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at
fair value less anticipated cost to sell at the date of foreclosure. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The historical average holding period for such properties is less than 12 months.

Comprehensive income

Annual comprehensive income reflects the
change in the Companys equity during the year arising from transactions and events other than investment by and distributions to shareholders. It consists of net income plus certain other changes in assets and liabilities that are reported as
separate components of stockholders equity rather than as income or expense.

Financial instruments

Derivatives that are used as part of the asset/liability management process are linked to specific assets or liabilities and have high correlation between the contract
and the underlying item being hedged, both at inception and throughout the hedge period. In addition, forwards and option contracts must reduce an exposures risk, and for hedges of anticipatory transactions, the significant terms and
characteristics of the transaction must be identified and the transactions must be probable of occurring. All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading.

In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial and
standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Fair value of financial instruments

Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. 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. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

Cash and cash equivalents: The
carrying amounts reported in the balance sheet for cash and due from banks and interest-bearing deposits with banks approximate their fair values.



44



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Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued

Fair value of financial instruments, continued

Available-for-sale and held-to-maturity securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of restricted equity securities approximate fair values.

Loans receivable: For
variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values, where applicable. The carrying amount of accrued interest receivable approximates its fair value. Loans held for sale generally have fixed purchase commitments. Therefore, the
carrying amount approximates fair market value.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal
to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value.

Debt: The fair value of other debt
is estimated using a discounted cash flow calculation that applies contracted interest rates being paid on the debt to the current market interest rate of similar debt.

Other liabilities: For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The carrying amounts of other liabilities approximates their
fair values.

Reclassification

Certain
reclassifications have been made to the prior years consolidated financial statements to place them on a comparable basis with the current year. Net income and stockholders equity previously reported were not affected by these
reclassifications.

Note 2. Restrictions on Cash

To
comply with banking regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $58,000 and $603,000 for the periods including December 31, 2005 and 2004,
respectively.



45



---

Notes to Consolidated Financial Statements



Note 3. Securities

Debt and equity securities have been classified in the balance sheets according to managements intent. The carrying amount of securities (all available-for-sale) and their approximate fair values at December 31, 2005 and 2004
follow:



|                                  |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|--------------------------------- |  | ------------- | ---------- | --------------- | - | ---------------- |  | - | ---------- | - |  | - | ----------
|                                  |  | AmortizedCost |            | UnrealizedGains |   | UnrealizedLosses |  |   | Fair Value
|2005                              |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|U.S. Government agency securities |  | $             | 7,255,000  |                 | $ |                 |  | $ | (161,645   | ) |  | $ | 7,093,355 
|Equity securities                 |  |               | 322,000    |                 |   |                 |  |   |           |   |  |   | 322,000   
|                                  |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|                                  |  | $             | 7,577,000  |                 | $ |                 |  | $ | (161,645   | ) |  | $ | 7,415,355 
|                                  |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|2004                              |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|U.S. Government agency securities |  | $             | 10,249,550 |                 | $ |                 |  | $ | (63,566    | ) |  | $ | 10,185,984
|Equity securities                 |  |               | 322,000    |                 |   |                 |  |   |           |   |  |   | 322,000   
|                                  |  |               |            |                 |   |                  |  |   |            |   |  |   |           
|                                  |  | $             | 10,571,550 |                 | $ |                 |  | $ | (63,566    | ) |  | $ | 10,507,984
|                                  |  |               |            |                 |   |                  |  |   |            |   |  |   |           

The fair value of securities with unrealized losses, all U.S. Government agency securities, was $7,093,355 at
December 31, 2005. All of these securities had been in an unrealized loss, all U.S. Government agency securities, position for one-year or more. The fair value of securities with unrealized losses was $10,185,984 at December 31, 2004. None
of these securities had been in an unrealized loss position for one-year or more. Management considers the nature of the investment, the underlying causes of the decline in market value, the severity and duration of the decline in market value and
other evidence, on a security by security basis, in determining if the decline in market value is other than temporary. Management believes all unrealized losses to be temporary in nature.

Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB), The Community Bankers Bank, The Federal Reserve
of Richmond (Federal Reserve), Virginia Title Center and Bankers Insurance, LLC. All of those entities except Virginia Title Center and Bankers Insurance, LLC are upstream correspondents of the Bank. Virginia Title Center is a title
company. Bankers Insurance, LLC is an insurance company. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to hold that stock so long as it is an FHLB member. The
Federal Reserve requires Banks to purchase stock as a condition of membership in the Federal Reserve system. The Banks stock in The Community Bankers Bank and Virginia Title Center is restricted only in the fact that the stock may only be
repurchased by the respective companies.

Investment securities with a market value of approximately $3,408,592 and $1,479,053 were pledged as collateral
on public deposits at December 31, 2005 and 2004, respectively. Gross proceeds from the sale of securities available for sale amounted to $507,500 for the year ended December 31, 2004. There was a realized gain of $157,500 on the sale of
investment securities for the year ended December 31, 2004. There were no gross proceeds from sales of securities available for sale and there were no realized gains or losses on the sales or maturities of investment securities for the years
ended December 31, 2005 or 2003.

The amortized cost and fair value of debt securities (all available-for-sale) at December 31, 2005, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                      |  |                |           |            |   |          
|------------------------------------- |  | -------------- | --------- | ---------- | - | ---------
|                                      |  | Amortized Cost |           | Fair Value
|Due within one year                   |  | $              | 2,000,000 |            | $ | 1,965,625
|Due after one year through five years |  |                | 5,255,000 |            |   | 5,127,730
|                                      |  |                |           |            |   |          
|                                      |  | $              | 7,255,000 |            | $ | 7,093,355
|                                      |  |                |           |            |   |          



46



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Notes to Consolidated Financial Statements



Note 4. Loans Receivable

The major components of loans in the balance sheet at December 31, 2005 and 2004 are as follows (in thousands):



|                                  |  |      |             |   |      |   |             |  
|--------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                  |  | 2005 |             |   | 2004 |  
|Commercial                        |  | $    | 20,506,154  |   |      | $ | 19,109,268  |  
|Real estate:                      |  |      |             |   |      |   |             |  
|Construction and land development |  |      | 10,698,413  |   |      |   | 10,512,676  |  
|Farmland                          |  |      | 256,198     |   |      |   | 370,440     |  
|Residential, 1-4 families         |  |      | 43,199,183  |   |      |   | 41,566,239  |  
|Residential, 5 or more families   |  |      | 3,015,155   |   |      |   | 3,861,220   |  
|Nonfarm, nonresidential           |  |      | 55,319,497  |   |      |   | 47,897,975  |  
|Consumer                          |  |      | 4,772,764   |   |      |   | 5,254,990   |  
|Other                             |  |      | 872,560     |   |      |   | 2,150,230   |  
|                                  |  |      |             |   |      |   |             |  
|                                  |  |      | 138,639,924 |   |      |   | 130,723,038 |  
|Net deferred loan fees            |  |      | (219,874    | ) |      |   | (188,953    | )
|Allowance for loan losses         |  |      | (1,385,524  | ) |      |   | (1,392,127  | )
|                                  |  |      |             |   |      |   |             |  
|                                  |  | $    | 137,034,526 |   |      | $ | 129,141,958 |  
|                                  |  |      |             |   |      |   |             |  

Note 5. Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 is as follows:



|                                  |  |      |           |   |      |   |            |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                  |  | 2005 |           |   | 2004 |   |            | 2003 | 
|Balance, beginning                |  | $    | 1,392,127 |   |      | $ | 2,128,881  |      |  | $ | 1,301,659 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 401,847   |   |      |   | 485,044    |      |  |   | 903,000   |  
|Recoveries of amounts charged off |  |      | 88,290    |   |      |   | 8,542      |      |  |   | 7,222     |  
|Amounts charged off               |  |      | (496,740  | ) |      |   | (1,230,340 | )    |  |   | (83,000   | )
|                                  |  |      |           |   |      |   |            |      |  |   |           |  
|Balance, ending                   |  | $    | 1,385,524 |   |      | $ | 1,392,127  |      |  | $ | 2,128,881 |  
|                                  |  |      |           |   |      |   |            |      |  |   |           |  

The following is a summary of information pertaining to impaired and
nonperforming loans at December 31:



|                                              |  |      |           |      |   |          
|--------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                              |  | 2005 |           | 2004
|Impaired loans without a valuation allowance  |  | $    | 2,404,697 |      | $ | 1,418,536
|Impaired loans with a valuation allowance     |  |      | 491,038   |      |   | 1,587,666
|                                              |  |      |           |      |   |          
|Total impaired loans                          |  | $    | 2,895,735 |      | $ | 3,006,202
|                                              |  |      |           |      |   |          
|Valuation allowance related to impaired loans |  | $    | 212,400   |      | $ | 286,971  
|                                              |  |      |           |      |   |          

Non-accrual loans and loans past due 90 days or more and still accruing interest at December 31, 2005 were
approximately $311,000 and $328,000 respectively. Those loans were approximately $600,000 and $301,000, respectively at December 31, 2004. The average annual recorded investment in impaired loans and interest income recognized on impaired loans
for the years ended December 31, 2005 and 2004 is summarized below:



|                                                        |  |      |           |      |   |          
|------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                        |  | 2005 |           | 2004
|Average investment in impaired loans                    |  | $    | 3,104,172 |      | $ | 2,892,248
|                                                        |  |      |           |      |   |          
|Interest income recognized for the year                 |  | $    | 311,734   |      | $ | 298,224  
|                                                        |  |      |           |      |   |          
|Interest income recognized on a cash basis for the year |  | $    | 317,825   |      | $ | 295,033  
|                                                        |  |      |           |      |   |          

The Company is not committed to lend additional funds to debtors whose loans are
impaired or have been modified.



47



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Notes to Consolidated Financial Statements



Note 6. Property and Equipment

Components of property and equipment and total accumulated depreciation at December 31, 2005 and 2004 are as follows:



|                                            |  |      |           |      |   |          
|------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                            |  | 2005 |           | 2004
|Land, buildings and improvements            |  | $    | 3,748,416 |      | $ | 3,748,416
|Furniture and equipment                     |  |      | 1,824,933 |      |   | 1,805,407
|                                            |  |      |           |      |   |          
|Property and equipment, total               |  |      | 5,573,349 |      |   | 5,553,823
|                                            |  |     
|Less accumulated depreciation               |  |      | 1,542,023 |      |   | 1,276,570
|                                            |  |      |           |      |   |          
|Property and equipment, net of depreciation |  | $    | 4,031,326 |      | $ | 4,277,253
|                                            |  |      |           |      |   |          

Depreciation expense was approximately $298,000, $369,000 and $316,000 in 2005,
2004 and 2003, respectively.

The Corporation leases two branch facilities accounted for as operating leases. Rental expense under these leases for the
years ended December 31, 2005, 2004 and 2003 was $126,000, $123,821 and $93,863, respectively. Future non-cancelable lease payments are as follows:



|                    |  |   |        
|------------------- |  | - | -------
|2006                |  | $ | 130,400
|2007                |  |   | 100,200
|2008                |  |   | 90,000 
|2009                |  |   | 52,800 
|2010 and thereafter |  |   | 57,200 
|                    |  |   |        
|                    |  | $ | 430,600
|                    |  |   |        

Note 7. Bank Owned Life Insurance

The Bank paid $3,250,000 for bank owned life insurance policies in November 2004. The earnings from these policies will be used to offset employee benefit costs. The cash surrender value of these policies, which is
included in other assets on the accompanying consolidated balance sheets, was $3,418,676 and $3,262,145 as of December 31, 2005 and 2004, respectively.

Note 8. Deposits

The aggregate amount of
time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was approximately $21,501,399 and $18,867,788, respectively. At December 31, 2005, the scheduled maturities of time deposits are as follows:



|               |  |   |            
|-------------- |  | - | -----------
|2006           |  | $ | 55,304,239 
|2007           |  |   | 20,759,112 
|2008           |  |   | 7,225,403  
|2009           |  |   | 6,257,545  
|2010 and later |  |   | 3,224,729  
|               |  |   |            
|               |  |   | $92,771,028
|               |  |   |            

Demand deposit accounts with overdraft balances that were reclassified as loans amounted to $77,341 and $3,840 at
December 31, 2005 and 2004, respectively.



48



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Notes to Consolidated Financial Statements



Note 9. Short-term Debt

Short-term debt consists of federal funds purchased, which generally mature within one to four days from the transaction date. Additional information at December 31, 2005 and 2004 is summarized below:



|                                                     |  |      |           |   |      |   |         |  
|---------------------------------------------------- |  | ---- | --------- | - | ---- | - | ------- | -
|                                                     |  | 2005 |           |   | 2004 |  
|Outstanding balance at December 31                   |  | $    | 5,878,000 |   |      | $ | 275,000 |  
|                                                     |  |      |           |   |      |   |         |  
|Year-end weighted averaged rate                      |  |      | 4.40      | % |      |   | 2.40    | %
|                                                     |  |      |           |   |      |   |         |  
|Daily average outstanding during the year            |  | $    | 1,044,668 |   |      | $ | 61,661  |  
|                                                     |  |      |           |   |      |   |         |  
|Average rate for the year                            |  |      | 3.61      | % |      |   | 1.62    | %
|                                                     |  |      |           |   |      |   |         |  
|Maximum outstanding at any month-end during the year |  | $    | 5,878,000 |   |      | $ | 794,000 |  
|                                                     |  |      |           |   |      |   |         |  

At December 31, 2005, the Corporation had established lines of credit of approximately $24,400,000 with
various correspondent banks to provide additional liquidity if, and as needed.

Note 10. Long-term Debt

On September 26, 2003, the Corporation issued subordinated debt maturing September 26, 2015 in the amount of $2,500,000. The adjustable-rate instrument is tied
to the Wall Street Journal prime rate less 0.25%. The interest rate was 7.00% at December 31, 2005. The debt may be included in the calculation of the Companys total risk-based capital ratio.

Note 11. Fair Value of Financial Instruments

The estimated fair values of the Corporations financial instruments are as follows (dollars in thousands):



|                                        |  |                   |         |                   |   |                 |  |            |         |  |   |        
|--------------------------------------- |  | ----------------- | ------- | ----------------- | - | --------------- |  | ---------- | ------- |  | - | -------
|                                        |  | December 31, 2005 |         | December 31, 2004
|                                        |  | Carrying Amount   |         | Fair Value        |   | Carrying Amount |  | Fair Value
|Financial assets                        |  |                   |         |                   |   |                 |  |            |         |  |   |        
|Cash and cash equivalents               |  | $                 | 7,965   |                   | $ | 7,965           |  | $          | 7,460   |  | $ | 7,460  
|Securities, available-for-sale          |  |                   | 7,415   |                   |   | 7,415           |  |            | 10,508  |  |   | 10,508 
|Restricted equity securities            |  |                   | 879     |                   |   | 879             |  |            | 886     |  |   | 886    
|Loans, net of allowance for loan losses |  |                   | 137,035 |                   |   | 137,594         |  |            | 129,142 |  |   | 133,587
|Loan held-for-sale                      |  |                   | 523     |                   |   | 523             |  |            |         |  |   |       
|                                        |  |                   |         |                  
|Financial liabilities                   |  |                   |         |                   |   |                 |  |            |         |  |   |        
|Deposits                                |  |                   | 138,952 |                   |   | 139,946         |  |            | 139,440 |  |   | 139,882
|Federal funds purchased                 |  |                   | 5,878   |                   |   | 5,878           |  |            | 275     |  |   | 275    
|Subordinated debt                       |  |                   | 2,500   |                   |   | 2,500           |  |            | 2,500   |  |   | 2,500  

49



---

Notes to Consolidated Financial Statements



Note 12. Earnings per Share

The following table details the computation of basic and diluted earnings per share for the years ended December 31, 2005, 2004 and 2003 (adjusted for the 6-for-5 stock split declared October 25, 2004).



|                                                     |  |      |           |   |      |   |           |      |  |   |          
|---------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                     |  | 2005 |           |   | 2004 |   |           | 2003
|Net income                                           |  | $    | 886,876   |   |      | $ | 861,298   |      |  | $ | 1,016,802
|Preferred stock dividend                             |  |      | (150,000  | ) |      |   | (150,000  | )    |  |   |         
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Net income (income available to common shareholders) |  | $    | 736,876   |   |      | $ | 711,298   |      |  | $ | 1,016,802
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding           |  |      | 1,162,326 |   |      |   | 1,162,334 |      |  |   | 1,162,336
|Effect of dilutive options                           |  |      | 91,808    |   |      |   | 41,074    |      |  |   | 17,964   
|Effect of dilutive convertible preferred stock       |  |      | 360,000   |   |      |   | 360,000   |      |  |   | 355,435  
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding, diluted  |  |      | 1,614,134 |   |      |   | 1,563,408 |      |  |   | 1,535,735
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Basic earnings per share                             |  | $    | .63       |   |      | $ | .61       |      |  | $ | 0.87     
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Diluted earnings per share                           |  | $    | .55       |   |      | $ | .55       |      |  | $ | 0.66     
|                                                     |  |      |           |   |      |   |           |      |  |   |          

Note 13. Benefit Plans

Defined Contribution Plan

The Bank maintains a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. The
plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. In addition, the Bank may make additional contributions at the discretion of the Board of Directors. The
Corporation made a contribution in the amount of $20,400 in 2004 and no contribution in 2005 and 2003.

Flexible Benefits Plan

The Corporation maintains a Flexible Benefits Plan which covers substantially all employees. Participants may set aside pre-tax dollars to provide for future expenses
such as insurance, dependent care or health care. The Corporation makes no contributions to this plan.

Stock Option Plan

During 2000, the Corporation adopted a long-term incentive stock option plan under which up to 240,000 (adjusted for the 6-for-5 stock split declared October 25,
2004) shares of stock may be issued. Shares subject to the plan may be issued in any combination of incentive stock options, non-incentive stock options, restricted stock or stock appreciation rights, provided that the total value of shares issued
pursuant to incentive stock options may not exceed $100,000 to any individual. Termination of restrictions on any restricted stock granted or expiration of stock appreciation rights are controlled by the terms of each individual grant. Incentive and
non-incentive options expire no more than 10 years from the date of grant. Exercise prices of all options are determined by each individual grant except that incentive stock options may not be granted at less than fair market value and non-incentive
stock options may not be granted at less than the initial subscription price of the Banks stock ($8.33) (adjusted for the 6-for-5 stock split declared October 25, 2004). Vesting of incentive stock options is determined in accordance with
the terms of each option granted, but may not vest sooner than one year from the option grant date.



50



---

Notes to Consolidated Financial Statements



Note 13. Benefit Plans, continued

Stock Option Plan, continued

Activity under the plan during the years ended December 31, 2005, 2004, and
2003 is summarized below (adjusted for the 6-for-5 stock split declared October 25, 2004):



|                          |  |                         |   |  |                         |   |  |                            
|------------------------- |  | ----------------------- | - |  | ----------------------- | - |  | ---------------------------
|                          |  | Granted and Outstanding
|                          |  | Available for Grant     |   |  | Incentive Stock Options |   |  | Non-incentive Stock Options
|Balance December 31, 2002 |  | 11,870                  |   |  | 98,130                  |   |  | 90,000                     
|                          |  |                         |  
|Granted                   |  | (11,000                 | ) |  | 11,000                  |   |  |                           
|Forfeited                 |  | 11,666                  |   |  | (11,666                 | ) |  |                           
|                          |  |                         |   |  |                         |   |  |                            
|Balance December 31, 2003 |  | 12,536                  |   |  | 97,464                  |   |  | 90,000                     
|                          |  |                         |  
|Granted                   |  | (7,500                  | ) |  | 7,500                   |   |  |                           
|Forfeited                 |  |                        |   |  |                        |   |  |                           
|Stock split               |  | 1,008                   |   |  | 20,992                  |   |  | 18,000                     
|                          |  |                         |   |  |                         |   |  |                            
|Balance December 31, 2004 |  | 6,044                   |   |  | 125,956                 |   |  | 108,000                    
|                          |  |                         |  
|Granted                   |  |                        |   |  |                        |   |  |                           
|Forfeited                 |  |                        |   |  |                        |   |  |                           
|                          |  |                         |   |  |                         |   |  |                            
|Balance December 31, 2005 |  | 6,044                   |   |  | 125,956                 |   |  | 108,000                    
|                          |  |                         |   |  |                         |   |  |                            



51



---

Notes to Consolidated Financial Statements



Note 13. Benefit Plans, continued

Stock Option Plan, continued

Additional information relating to the plan for the years ended
December 31, 2005, 2004 and 2003 is listed below: (adjusted for the 6-for-5 stock split declared October 25, 2004):



|                                                                               |  |      |         |      |   |         |      |  |   |           |  
|------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | ---- |  | - | --------- | -
|                                                                               |  | 2005 |         | 2004 |   |         | 2003 | 
|Outstanding options at December 31:                                            |  |      |         |      |   |         |      | 
|Exercise price, beginning of the year(1)                                       |  | $    | 8.46    |      | $ | 8.43    |      |  | $ | 8.44      |  
|Exercise price, end of the year(1)                                             |  | $    | 8.46    |      | $ | 8.46    |      |  | $ | 8.43      |  
|Range of exercise prices:                                                      |  |      |         |      |   |         |      |  |   |           |  
|From                                                                           |  | $    | 8.33    |      | $ | 8.33    |      |  | $ | 8.33      |  
|To                                                                             |  | $    | 9.17    |      | $ | 9.17    |      |  | $ | 9.17      |  
|Remaining contractual life in months(1)                                        |  |      | 48      |      |   | 60      |      |  |   | 70        |  
|                                                                               |  |      |        
|Exercisable options outstanding at December 31:                                |  |      |         |      |   |         |      |  |   |           |  
|Number                                                                         |  |      | 230,957 |      |   | 224,970 |      |  |   | 214,478   |  
|Exercise price(1)                                                              |  | $    | 8.45    |      | $ | 8.43    |      |  | $ | 8.40      |  
|                                                                               |  |      |        
|Weighted average exercise price of options:                                    |  |      |         |      |   |         |      |  |   |           |  
|Granted during the year                                                        |  | $    |        |      | $ | 13.00   |      |  | $ | 9.17      |  
|Exercised during the year                                                      |  | $    |        |      | $ |        |      |  | $ |          |  
|Forfeited during the year                                                      |  | $    |        |      | $ |        |      |  | $ | 9.17      |  
|Expired during the year                                                        |  | $    |        |      | $ |        |      |  | $ |          |  
|                                                                               |  |      |        
|Significant assumptions used in determining fair value:                        |  |      |         |      |   |         |      |  |   |           |  
|Risk-free interest rate                                                        |  |      | n/a     |      |   | 4.27    | %    |  |   | 4.27      | %
|Expected life in years                                                         |  |      | n/a     |      |   | 10      |      |  |   | 10        |  
|Expected dividends                                                             |  |      | n/a     |      |   | 0.0     | %    |  |   | 0.0       | %
|Expected volatility                                                            |  |      | n/a     |      |   | 0.0     | %    |  |   | 0.0       | %
|                                                                               |  |      |        
|Grant-date fair value:                                                         |  |      |         |      |   |         |      |  |   |           |  
|Options granted during the year                                                |  | $    | n/a     |      | $ | 40,320  |      |  | $ | 41,690    |  
|                                                                               |  |      |        
|Results of operations:                                                         |  |      |         |      |   |         |      |  |   |           |  
|Compensation cost recognized in income for all stock-based compensation awards |  | $    |        |      | $ |        |      |  | $ |          |  
|                                                                               |  |      |         |      |   |         |      |  |   |           |  
|Pro forma net income before preferred stock dividend(2)                        |  | $    | 886,876 |      | $ | 834,687 |      |  | $ | 1,011,824 |  
|                                                                               |  |      |         |      |   |         |      |  |   |           |  
|Pro forma net income available to common stockholders(2)                       |  | $    | 736,876 |      | $ | 684,687 |      |  | $ | 1,011,824 |  
|                                                                               |  |      |         |      |   |         |      |  |   |           |  
|Pro forma income per common share(2)                                           |  | $    | .63     |      | $ | .59     |      |  | $ | 0.87      |  
|                                                                               |  |      |         |      |   |         |      |  |   |           |  
|Pro forma income per diluted common share(2)                                   |  | $    | .55     |      | $ | .53     |      |  | $ | 0.66      |  
|                                                                               |  |      |         |      |   |         |      |  |   |           |  



---

|(1) | Weighted average
|--- | ----------------

|(2) | As if the fair value based method prescribed by SFAS No. 123 has been applied, net of
income taxes
|--- | --------------------------------------------------------------------------------------------------



52



---

Notes to Consolidated Financial Statements



Note 14. Transactions with Related Parties

The Corporation has entered into transactions with its directors, executive officers, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions as those prevailing at the same time for comparable transactions with other customers and vendors.

Branch facility

During 2003, three members of the Banks executive management team purchased and renovated a building. The
building was sold to a third party and subsequently leased to the Bank and now houses the Lovingston branch. The renovation of this property was performed by a construction company which is an interest of one of the Corporations directors. The
members of management repaid any profit realized from this transaction to the Bank.

Loans

Aggregate loan transactions with related parties are as follows:



|                   |  |      |            |   |      |   |            |  
|------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                   |  | 2005 |            |   | 2004 |  
|Balance, beginning |  | $    | 6,960,491  |   |      | $ | 5,804,856  |  
|Advances           |  |      | 1,605,816  |   |      |   | 5,802,533  |  
|Repayments         |  |      | (2,237,583 | ) |      |   | (4,646,898 | )
|                   |  |      |            |   |      |   |            |  
|Balance, ending    |  | $    | 6,328,724  |   |      | $ | 6,960,491  |  
|                   |  |      |            |   |      |   |            |  

Note 15. Income Taxes

Current and deferred income tax components

The components of income tax expense are as follows:



|                                              |  |      |         |   |      |   |         |  |   |          |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- |  | - | -------- | -
|                                              |  | 2005 |         |   | 2004 |   | 2003    | 
|Current                                       |  | $    | 404,488 |   |      | $ | 114,645 |  | $ | 656,624  |  
|Deferred                                      |  |      | (15,260 | ) |      |   | 338,017 |  |   | (206,525 | )
|Deferred tax asset valuation allowance change |  |      |        |   |      |   |        |  |   | (155,844 | )
|                                              |  |      |         |   |      |   |         |  |   |          |  
|                                              |  | $    | 389,228 |   |      | $ | 452,662 |  | $ | 294,255  |  
|                                              |  |      |         |   |      |   |         |  |   |          |  

Rate reconciliation

A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate included in the statement of income follows:



|                                                              |  |      |         |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                              |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Tax at statutory federal rate                                 |  | $    | 433,875 |   |      | $ | 446,746 |      |  | $ | 445,759  |  
|State income tax, net of federal benefit                      |  |      |        |   |      |   | 3,326   |      |  |   |         |  
|Increase in cash surrender value of bank owned life insurance |  |      | (53,221 | ) |      |   | (4,129  | )    |  |   |         |  
|Other                                                         |  |      | 8,574   |   |      |   | 6,719   |      |  |   | 4,340    |  
|Deferred tax asset valuation allowance change                 |  |      |        |   |      |   |        |      |  |   | (155,844 | )
|                                                              |  |      |         |   |      |   |         |      |  |   |          |  
|                                                              |  | $    | 389,228 |   |      | $ | 452,662 |      |  | $ | 294,255  |  
|                                                              |  |      |         |   |      |   |         |      |  |   |          |  



53



---

Notes to Consolidated Financial Statements



Note 15. Income Taxes, continued

Deferred income tax analysis

The components of net deferred tax assets at
December 31 are summarized as follows:



|                                                     |  |      |         |      |   |        
|---------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                     |  | 2005 |         | 2004
|Deferred tax assets                                  |  |      |         |      |   |        
|Allowance for loan losses                            |  | $    | 316,039 |      | $ | 326,635
|Loan fees                                            |  |      | 74,757  |      |   | 64,244 
|Net unrealized loss on securities available for sale |  |      | 54,959  |      |   | 21,612 
|                                                     |  |      |         |      |   |        
|Deferred tax assets                                  |  |      | 445,755 |      |   | 412,491
|                                                     |  |      |         |      |   |        
|Deferred tax liabilities                             |  |      |         |      |   |        
|Accretion of bond discount                           |  |      |        |      |   | 678    
|Depreciation                                         |  |      | 117,573 |      |   | 132,238
|                                                     |  |      |         |      |   |        
|Deferred tax liabilities                             |  |      | 117,573 |      |   | 132,916
|                                                     |  |      |         |      |   |        
|Net deferred tax asset                               |  | $    | 328,182 |      | $ | 279,575
|                                                     |  |      |         |      |   |        

Note 16. Commitments and Contingencies

Litigation

In the normal course of business the Company may be involved in various legal proceedings. The
Company was not involved in any litigation as of December 31, 2005.

Financial instruments with off-balance-sheet risk

The Corporation 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. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets.

The Corporation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 Corporation uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Corporations
commitments at December 31, 2005 and 2004 is as follows:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2005 |            | 2004
|Commitments to extend credit |  | $    | 24,883,103 |      | $ | 22,060,101
|Standby letters of credit    |  |      | 747,142    |      |   | 764,304   
|                             |  |      |            |      |   |           
|                             |  | $    | 25,630,245 |      | $ | 22,824,405
|                             |  |      |            |      |   |           



54



---

Notes to Consolidated Financial Statements



Note 16. Commitments and Contingencies, continued

Financial instruments with off-balance-sheet risk, continued

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 creditworthiness 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 party. Collateral held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate and income-producing commercial properties.

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. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

Concentrations of credit risk

Substantially all of the Banks loans, commitments to extend credit, and standby letters of
credit have been granted to customers in the Banks market area and such customers are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. The Banks primary focus is toward consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related
borrowers in excess of $2,200,000.

The Bank from time to time has cash and cash equivalents on deposit with financial institutions which exceed
federally-insured limits.

Other commitments

The Bank has entered into employment agreements with certain of its key officers covering duties, salary, benefits, provisions for termination and Bank obligations in the event of merger or acquisition.

Note 17. Regulatory Restrictions

Dividends

The Corporations dividend payments will be made primarily from dividends received from the Bank. The Bank, as a Virginia banking corporation, may pay dividends
only out of its retained earnings. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank.

Capital requirements

The Corporation and the
Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if
undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.



55



---

Notes to Consolidated Financial Statements



Note 17. Regulatory Restrictions, continued

Capital requirements, continued

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. Management
believes, as of December 31, 2005 and 2004, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31,
2005 and 2004, the Bank met the criteria to be considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table.

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



|                                         |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ----------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual |        |       | Minimum Capital Requirement |   |        | Minimum To Be WellCapitalized Under Prompt Corrective Action Provisions |       
|                                         |  | Amount |        | Ratio |                             |   | Amount |                                                                         | Ratio  |  |      | Amount |  | Ratio |       
|December 31, 2005:                       |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 16,178 |       | 11.47                       | % |        | $                                                                       | 11,285 |  | 8.00 | %      |  | $     | 14,106 |  | 10.00 | %
|Consolidated                             |  | $      | 18,512 |       | 12.92                       | % |        | $                                                                       | 11,466 |  | 8.00 | %      |  | $     | 14,333 |  | 10.00 | %
|Tier I Capital (to Risk-Weighted Assets) |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 14,803 |       | 10.49                       | % |        | $                                                                       | 5,642  |  | 4.00 | %      |  | $     | 8,464  |  | 6.00  | %
|Consolidated                             |  | $      | 14,627 |       | 10.21                       | % |        | $                                                                       | 5,733  |  | 4.00 | %      |  | $     | 8,600  |  | 6.00  | %
|Tier I Capital (to Average Assets)       |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 14,803 |       | 9.31                        | % |        | $                                                                       | 6,358  |  | 4.00 | %      |  | $     | 7,947  |  | 5.00  | %
|Consolidated                             |  | $      | 14,627 |       | 9.06                        | % |        | $                                                                       | 6,456  |  | 4.00 | %      |  | $     | 8,070  |  | 5.00  | %
|                                         |  |        |        |       |                             |  
|December 31, 2004:                       |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|                                         |  |        |        |       |                             |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 15,158 |       | 11.73                       | % |        | $                                                                       | 10,336 |  | 8.00 | %      |  | $     | 12,920 |  | 10.00 | %
|Consolidated                             |  | $      | 17,782 |       | 13.49                       | % |        | $                                                                       | 10,544 |  | 8.00 | %      |  | $     | 13,180 |  | 10.00 | %
|Tier I Capital (to Risk-Weighted Assets) |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 13,776 |       | 10.66                       | % |        | $                                                                       | 5,168  |  | 4.00 | %      |  | $     | 7,752  |  | 6.00  | %
|Consolidated                             |  | $      | 13,890 |       | 10.54                       | % |        | $                                                                       | 5,272  |  | 4.00 | %      |  | $     | 7,908  |  | 6.00  | %
|Tier I Capital (to Average Assets)       |  |        |        |       |                             |   |        |                                                                         |        |  |      |        |  |       |        |  |       |  
|Community First Bank                     |  | $      | 13,776 |       | 8.86                        | % |        | $                                                                       | 6,216  |  | 4.00 | %      |  | $     | 7,771  |  | 5.00  | %
|Consolidated                             |  | $      | 13,890 |       | 8.83                        | % |        | $                                                                       | 6,293  |  | 4.00 | %      |  | $     | 7,867  |  | 5.00  | %



56



---

Notes to Consolidated Financial Statements



Note 17. Regulatory Restrictions, continued

Inter-company transactions

Legal lending limits on loans by the Bank to the Corporation are governed by
Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its parent, if the loan is secured. If collateral is in the form of stocks, bonds,
debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least
10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve
Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Corporation was approximately $1,480,000 at December 31, 2005. No 23A transactions existed at
December 31, 2005.

Note 18. Preferred Stock

On
May 13, 2002 the shareholders approved the articles of incorporation which authorized the issue of up to 1,000,000 shares of preferred stock and the issue of shares of new preferred stock from time to time in the future, in one or more series,
and to fix and determine the relative rights and preferences of these shares, or of each series of shares, at the time of issuance and without the further approval of shareholders.

During 2002 the Corporations Board of Directors created a series of preferred stock consisting of 325,000 shares of non-cumulative, convertible preferred stock that provides for a stated annual dividend of $0.50
per share (Series A Preferred Stock). Each share of preferred stock is convertible to 1.2 shares of common stock (after the 6 for 5 common stock split declared on October 2, 2004) within two years after the preferred stock is
issued. Through December 31, 2002, the Corporation had sold an aggregate of 265,100 shares of these shares at a price of $10.00 per share in a private offering to a group of accredited investors, including certain of the
Corporations directors and existing shareholders. The proceeds from the sale of those shares was used to enhance the capital position of the Bank, to purchase 62,700 shares of Highlands Community Bank common stock and for general corporate
activities conducted by the Corporation. In 2003 an additional 34,900 shares were sold, the proceeds of which were used to support the capital position of the Bank. The Corporations Board of Directors declared five percent cash dividends of
$0.50 per outstanding share of convertible preferred stock payable in October 2004 and October 2005.

These shares of preferred stock have preferences
over, or special terms that differ from common stock, including, among other things:



| |  |  | the right to receive dividends (which may be cumulative or non-cumulative) at a stated rate before any dividend may be paid on common stock or its other shares of preferred stock;
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the right to receive a stated distribution upon any liquidation of the Corporation before any distribution could be made to holders of common stock or its other preferred stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additional shares of preferred stock that may be issued in the future will have preferences over common stock and possibly preexisting
preferred stock.

Note 19. Common Stock Split

The
Corporations Board of Directors declared a 6 for 5 common stock split in the form of a 20% stock dividend payable October 25, 2004 to common stockholders of record on October 15, 2004. Holders of record of common stock as of the
record date received one additional share of common stock for every five shares they owned on that date. Cash was paid for fractional shares. A total of 193,713 additional shares of common stock were issued as a result of this stock split.



57



---

Notes to Consolidated Financial Statements



Note 20. Pending Merger Plans

The Corporations Board of Directors entered into a definitive agreement with American National Bankshares Inc., on October 18, 2005, pursuant to which American National will acquire the Corporation. The
agreement provides that stockholders of the Corporation will have the right to receive either 0.9219 shares of American National common stock or $21.00 in cash for each share of the Corporations common stock. Each preferred stockholder of the
Corporation will have the right to receive either 1.1063 shares of American National common stock or $25.20 in cash, for each share of the Corporations preferred stock. Per the agreement, cash consideration is limited to 50 percent of the
total consideration. The total transaction value is estimated to be $33.9 million.

The merger is subject to approval by the stockholders of the
Corporation at a special meeting on March 27, 2006. Completion of the merger will require approval by more than two-thirds of the outstanding shares of the Corporation common stock and Series A preferred stock. If approved, the merger is
expected to take effect on or about April 1, 2006.

The Corporation has employment agreements with four executive officers that include terms that
provide for certain severance payments to the officers if they terminate their employment in connection with a change of control of the Corporation. The parties to the merger have agreed that each officer will receive such payments regardless of the
arrangements, if any, American National makes for the continuation of employment of these officers. The Corporation also has an agreement with its former president who resigned in September 2005 under which the Corporation continued to employ the
former president for certain services. Under the terms of the merger agreement, the former president is entitled to receive a severance payment on the same basis as the above four officers. The approximate aggregate amount of these payments will be
$1,530,300.

The Corporation has awarded certain employees, officers and directors stock options pursuant to its incentive stock plan. To the extent the
options have not been exercised, upon consummation of the merger the options will be cancelled for a cash payment equal to $21.00 less the exercise price of the option.



58



---

Notes to Consolidated Financial Statements



Note 21. Parent Company Financial Information

Condensed financial information of Community First Financial Corporation is presented as follows:

Balance Sheets

December 31, 2005 and 2004



|                                                                    |  |      |            |   |      |   |            |  
|------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                    |  | 2005 |            |   | 2004 |  
|Assets                                                              |  |      |            |   |      |   |            |  
|Cash and due from banks                                             |  | $    | 18,217     |   |      | $ | 97,576     |  
|Investment securities available for sale                            |  |      | 322,000    |   |      |   | 322,000    |  
|Loans, net of allowance for loan losses of $10,000 in 2005 and 2004 |  |      | 1,898,758  |   |      |   | 2,248,359  |  
|Investment in subsidiary bank at equity                             |  |      | 14,695,874 |   |      |   | 13,734,528 |  
|Other                                                               |  |      | 85,135     |   |      |   | 10,950     |  
|                                                                    |  |      |            |   |      |   |            |  
|Total assets                                                        |  | $    | 17,019,984 |   |      | $ | 16,413,413 |  
|                                                                    |  |      |            |   |      |   |            |  
|Liabilities                                                         |  |      |            |   |      |   |            |  
|Accounts payable and other liabilities                              |  | $    |           |   |      | $ | 65,572     |  
|Subordinated debt                                                   |  |      | 2,500,000  |   |      |   | 2,500,000  |  
|                                                                    |  |      |            |   |      |   |            |  
|Total liabilities                                                   |  |      | 2,500,000  |   |      |   | 2,565,572  |  
|Stockholders equity                                                |  |      |            |   |      |   |            |  
|Preferred stock                                                     |  |      | 2,970,989  |   |      |   | 2,970,989  |  
|Common stock                                                        |  |      | 9,650,323  |   |      |   | 9,650,323  |  
|Retained earnings                                                   |  |      | 2,005,358  |   |      |   | 1,268,482  |  
|Other comprehensive income                                          |  |      | (106,686   | ) |      |   | (41,953    | )
|                                                                    |  |      |            |   |      |   |            |  
|Total stockholders equity                                          |  |      | 14,519,984 |   |      |   | 13,847,841 |  
|                                                                    |  |      |            |   |      |   |            |  
|Total liabilities and stockholders equity                          |  | $    | 17,019,984 |   |      | $ | 16,413,413 |  
|                                                                    |  |      |            |   |      |   |            |  

Statements of Income

Years ended December 31, 2005, 2004 and 2003



|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|---------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | --------- | -
|                                                                                   |  | 2005 |           |   | 2004 |   |          | 2003 | 
|Income                                                                             |  |      |           |   |      |   |          |      |  |   |           |  
|Interest Income                                                                    |  | $    | 120,581   |   |      | $ | 85,512   |      |  | $ | 13,574    |  
|Gain on sale of investment securities                                              |  |      |          |   |      |   | 157,500  |      |  |   |          |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Total income                                                                       |  |      | 120,581   |   |      |   | 243,012  |      |  |   | 13,574    |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Expenses                                                                           |  |      |           |   |      |   |          |      |  |   |           |  
|Professional fees                                                                  |  |      | 154,101   |   |      |   | 10,613   |      |  |   | 19,370    |  
|Interest expense                                                                   |  |      | 147,791   |   |      |   | 102,842  |      |  |   | 24,914    |  
|Provision for loan losses                                                          |  |      |          |   |      |   | 10,000   |      |  |   |          |  
|Other expenses                                                                     |  |      | 29,603    |   |      |   | 35,576   |      |  |   | 12,134    |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Total expenses                                                                     |  |      | 331,495   |   |      |   | 159,031  |      |  |   | 56,418    |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Income (loss) before income taxes and equity in undistributed income of subsidiary |  |      | (210,914  | ) |      |   | 83,981   |      |  |   | (42,844   | )
|Income tax expense (benefit)                                                       |  |      | (71,711   | ) |      |   | 31,708   |      |  |   | (30,834   | )
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Income (loss) before equity in undistributed income of subsidiary                  |  |      | (139,203  | ) |      |   | 52,273   |      |  |   | (12,010   | )
|Equity in undistributed income of subsidiary                                       |  |      | 1,026,079 |   |      |   | 809,025  |      |  |   | 1,028,812 |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Net income                                                                         |  |      | 886,876   |   |      |   | 861,298  |      |  |   | 1,016,802 |  
|Preferred stock dividends                                                          |  |      | (150,000  | ) |      |   | (150,000 | )    |  |   |          |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  
|Net income available to common stockholders                                        |  | $    | 736,876   |   |      | $ | 711,298  |      |  | $ | 1,016,802 |  
|                                                                                   |  |      |           |   |      |   |          |      |  |   |           |  



59



---

Notes to Consolidated Financial Statements



Note 21. Parent Company Financial Information, continued

Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003



|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                         |  | 2005 |            |   | 2004 |   |          | 2003 | 
|Cash flows from operating activities                     |  |      |            |   |      |   |          |      |  |   |            |  
|Net income                                               |  | $    | 886,876    |   |      | $ | 861,298  |      |  | $ | 1,016,802  |  
|Adjustments:                                             |  |      |            |   |      |   |          |      |  |   |            |  
|Increase in equity in undistributed income of subsidiary |  |      | (1,026,079 | ) |      |   | (809,025 | )    |  |   | (1,028,812 | )
|Provision for loan losses                                |  |      |           |   |      |   | 10,000   |      |  |   |           |  
|Gain on sale of investment securities                    |  |      |           |   |      |   | (157,500 | )    |  |   |           |  
|Deferred income tax benefit                              |  |      |           |   |      |   | (3,796   | )    |  |   |           |  
|Other assets                                             |  |      | (74,185    | ) |      |   | (1,989   | )    |  |   | (5,165     | )
|Other liabilities                                        |  |      | (65,572    | ) |      |   | 55,224   |      |  |   | 10,347     |  
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash used by operating activities                    |  |      | (278,960   | ) |      |   | (45,788  | )    |  |   | (6,828     | )
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Cash flows from investing activities                     |  |      |            |   |      |   |          |      |  |   |            |  
|Proceeds from sale of investment securities              |  |      |           |   |      |   | 507,500  |      |  |   |           |  
|Net increase in loans receivable                         |  |      | 349,601    |   |      |   | (470,674 | )    |  |   | (1,787,685 | )
|Investment in subsidiary                                 |  |      |           |   |      |   |         |      |  |   | (900,000   | )
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash (used in) provided by investing activities      |  |      | 349,601    |   |      |   | 36,826   |      |  |   | (2,687,685 | )
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Cash flows from financing activities                     |  |      |            |   |      |   |          |      |  |   |            |  
|Issuance of preferred stock, net                         |  |      |           |   |      |   |         |      |  |   | 349,000    |  
|Purchase of fractional shares                            |  |      |           |   |      |   | (104     | )    |  |   |           |  
|Preferred stock dividends                                |  |      | (150,000   | ) |      |   | (150,000 | )    |  |   |           |  
|Proceeds from issuance of subordinated debt              |  |      |           |   |      |   |         |      |  |   | 2,500,000  |  
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash provided by (used in) financing activities      |  |      | (150,000   | ) |      |   | (150,104 | )    |  |   | 2,849,000  |  
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Increase (decrease) in cash and due from banks           |  |      | (79,359    | ) |      |   | (159,066 | )    |  |   | 154,487    |  
|Cash and cash equivalents, beginning                     |  |      | 97,576     |   |      |   | 256,642  |      |  |   | 102,155    |  
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents, ending                        |  | $    | 18,217     |   |      | $ | 97,576   |      |  | $ | 256,642    |  
|                                                         |  |      |            |   |      |   |          |      |  |   |            |  



60



---

Report to Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Community First Bank

Lynchburg, Virginia

We have audited the consolidated balance sheets of
Community First Financial Corporation and subsidiary as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in 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 Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community First Financial
Corporation at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United
States of America.



|                          
|--------------------------
|/s/ Larrowe & Company, PLC
|                          
|Galax, Virginia           
|January 27, 2006          



61



---

Managements Discussion and Analysis



To accurately understand the change in the Companys financial statements, the following information is
provided. The Company commenced operations on July 1, 2002 and was capitalized through the issuance of $9,686,130 in common stock. CFFC was organized for the sole purpose of becoming Community First Banks parent holding company. Community
First Bank (CFB or the Bank) commenced operations on October 14, 1999 as a state charted, FDIC insured commercial bank. The Bank is also a member of the Federal Reserve Bank System. On October 18, 2005, the
Companys Board of Directors announced that it had entered into a definitive agreement with American National Bankshares Inc., pursuant to which American National will acquire Community First Financial Corporation. The shareholders of Community
First will vote on the merger at a special meeting on March 27, 2006. If approved, the merger will take effect on or about April 1, 2006. This commentary provides an overview of Community First Financial Corporations
(CFFC or the Corporation or the Company) financial condition, changes in financial condition and results of operations for 2005 and 2004. The following discussion should assist readers in the analysis of the
accompanying financial statements.

Critical Accounting Policies

The Banks financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The notes to the audited financial statements included herein contain a
summary of the significant accounting policies. Management believes the Banks policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of
intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, management considers the policies
related to those areas as critical.

Summary of Results of Operations

2005 Compared to 2004

The Company had net income (before preferred stock dividends) for the year ended
December 31, 2005 of $886,876 compared to $861,298 for the year ending December 31, 2004, an increase of 3.0%. Return on average assets was .55% in 2005 and 2004. Return on average stockholders equity was 6.24% in 2005 compared to
6.38% in 2004. Basic earnings per share for the year 2005 was $0.63 compared to $0.61 for the year ended 2004 an increase of $0.02 or 3.3%.

2004
Compared to 2003

The Company had net income (before preferred stock dividends) for the year ended December 31, 2004 of $861,298 compared to
$1,016,802 for the year ending December 31, 2003, a decrease of 15.3%. Return on average assets was .55% and .64% in 2004 and 2003, respectively. Return on average stockholders equity was 6.38% in 2004 compared to 8.46% in 2003. Basic
earnings per share for the year 2004 was $0.61 compared to $0.87 for the year ended 2003 (adjusted for the 6-for-5 stock split declared October 25, 2004) a decrease of $0.26 or 29.9%.

Net Interest Income

The principal source of earnings for
Community First Financial Corporation is net interest income. Net interest income is defined as the difference between interest and fees generated by earning assets and the cost of funds supporting those assets. As such, net interest income
represents the gross profit from the Banks lending, investment and funding activities.

A large number of variables interact to effect net interest
income. Included are variables such as changes in mix and volume of earning assets and interest bearing liabilities, market interest rates and the statutory Federal tax rate. It is managements ongoing policy to maximize net interest income
through the development of balance sheet and pricing strategies while maintaining appropriate risk levels as set by the Board.



62



---

Managements Discussion and Analysis



The Companys net interest income totaled $5.955 million and $5.620 million for 2005 and 2004, respectively,
representing an increase of $335,000 or 6.0%. This increase was primarily the result of increases in interest rates on loans and increased loan volume. The average rate paid on interest-bearing deposits increased to 2.97% in 2005 from 2.44% for 2004
representing an increase of 0.53 basis points. The average yield on earning assets increased to 6.72% in 2005 from 6.09% in 2004 representing an increase of 0.63 basis points.

The Companys net interest income totaled $5.620 million and $5.426 million for 2004 and 2003, respectively, representing an increase of $194,000 thousand or 3.6%. This increase was primarily the result of a
decrease in rates paid on interest bearing deposits.

Total interest income increased $1.041 million from $8.756 million for 2004 to $9.797 million for
2005. Total interest expense increased $706,000 from $3.136 million for 2004 to $3.842 million for 2005. The net interest margin increased from 3.91% for 2004 to 4.09% for 2005. Increased rates earned on assets were the primary cause for the
increase.

Other Operating Income and Other Operating Expenses

Other operating income increased to $730,199 from $580,079, an increase of $150,120 or 25.9% in 2005 from 2004. Mortgage loan origination fees increased from $43,536 to $154,127, an increase of $110,591 or 254.0% in
2005. Service charges and fees on deposit accounts increased to $301,071 in 2005 from $287,386 in 2004, an increase of $13,685 or 4.8%. The increase in cash surrender value of life insurance increased to $156,531 from $12,145, an increase of
$144,386 in 2005. The life insurance was purchased in the fourth quarter of 2004. The corporation realized a gain from the sale of securities in the amount of $157,500 in 2004. There were no such gains in 2005.

Other operating income decreased to $580,079 from $1,018,460, a decrease of $438,381 or 43.0% in 2004 from 2003. Substantially all of the decrease is attributable to a
decrease in mortgage loan origination fees.

Other operating expenses increased to $5.007 million in 2005 from $4.401 million in 2004, an increase of
$606,000 or 13.8%. Bank-wide salary and employee benefit expenses increased by $374,634 or 17.6% in 2005 from 2004 primarily due to pay increases and additional personnel. Other expenses include a $150,000 payment to settle litigation in 2005.
Legal, accounting and other professional fees increased from $137 thousand in 2004 to $364 thousand in 2005, an increase of $227 thousand or 165.7%, primarily due to merger expenses, compliance with the Sarbanes-Oxley Act requirements, and other
legal and accounting matters.

Other operating expenses increased to $4.4 million in 2004 from $4.2 million in 2003 or 4.0%. Bank-wide salary and employee
benefit expenses decreased by $261,083 or 10.9% in 2004 from 2003 due primarily to staff reductions. Occupancy and equipment expense increased by $100,956 or 17.3% primarily due to a full year of having four branches after the relocation of the
Lovingston Office in April 2003 and opening the Timberlake Road office in September 2003.

Summary of Statements of Financial Condition

Assets

At December 31, 2005, the Company
had total assets of $162.5 million, representing an increase of $6.0 million or 3.8% from the December 31, 2004 balance of $156.5 million. This increase was primarily due to an increase in loans, the result of increased loan demand.



63



---

Managements Discussion and Analysis



Loans

The net
loan portfolio totaled $137.0 and $129.1 million for 2005 and 2004, respectively, representing an increase of $7.9 million or 6.1%. Real estate loans, both mortgage and construction, increased by $8.3 million to $112.5 million. Consumer loans
decreased $0.5 million to $4.8 million while commercial loans increased to $20.5 million at December 31, 2005 from $19.1 million at December 31, 2004. Consistent with its focus on providing community based financial services, the Bank
generally does not make loans outside its principal market regions. By policy it does not originate or purchase leveraged loans or loans to foreign entities or individuals.

The Bank had non-performing loans, repossessed and foreclosed properties at December 31, 2005 and December 31, 2004, totaling $680,641 and $901,519, respectively.

Provision/Allowance for Loan Losses

The provision for loan losses is
a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with managements evaluation of the credit quality and risk of the loan portfolio. The Bank maintains an allowance which management believes
represents a conservative estimate of potential losses in the Banks loan portfolio. To achieve this goal, the loan loss provision must be sufficient to cover loans charged off plus the growth (if any) in the loan portfolio. In determining the
adequacy of the allowance for loan losses, management uses a methodology, which specifically identifies and establishes reserves for high-risk loans. A general reserve is established for non-specifically reserved loans. Loans in non accrual status
and over ninety days past due are considered in this evaluation as well as other loans that may have a potential for loss.

The allowance decreased by
$736,754 in 2004 due to a provision of $485,044 and charge-offs (net of recoveries) of $1,221,798 that decreased the allowance to $1,392,127 as of December 31, 2004. The allowance decreased by $6,603 in 2005 due to a provision of $401,847 and
charge-offs (net of recoveries) of $408,450 that decreased the allowance to $1,385,524 as of December 31, 2005. Management and the Board of Directors believe that the allowance at year-end was adequate relative to the current levels of risk in
the portfolio. The allowance for loan losses as a percentage of gross loans decreased from 1.07% to 1.00% at December 31, 2004 and 2005, respectively. Management and the Board of Directors believe, based upon many factors, including
calculations of specific impairment of certain loans, actual and expected credit losses, loan performance measures, historical trends, general economic conditions, and specific conditions of the individual borrower that the allowance at year-end was
adequate relative to the current levels of risk in the portfolio.

Loan charge-offs totaled $496,740 in 2005, $1,230,340 in 2004, and $83,000 in 2003, and
recoveries were $88,290, $8,542, and $7,222 respectively in 2005, 2004 and 2003. Loans charge offs in 2004 of $1,230,340 included primarily two loans to one customer totaling approximately $1,200,000. Additional significant loan charge offs of this
nature is not anticipated at this time.

Securities and Federal Funds Sold and Purchased

At year-end 2005 securities totaled $8.294 million compared to $11.394 million on December 31, 2004. There were no federal funds sold at December 31, 2004 and
2005. Federal funds purchased were $5,878,000 and $275,000 at December 31, 2005 and 2004, respectively. Federal funds purchased and sold are used to manage the Banks liquidity position. Reductions in investments were due primarily to
maturing bonds, the proceeds of which were used to fund loan growth. Increases in Federal Funds purchased were use to fund loan growth.

Deposits

Deposits totaled $139.0 and $139.4 million at December 31, 2005 and 2004 respectively, representing a decrease of 0.3%. As the Bank concentrated
on developing retail and commercial relationships, noninterest-bearing demand deposit accounts increased from $17.6 million to $18.7 million or 6.2%. Certificates of Deposit accounts increased to $92.8 million from $76.2 million or 21.8%.



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Managements Discussion and Analysis



Stockholders Equity

The adequacy of the Companys capital is reviewed by management on an ongoing basis with reference to the size, composition and quality of the companys asset and liability levels and consistent with regulatory requirements and
industry standards. Management seeks to maintain a capital structure that assures an adequate level to support anticipated asset growth and absorb potential losses. During 2002 the Company increased equity through the private placement of 265,100
shares of preferred stock, increasing equity by $2.6 million and an additional 34,900 shares in 2004 increasing equity by $0.3 million.

The Board of
Directors declared a 6 for 5 common stock split in the form of a 20% stock dividend payable October 25, 2004 to common stockholders of record on October 15, 2004. Holders of record of common stock as of the record date received one
additional share of common stock for every five shares they owned on that date. Cash was paid for fractional shares. The Board of Directors also declared cash dividends of $0.50 per share on the 300,000 issued and outstanding shares of convertible
preferred stock, representing the five percent dividend payable for the years 2005 and 2004.

Stockholders equity was $14.520 million at the end of
2005 compared to $13.848 million at the end of 2004 or a 4.9% increase. The Banks equity to asset ratio at December 31, 2005 was 8.9% compared to 8.8% at December 31, 2004.

Liquidity, Market Risk and Interest Sensitivity

The objectives of
the Banks liquidity management policy are to provide adequate funds to meet the needs of depositors and borrowers at all times, as well as providing funds to meet the basic needs for ongoing operations, and to allow funding of longer-term
investment opportunities and regulatory requirements. Sufficient assets are maintained on a short-term basis to meet the liquidity demands anticipated by management. The most immediate and efficient source of liquidity are short-term investments,
which include federal funds sold and securities maturing within one year.

Market risk is the risk of loss arising from adverse changes in interest rates.
Interest rate risk can be measured by looking at the volatility of projected net interest income as a result of possible changes in interest rates over a given period of time. The Banks goal is to limit interest rate exposure to prudent levels
as determined by the Banks Board of Directors. The Board establishes limits on the earnings at risk for a particular period, usually defined as the next twelve months. Actions that can be taken to manage interest rate risk include changing the
mix of floating rate versus fixed rate earning assets and funding sources, changes in average maturities within the securities available for sale portfolio through sales and purchases, and product development efforts to attract new loans and
deposits.

Another tool for assessing interest rate risk is the quantification of the economic fair value of stockholders equity (EVE). Economic
value of equity consists of the present value of all future cash flows from assets and liabilities. Potential, changes in the EVE are calculated by projecting cash flows and computing present values under a series of different rate scenarios.

While Community First Bank believes that these methodologies provide a meaningful representation of the Banks interest rate sensitivity, the
methodologies do not necessarily take into account all developments which can have an effect on net interest income, such as changes in credit quality or changes in the amount and composition of earning assets and sources of funds.

Information contained in Managements Discussion and Analysis of Financial Conditions and Results of Operations may contain forward-looking statements
with respect to the Banks financial condition and results of operation. These forward-looking statements may involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such
forward-looking statements include, but are not limited to, an increase in competitive pressures in the banking industry, economic conditions, adverse technological change, changes in the interest rate environment or the Banks interest rate
position, and the impact of future legal and regulatory actions. It is important to note that the actual results may differ materially from those projected in forward- looking statements.



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