---

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



---

FORM 10-KSB



---

ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2006

Commission File Number:  000-49787



---

BOTETOURT BANKSHARES, INC.

(Exact Name of Issuer as Specified in Its Charter)



---



|                         |  |                                       
|------------------------ |  | --------------------------------------
|Virginia                 |  | 54-1867438                            
|(State of Incorporation) |  | (I.R.S. EmployerIdentification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|19747 Main StreetBuchanan, Virginia      |  | 24066     
|(Address of Principal Executive Offices) |  | (Zip Code)

(540) 591-5000

(Issuers telephone number, including area code)



---

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

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $1.00



---

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

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

The issuers revenues for its most recent fiscal year were $18,748,965.

The aggregate market value of the voting and non-voting common equity, consisting solely of common stock, held by non-affiliates of the issuer (1,015,799 shares) computed by reference to the closing price of such stock was $43,679,357 as of
March 29, 2007.

The number of shares of outstanding common stock of the issuer as of March 29, 2007 is 1,242,850.



DOCUMENTS INCORPORATED BY REFERENCE

The issuers Proxy Statement dated March 30, 2007 is incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11, 12 and 14.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:    YES ̈NO  x



---



---

PART I



|Item 1. | Description of Business
|------- | -----------------------

General

Botetourt Bankshares, Inc. (the Company) was incorporated as a Virginia corporation on January 17, 1997 and is the one-bank holding
company for and sole shareholder of Bank of Botetourt (the Bank). The Bank was acquired by the Company on September 30, 1997. The Company has no significant operations other than owning the stock of the Bank.

Bank of Botetourt was founded in 1899 and currently operates eight offices in three counties of Virginia. The main office is in Buchanan, with other
Botetourt County office locations in Daleville, Eagle Rock and Troutville. The Banks operations center is located in Buchanan and the Banks loan administration center is located in Troutville. The Roanoke County offices are located on
Challenger Avenue in east Roanoke County and on Peters Creek Road in north Roanoke County. The Rockbridge County offices are located in Lexington and Fairfield.

The Bank operates for the primary purpose of providing an adequate return to our shareholders while simultaneously meeting the banking needs of individuals and small to medium sized businesses in the Banks
service area, while developing personal, hometown associations with these customers. The Bank offers a wide range of banking services including checking and savings accounts; commercial, installment, mortgage and personal loans; safe deposit boxes;
and other associated services. The Banks primary sources of revenue are interest income from its lending activities, and, to a lesser extent, from its investment portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and administrative expenses, such as salaries, occupancy and related expenses. The Bank does not provide trust services. Buchanan Service Corporation, a subsidiary of Bank of
Botetourt, provides non-traditional banking services for the Company, including insurance services, title insurance services, and investment brokerage services.

A substantial portion of the Companys market is located in the larger Roanoke Valley Metropolitan Statistical Area. This MSA varies widely with a medium-sized city, large rural base, mostly small businesses in
many different manufacturing and service industries, and relatively modest governmental employment. The Roanoke Metropolitan Statistical Area (MSA) is the commercial center for southwest Virginia, and is located approximately 165 miles west of
Richmond, Virginia, 178 miles northwest of Charlotte, North Carolina, 178 miles southeast of Charleston, West Virginia and 222 miles southwest of Washington, D.C. Hollins University and Roanoke College, with student enrollments of approximately
1,100 and 1,900, respectively, are located in the Roanoke MSA. Virginia Tech, with a full-time student population of more than 25,000, and Radford University, with an enrollment of 9,500, are each a 45-minute drive away.



---

The population in the Roanoke MSA was estimated at 282,980 at year-end 2005 and projected to be 302,200
by 2010. The Roanoke MSAs recent growth has been slower than that in other key Virginia markets, according to the Virginia Employment Commission. The Roanoke MSA had an unemployment rate of 2.7% in December 2006, compared with 2.7% for
Virginia and 4.3% nationally.

Over 6,500 businesses operate in the Roanoke MSA. The business community in the Roanoke MSA is diverse. The
principal components of the economy are retail trade, services, transportation, manufacturing, finance, insurance, health care and real estate. The Roanoke MSAs position as a regional center creates a strong medical, legal, and business
professional community. Carilion Health Systems, Lewis-Gale Hospital, and the Veterans Administration Hospital are among the areas largest employers, although they do not directly affect the Companys performance, since these employers
are not close to the Banks current branches. Other large employers include Norfolk Southern Corporation, Wachovia Corporation, The Kroger Co., General Electric Co., Advance Stores Company, Inc., and American Electric Power. Major employers
located directly in the Banks branch market of Rockbridge County, Botetourt County and northeast Roanoke County include Mohawk Carpet, Botetourt County Schools, Dynax America Corporation, Roanoke Cement Company, Koyo Steering Systems of USA,
Inc., and Gala Industries.

Lending Activities

The Banks lending services include real estate, commercial, agricultural and consumer loans. The loan portfolio constituted 88.69% of the earning assets of the Bank at December 31, 2006 and has historically produced the highest
interest rate spread above the cost of funds. The Banks loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that exceeds the authority of the loan officer
is forwarded to the loan committee for approval. The loan committee is composed of the Bank Chairman and CEO, President, the Vice President of credit administration, all commercial loan officers, and three outside directors. All aggregate credits
that exceed the loan committees lending authority are presented to the full Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the Banks loan
policy but also provides valuable insight through communication and pooling of knowledge, judgment and experience of its members.

The Bank
has in the past and intends to continue to make most types of real estate loans, including but not limited to, single and multi-family housing, farm loans, residential and commercial construction loans and loans for commercial real estate. At the
end of 2006 the Bank had 32.11% of the loan portfolio in single and multi-family housing, 28.80% in non-farm, non-residential loans, 4.68% in farm related real estate loans and 14.82% in real estate construction and land development loans. The
Banks loan portfolio also includes commercial and agricultural production loans totaling 12.07% of the portfolio at year-end 2006.



---

Consumer loans make up approximately 6.55% of the total loan portfolio. Consumer loans include loans for
household expenditures, car loans and other loans to individuals, including credit cards. While this category has experienced a greater percentage of charge-offs than the other classifications, the Bank is committed to continue to make this type of
loan to fill the needs of the Banks customer base. Other loans and leases, including loans to municipalities, amounted to 0.97%.

All
loans in the Banks portfolio are subject to risk from the condition of the economy in the Banks area and also that of the nation. The Bank has used and continues to use conservative loan-to-value ratios and thorough credit evaluation to
lessen the risk on all types of loans. The use of conservative appraisals has also reduced exposure on real estate loans. Thorough credit checks and evaluation of past internal credit history has helped to reduce the amount of risk related to
consumer loans. Government guarantees of loans are used when appropriate but apply to a very small percentage of the portfolio. Commercial loans are evaluated by collateral value and cash flow, including the ability to service debt. Businesses
seeking loans must have a good product line and sales, responsible management, manageable debt load and a product that is not critically affected by downturns in the economy.

Investments

The Bank invests a portion of its assets in U.S. Treasury issues, Government-sponsored
enterprises, state, county and municipal obligations, and equity securities. The Banks investments are managed in relation to loan demand and deposit growth and are generally used to provide for the investment of excess funds at reduced yields
and risks relative to increases in loan demand or to offset fluctuations in deposits. The Bank does not engage in any hedging activities. For additional information relating to investments, see Note 3 of the Companys financial statements.

Deposit Activities

Deposits are the major
source of funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand, NOW and money market deposits and small denomination certificates of deposit, to be core deposits. These accounts comprised
approximately 80.47% of the Banks total deposits at December 31, 2006. Certificates of deposit in denominations of $100,000 or more represented the remaining 19.53% of deposits at year end.

Employees

At December 31, 2006,
the Company had 85 full time equivalent employees, none of which are represented by a union or covered by a collective bargaining agreement. Management considers employee relations to be good.



---

Competition

The Company encounters strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies
as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Company competes with other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Many of these competitors have substantially greater resources and lending limits and may offer
certain services that we do not currently provide. In addition, many of the Companys competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state
legislation has heightened the competitive environment in which financial institutions must conduct their business. Accordingly, the potential for competition among financial institutions of all types has increased significantly.

The Company competes by relying upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and
staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions, like the Bank, tend to compete primarily by rate and personal service.

Currently, in Botetourt County, the Company competes with five other commercial banks that operate 13 branches in the county. As of
June 30, 2006, the Company held 41.50% of the deposits in Botetourt County, which represents the largest market share of all financial institutions in the county. The Company held 12.98% of the market share of Rockbridge County and 3.88% of the
market share of Roanoke County. During the twelve month period ended June 30, 2006, the Company increased market share in all three counties of its market area.

Government Supervision and Regulation

The following discussion is a summary of the principal laws
and regulations that comprise the regulatory framework that apply to the Company and the Bank. Other laws and regulations that govern various aspects of the operations of banks and bank holding companies are not described, although violations of
such laws and regulations could result in supervisory enforcement action against the Company or the Bank. The following descriptions summarize the material terms of the principal laws and regulations and are qualified in their entirety by reference
to applicable laws and regulations.

General

The Company is subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the Exchange Act) including the filing of periodic reports with the SEC. The SEC makes such filings available
on their website www.sec.gov. You may find these filings also on the Companys and the Banks website. www.bankofbotetourt.com



---

The Sarbanes-Oxley Act (the SOA), aimed at improving corporate governance, public reporting,
and company performance, became law in 2002. As an Exchange Act reporting company, the Company must comply with the SOA. The requirements under SOA continue to evolve, but the Company has taken steps to ensure that it will comply fully with the SOA
and any applicable rules and regulations implemented in the future. Parts of the SOA (i) require that periodic reports containing financial statements that are filed with the SEC be accompanied by Chief Executive Officer and Chief Financial
Officer certifications as to their accuracy and compliance with law; (ii) prohibit public companies, with certain limited exceptions, from making personal loans to their directors or executive officers; (iii) force company Chief Executive
Officers and Chief Financial Officers to forfeit bonuses and profits if company financial statements are restated due to misconduct; (iv) require audit committees to pre-approve all audit and non-audit services provided by an issuers
outside auditors, except for deminimis non-audit services; (v) protect employees of public companies from retaliatory action if they assist in investigations relating to violations of the federal securities laws from retaliatory action;
(vi) require companies to disclose in plain English on a rapid and current basis material changes in their financial condition or operations; (vii) require a public companys Section 16 insiders to make Form 4 filings
with the SEC within two business days following the day on which purchases or sales of the companys equity securities were made; and (viii) increase penalties for existing crimes and create new criminal offenses. Compliance with other
provisions will be required after implementing rules and regulations are adopted by the SEC and the Public Company Accounting Oversight Board (PCAOB) authorized by the SOA. While management expects the Company to continue incurring
additional expenses in complying with the requirements of the SOA and the regulations adopted, it anticipates that those expenses will not have a material effect on the Companys results of operations or financial condition.

As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the BHCA), and the
examination and reporting requirements of the Board of Governors of the Federal Reserve System (the Federal Reserve). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of
the voting shares or substantially all of the assets of any additional bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. The BHCA also generally limits the activities of a bank holding
company to that of banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or controlling banks.

As a state bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission Bureau of Financial
Institutions (Bureau). The Bank, not a member bank of the Federal Reserve System, is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (FDIC). Federal and Virginia laws also
govern the activities in which the Bank may



---

engage, the investments that it may make and limit the aggregate amount of loans that may be granted to one borrower to 15% of the banks capital and
surplus. Various consumer and compliance laws and regulations also affect the Banks operations.

The earnings of the Bank, and
therefore the earnings of the Company, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including those referred to above.

The Bureau and FDIC conduct regular examinations of the Bank and review such matters as the adequacy of loan loss reserves, quality of loans and
investments, management practices, compliance with laws, and other aspects of its operations. In addition to these regular examinations, the Bank must furnish the FDIC with periodic reports containing a full and accurate statement of its affairs.
Supervision, regulation and examination of banks by these agencies are intended primarily for the protection of depositors rather than shareholders.

Insurance of Accounts, Assessments and Regulation by the FDIC

The deposits of the Bank are insured by the FDIC up to the limits
set forth under applicable law. The deposits of the Bank are also subject to the deposit insurance assessments of the FDIC.

The FDIC has a
risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors (including supervisory evaluations). Under this system,
depository institutions are charged on a sliding scale based on such institutions capital levels and supervisory subgroup assignment. These rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to
impose special assessments from time to time.

The FDIC is authorized to prohibit an insured institution from engaging in any activity that
the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against such banks. The FDIC may terminate the deposit insurance of any depository institution if
it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition
imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at
the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in
termination of the Banks deposit insurance.

In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which
made certain changes to this federal deposit insurance program. This Act



---

merged the BIF and SAIF Insurance Funds on July 1, 2006. The Act increased retirement account coverage per depositor from a maximum of $100,000 to
$250,000. It also provides inflationary adjustments above the current $100,000 coverage for deposit insurance on all other accounts beginning in 2010.

Capital

The FDIC and the Federal Reserve have issued risk-based and leverage capital guidelines applicable to banking
organizations that they supervise. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities,
such as standby letters of credit) of 8%. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles (Tier 1 capital). The remainder may
consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance (Tier 2 capital and, together with Tier 1 capital, total capital).

In addition, each of the Federal banking regulatory agencies has established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% for bank holding companies that are rated a composite 1 and 4% for all other bank holding
companies. Bank holding companies are expected to maintain higher than minimum capital ratios if they have supervisory, financial, operational or managerial weaknesses, or if they are anticipating or experiencing significant growth.

The risk-based capital standards of the FDIC and the Federal Reserve explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, including an institutions ability to manage these risks, as important factors to be taken into account by the agency in assessing an institutions overall capital adequacy. The capital guidelines also provide
that an institutions exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banks capital adequacy. The FDIC and the Federal Reserve also have
issued additional capital guidelines for bank holding companies that engage in certain trading activities. At present, these guidelines do not apply to the Company.

Other Safety and Soundness Regulations

There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event
that the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary banks and



---

to commit resources to support those banks in circumstances where it might not do so otherwise. The FDICs claim for reimbursement is superior to claims
of shareholders of the insured bank or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured bank.

The Federal banking agencies also have broad powers under current Federal law to take prompt corrective action to resolve problems of banks and other
insured institutions. The Federal Deposit Insurance Act requires that the federal banking agencies establish five capital levels for insured depository institutions - well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized. It also requires or permits such agencies to take certain supervisory actions should an insured institutions capital level
fall. For example, an adequately capitalized institution is restricted from accepting brokered deposits. An undercapitalized or significantly undercapitalized institution must develop a capital restoration plan
and is subject to a number of mandatory and discretionary supervisory actions. These powers and authorities are in addition to the traditional powers of the Federal banking agencies to deal with undercapitalized institutions. Both the Company and
the Bank are well capitalized under FDIC guidelines.

Federal regulatory authorities also have broad enforcement powers over
the Company and the Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of any such institution for the benefit of depositors and other creditors.

Reporting Terrorist Activities

The Federal Bureau of
Investigation (FBI) has sent, and will send, banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001 terrorist attacks and other attacks as they may occur and are investigated.
The FBI has requested, and will request in the future, that the Bank search its records for any relationships or transactions with persons on those lists. In addition, on an ongoing basis, the Office of Foreign Assets Control (OFAC), a
division of the Department of the Treasury, is responsible for helping to insure that United States entities do not engage in transactions with enemies of the United States, as defined by various Executive Orders and Acts of Congress. If
the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze that account, file a suspicious activity report and notify the FBI. The Bank actively checks high-risk OFAC areas such as new accounts, wire
transfers and customer files.



---

Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. Virtually all of the cash revenues of the Company results from dividends paid to the Company by the Bank. Under Virginia law a Virginia chartered bank may not declare a
dividend in excess of its undivided profits. As a Virginia corporation the Bank may not declare a dividend if after the dividend it cannot pay its debts as they become due or its assets would exceed its liabilities. A bank may not declare or pay any
dividend if, after making the dividend, the bank would be undercapitalized, as defined in regulations of the FDIC. In addition, the Company is subject to various general regulatory policies relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums.

Community Reinvestment

The requirements of the Community Reinvestment Act (CRA) are applicable to the Bank. The CRA imposes on financial institutions an affirmative
and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institutions efforts in meeting
community credit needs currently are evaluated as part of the examination process pursuant to a number of assessment factors. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The
Company strives to meet the credit needs of all aspects of its market, consistent with safe and sound banking practices. Bank of Botetourt holds an outstanding rating, as publicly disclosed in its most recent CRA examination report issued by the
FDIC.

Interstate Banking and Branching

Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. A bank headquartered in one state is able to merge with a bank headquartered in another state, as long as neither of
the states has opted out of such interstate merger authority prior to such date. Virginia, North Carolina, West Virginia and Maryland all permit such mergers. Once a bank has established branches in a state through an interstate merger transaction,
the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law.

Economic and Monetary Polices

The Companys operations
are affected not only by general economic conditions, but also by the economic and monetary policies of various regulatory authorities. In particular, the Federal Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates



---

charged on loans or paid for deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.



|Item 2. | Description of Property
|------- | -----------------------

The Company and the Bank are headquartered
in the Main Office at 19747 Main Street, Buchanan, Virginia. In addition, the Bank owns and operates retail banking offices in Virginia located at 670 Roanoke Road in Daleville, 58 Railroad Avenue in Eagle Rock, 5462 Lee Highway in Troutville, 3801
Challenger Avenue and 3130 Peters Creek Road in Roanoke, 65 East Midland Trail in Lexington, and 5905 North Lee Highway in Fairfield. The Bank owns additional facilities which are utilized for its Operations Center at 19800 Main Street in Buchanan,
and its Loan Administration Center at 21 Stoney Battery Road in Troutville.



|Item 3. | Legal Proceedings
|------- | -----------------

In the ordinary course of
operations, the Company and the Bank expect to be parties to various legal proceedings. At present, there are no pending or threatened proceedings against the Company or the Bank which, if determined adversely, would have a material effect on our
business, results of operations, or financial position.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

No matters were submitted to a vote of Companys shareholders during the fourth quarter of 2006.



---

PART II



|Item 5. | Market for Common Equity and Related Stockholder Matters
|------- | --------------------------------------------------------

Shares of the Companys Common Stock are neither listed on any stock exchange nor quoted on the NASDAQ Stock Market and trades infrequently. Shares of Common Stock have periodically been sold in a limited number of privately negotiated
transactions. Based on information available to it, the Company believes that from January 1, 2006 to December 31, 2006, the selling price of shares of Common Stock ranged from $27.00 to $49.00. There may, however, have been other
transactions at other prices not known to the Company.

Market Price and Dividends



|                   |  |       |  |      
|------------------ |  | ----- |  | -----
|2005:              |  | High  |  | Low  
|1stQuarter         |  | 24.00 |  | 22.50
|2ndQuarter         |  | 24.00 |  | 23.50
|3rdQuarter         |  | 24.00 |  | 22.50
|4thQuarter         |  | 29.00 |  | 25.00
|                   |  |      
|2006:              |  |       |  |      
|1stQuarter         |  | 30.05 |  | 28.25
|2ndQuarter         |  | 33.00 |  | 27.00
|3rdQuarter         |  | 34.00 |  | 31.00
|4thQuarter         |  | 49.00 |  | 35.00
|                   |  |      
|Dividends Declared |  |       |  |      
|                   |  |      
|2005:              |  |       |  |      
|                   |  |      
|January            |  | 0.14  |  |      
|April              |  | 0.14  |  |      
|July               |  | 0.16  |  |      
|October            |  | 0.16  |  |      
|                   |  |      
|2006:              |  |       |  |      
|                   |  |      
|January            |  | 0.18  |  |      
|April              |  | 0.18  |  |      
|July               |  | 0.18  |  |      
|October            |  | 0.18  |  |      

As of March 5, 2007, there were approximately 850 record holders of Common Stock.



---

The Company is a legal entity separate and distinct from its subsidiary, and its cash revenues depend
primarily on the payment of dividends from the Bank. The Bank is subject to certain legal restrictions on the amount of dividends it is permitted to pay to the Company. In addition, the final determination of the timing, amount and payment of
dividends on shares of the Companys Common Stock is at the discretion of the Companys Board of Directors and will depend upon the earnings of the Company and the Bank, the financial condition of the Company and other factors, including
general economic conditions and applicable governmental regulations and policies.

Performance Graph

The following graph compares the yearly percentage change in the cumulative total of shareholder return on the Companys Common Stock with the
cumulative return on the NASDAQ Composite Index, the SNL Bank and Thrift Index for the period beginning July 5, 2002 and ending December 31, 2006. These comparisons assume the investment of $100 in Company Common Stock and in each of the
indices on July 5, 2002 and the reinvestment of any dividends.

LOGO

Botetourt Bankshares, Inc. became a public reporting company in 2002 with its first recorded stock trade on July 5, 2002.



---

---

Managements Discussion and Analysis



---



Managements Discussion and Analysis of Operations

Overview

Managements Discussion and Analysis is provided to
assist in understanding and evaluating Botetourt Bankshares, Inc.s financial condition and its results of operations. The following discussion should be read in conjunction with the Companys consolidated financial statements.

Botetourt Bankshares, Inc., the parent company of Bank of Botetourt, currently operates eight offices in three counties of Virginia. The main office is in Buchanan,
with other Botetourt County office locations in Daleville, Eagle Rock and Troutville. The Banks operations center is located in Buchanan and the loan administration center is located in Troutville. The Roanoke County offices are located on
Challenger Avenue in eastern Roanoke County and on Peters Creek Road in north Roanoke County. The Rockbridge County offices are located at 65 East Midland Trail in Lexington and 5905 N. Lee Highway in Fairfield. Buchanan Service Corporation, a
subsidiary of Bank of Botetourt, provides non-traditional banking services for the Company, including insurance services, title insurance services, and investment brokerage services.

The individual market conditions of each county vary from rural to urban with Botetourt County being the most rural and Roanoke County the most urban. The southern portion of Botetourt County has enjoyed both
residential and industrial growth due to the development of subdivisions and industrial parks. Bank of Botetourt and bank personnel work with local government and business leaders in an effort to continue to attract industry to our entire market
area.

Earnings increased by 8.32% in 2006 to $3.5 million compared to $3.2 million for 2005 and $2.4 million in 2004. Return on average assets was 1.41%
in 2006, 1.43% in 2005, and 1.17% in 2004. Our return on assets compares favorably to members of our peer group. During 2006, 2005 and 2004, revenues from the Bank of Botetourt represented approximately 99% of Botetourt Bankshares, Inc.s total
revenues.

The total assets of Botetourt Bankshares, Inc. grew to $254.4 million in 2006 from $238.5 million in 2005, a 6.67% increase. Average equity to
average assets demonstrates the Companys strong capital position with a ratio of 9.26% at December 31, 2006. Our capital position continues to be in line with our peer groups average.

The Sarbanes-Oxley Act of 2002 was enacted to increase the reliability of financial statements issued by public companies. The Act increases the number of independent
parties responsible for the issuance of the financial statements and increases the independence of those already involved in the financial statement process. At December 31, 2006, the Company was in compliance with the Act.

Management plans to continue increasing market share by expanding to contiguous markets using earnings from operations to fund the Companys growth. During the
fourth quarter of 2006, Bank of Botetourt entered into a contract to purchase property located at LakeWatch Plantation in Franklin County, Virginia for construction of a branch office. Regulatory filings for the branch application were submitted
during the first quarter of 2007 with an anticipated opening date during the fourth quarter of 2007. Also in 2007, a planned expansion of the loan administration center will create needed office space for loan processing and loan administration
functions. Management of Botetourt Bankshares, Inc. has no plans to raise capital for its expansionary activities through external sources.

Critical
Accounting Policy

The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States
(GAAP). The notes to the audited consolidated financial statements included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2006 contain a summary of its significant accounting policies. Management believes
the Companys policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments that often require assumptions
or estimates about highly uncertain matters. Accordingly, the Company considers the policy related to this area critical.



---

---

Managements Discussion and Analysis



---



Table 1. Net Interest Income and Average Balances (thousands)



|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|-------------------------------------------- |  | -------------- | ------- | ---------------------- | ---- | ----------- |  | ---- | -------------- |  | ---------------------- | ------- | ----------- | - | ------ | -------------- | ----- | ---------------------- |  | ----------- | ------- |  | - | ------ |  | ---- | -
|                                             |  | 2006           |         |                        | 2005 |             |  | 2004 |               
|                                             |  | AverageBalance |         | InterestIncome/Expense |      | Yield/Cost2 |  |      | AverageBalance |  | InterestIncome/Expense |         | Yield/Cost2 |   |        | AverageBalance |       | InterestIncome/Expense |  | Yield/Cost2 |        
|Interest-earning assets:                     |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Deposit with banks                           |  | $              | 242     |                        | $    | 12          |  | 4.96 | %              |  | $                      | 188     |             | $ | 5      |                | 2.66  | %                      |  | $           | 208     |  | $ | 2      |  | 0.96 | %
|Taxable investment securities                |  |                | 20,216  |                        |      | 787         |  | 3.89 | %              |  |                        | 16,587  |             |   | 569    |                | 3.43  | %                      |  |             | 14,663  |  |   | 521    |  | 3.55 | %
|Nontaxable investment securities             |  |                | 9,636   |                        |      | 415         |  | 4.31 | %              |  |                        | 9,440   |             |   | 405    |                | 4.29  | %                      |  |             | 9,412   |  |   | 408    |  | 4.33 | %
|Federal funds sold                           |  |                | 6,996   |                        |      | 340         |  | 4.86 | %              |  |                        | 4,534   |             |   | 159    |                | 3.51  | %                      |  |             | 3,639   |  |   | 55     |  | 1.51 | %
|Loans, net1                                  |  |                | 194,081 |                        |      | 15,401      |  | 7.94 | %              |  |                        | 175,862 |             |   | 12,743 |                | 7.25  | %                      |  |             | 158,934 |  |   | 10,716 |  | 6.74 | %
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total interest-earning assets                |  |                | 231,171 |                        |      | 16,955      |  |      |                |  |                        | 206,611 |             |   | 13,881 |                |       |                        |  |             | 186,856 |  |   | 11,702 |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Yield on average interest-earning assets     |  |                |         |                        |      |             |  | 7.33 | %              |  |                        |         |             |   |        |                | 6.72  | %                      |  |             |         |  |   |        |  | 6.26 | %
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Noninterest-earning assets:                  |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Cash and due from banks                      |  |                | 6,540   |                        |      |             |  |      |                |  |                        | 8,404   |             |   |        |                |       |                        |  |             | 10,752  |  |   |        |  |      |  
|Property and equipment                       |  |                | 5,694   |                        |      |             |  |      |                |  |                        | 5,825   |             |   |        |                |       |                        |  |             | 5,713   |  |   |        |  |      |  
|Interest receivable and other                |  |                | 3,935   |                        |      |             |  |      |                |  |                        | 3,670   |             |   |        |                |       |                        |  |             | 3,311   |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total noninterest-earning assets             |  |                | 16,169  |                        |      |             |  |      |                |  |                        | 17,899  |             |   |        |                |       |                        |  |             | 19,776  |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total assets                                 |  | $              | 247,340 |                        |      |             |  |      |                |  | $                      | 224,510 |             |   |        |                |       |                        |  | $           | 206,632 |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Interest-bearing liabilities:                |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Demand deposits                              |  | $              | 20,812  |                        |      | 30          |  | 0.14 | %              |  | $                      | 21,885  |             |   | 22     |                | 0.10  | %                      |  | $           | 20,589  |  |   | 21     |  | 0.10 | %
|Savings and money markets                    |  |                | 37,237  |                        |      | 514         |  | 1.38 | %              |  |                        | 38,453  |             |   | 289    |                | 0.75  | %                      |  |             | 39,405  |  |   | 264    |  | 0.67 | %
|Time deposits                                |  |                | 130,355 |                        |      | 5,504       |  | 4.22 | %              |  |                        | 112,043 |             |   | 3,742  |                | 3.34  | %                      |  |             | 99,445  |  |   | 3,041  |  | 3.06 | %
|Other borrowings                             |  |                | 648     |                        |      | 36          |  | 5.56 | %              |  |                        | 544     |             |   | 17     |                | 3.13  | %                      |  |             | 953     |  |   | 14     |  | 1.47 | %
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total interest-bearing liabilities           |  |                | 189,052 |                        |      | 6,084       |  |      |                |  |                        | 172,925 |             |   | 4,070  |                |       |                        |  |             | 160,392 |  |   | 3,340  |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Cost on average interest-bearing liabilities |  |                |         |                        |      |             |  | 3.22 | %              |  |                        |         |             |   |        |                | 2.35  | %                      |  |             |         |  |   |        |  | 2.08 | %
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Noninterest-bearing liabilities              |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Demand deposits                              |  |                | 34,030  |                        |      |             |  |      |                |  |                        | 29,992  |             |   |        |                |       |                        |  |             | 26,788  |  |   |        |  |      |  
|Interest payable and other                   |  |                | 1,354   |                        |      |             |  |      |                |  |                        | 1,016   |             |   |        |                |       |                        |  |             | 913     |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total noninterest-bearing liabilities        |  |                | 35,384  |                        |      |             |  |      |                |  |                        | 31,008  |             |   |        |                |       |                        |  |             | 27,701  |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total liabilities                            |  |                | 224,436 |                        |      |             |  |      |                |  |                        | 203,933 |             |   |        |                |       |                        |  |             | 188,093 |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |               
|Stockholders equity                         |  |                | 22,904  |                        |      |             |  |      |                |  |                        | 20,577  |             |   |        |                |       |                        |  |             | 18,539  |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Total liabilities and stockholders equity   |  | $              | 247,340 |                        |      |             |  |      |                |  | $                      | 224,510 |             |   |        |                |       |                        |  | $           | 206,632 |  |   |        |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Net interest income                          |  |                |         |                        | $    | 10,871      |  |      |                |  |                        |         |             |   | $9,811 |                |       |                        |  |             |         |  | $ | 8,362  |  |      |  
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  
|Net yield on interest-earning assets         |  |                |         |                        |      |             |  | 4.70 | %              |  |                        |         |             |   |        |                | 4.75% |                        |  |             |         |  |   |        |  | 4.48 | %
|                                             |  |                |         |                        |      |             |  |      |                |  |                        |         |             |   |        |                |       |                        |  |             |         |  |   |        |  |      |  

---

|(1) | Average loan balances include nonaccrual loans and are net of loan loss reserve.
|--- | --------------------------------------------------------------------------------

|(2) | The amounts are not adjusted for tax equivalent yield on tax-exempt investments.
|--- | --------------------------------------------------------------------------------



---

---

Managements Discussion and Analysis



---



Net Interest Income

Net interest income, the principal source of bank earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily
deposits used to fund earning assets). Table 1 summarizes the major components of net interest income for the past three years and also provides yields and average balances.

Net interest income increased in 2006 to $10.9 million compared to $9.8 million in 2005 and $8.4 million in 2004. The increase in net interest income was the result of growth in earning assets and an increasing
interest rate environment. Net interest margin was adversely impacted by the rising cost of time deposits, due to an inverted yield curve, which increased short-term rates at a more rapid than normal pace. Competition for deposits and loans continue
to compress net margins. Additional factors influencing net interest margin include aggressive pricing and competition from unregulated organizations. The net interest margin for 2006 decreased by 5 basis points to 4.70% compared to 4.75% for 2005
and 4.48% for 2004. The effects of changes in volumes and rates on net interest income in 2006 compared to 2005, and 2005 compared to 2004 are shown in Table 2.

Interest income for 2006 increased by $3.1 million to $17.0 million from $13.9 million in 2005. Interest income in 2004 totaled $11.7 million. The increase in interest income in 2006 from 2005 and in 2005 over 2004 were both the result of
an increase in loan volume and a rising interest rate environment.

Interest expense increased in 2006 by $2.0 million to $6.1 million from $4.1 million in
2005. The increase in 2006 from 2005 as well as the increase in 2005 from 2004 was due to both growth in interest-bearing deposits and higher interest rates paid on deposits. Interest paid on time deposits, which make up the largest portion of
interest-bearing deposits, increased $1,762,000, or 47.1%, from 2005 to 2006. The average rate paid on time deposits increased 88 basis points to 4.22% in 2006 from 3.34% in 2005.

Table 2. Rate/Volume Variance Analysis (thousands)



|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|-------------------------------- |  | --------------------------------- | ----- | ---------------------- | --------------------- | ----- | --------------------------------- | ---- | ----- | ---------------------- | ------ | - | ----- | - |  | - | --- | - |  | - | ----- | -
|                                 |  | 2006 Compared to 2005             |       |                        | 2005 Compared to 2004 |      
|                                 |  | Interest Income/ Expense Variance |       | Variance Attributed To |                       |       | Interest Income/ Expense Variance |      |       | Variance Attributed To |       
|                                 |  | Rate                              |       | Volume                 |                       |       |                                   | Rate |       |                        | Volume |  
|Interest-earning assets:         |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Deposits in other banks          |  | $                                 | 7     |                        | $                     | 5     |                                   | $    | 2     |                        |        | $ | 3     |   |  | $ | 3   |   |  | $ |      |  
|Taxable investment securities    |  |                                   | 218   |                        |                       | 83    |                                   |      | 135   |                        |        |   | 48    |   |  |   | (17 | ) |  |   | 65    |  
|Nontaxable investment securities |  |                                   | 10    |                        |                       | 2     |                                   |      | 8     |                        |        |   | (3    | ) |  |   | (4  | ) |  |   | 1     |  
|Federal funds sold               |  |                                   | 181   |                        |                       | 75    |                                   |      | 106   |                        |        |   | 104   |   |  |   | 88  |   |  |   | 16    |  
|Loans                            |  |                                   | 2,658 |                        |                       | 1,272 |                                   |      | 1,386 |                        |        |   | 2,027 |   |  |   | 836 |   |  |   | 1,191 |  
|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Total                            |  |                                   | 3,074 |                        |                       | 1,437 |                                   |      | 1,637 |                        |        |   | 2,179 |   |  |   | 906 |   |  |   | 1,273 |  
|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Interest-bearing liabilities:    |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Demand deposits                  |  |                                   | 8     |                        |                       | 9     |                                   |      | (1    | )                      |        |   | 1     |   |  |   |    |   |  |   | 1     |  
|Savings deposits                 |  |                                   | 225   |                        |                       | 234   |                                   |      | (9    | )                      |        |   | 25    |   |  |   | 31  |   |  |   | (6    | )
|Time deposits                    |  |                                   | 1,762 |                        |                       | 1,089 |                                   |      | 673   |                        |        |   | 701   |   |  |   | 295 |   |  |   | 406   |  
|Other borrowings                 |  |                                   | 19    |                        |                       | 15    |                                   |      | 4     |                        |        |   | 3     |   |  |   | 5   |   |  |   | (2    | )
|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Total                            |  |                                   | 2,014 |                        |                       | 1,347 |                                   |      | 667   |                        |        |   | 730   |   |  |   | 331 |   |  |   | 399   |  
|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  
|Net interest income              |  | $                                 | 1,060 |                        | $                     | 90    |                                   | $    | 970   |                        |        | $ | 1,449 |   |  | $ | 575 |   |  | $ | 874   |  
|                                 |  |                                   |       |                        |                       |       |                                   |      |       |                        |        |   |       |   |  |   |     |   |  |   |       |  

---

|(1) | The variance in interest
attributed to both volume and rate has been allocated to variance attributed to volume and variance attributed to rate in proportion to the absolute value of the change in each.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Balances of nonaccrual loans have been included in average loan balances.
|--- | -------------------------------------------------------------------------



---

---

Managements Discussion and Analysis



---



Provision for Loan Losses

The allowance for loan losses is established to provide for potential losses in the Companys loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. Management determines the amount of the
provision for loan losses required to maintain an allowance adequate to provide for any potential losses. The factors considered in making this decision are the collectibility of problem loans, volume of new loans, composition of the loan portfolio,
known local business problems, and general economic outlook.

The Bank has experienced above average loan growth during the past three years as economic
conditions in the Banks market areas have remained strong. Nonperforming assets at year-end 2006 were 0.85% of loans outstanding as compared to 1.08% at year-end 2005. Bank management has implemented a comprehesive loan review program that
includes a risk rating system for all loans. 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 adequacy of the allowance is determined by analysis of the different
components. Management continually evaluates the adequacy of the loan loss reserve. The loan loss provision allocated for 2006 reflects the amount determined by management to maintain the reserve at a level adequate based on the overall risk in the
portfolio.

In 2006, management decreased the provision for loan losses to $300,000 from $450,000 in 2005 due to overall improvement of asset quality in
the loan portfolio and less net loan charge-offs. The provision for loan losses was $725,000 in 2004. The Banks allowance for loan losses as a percentage of total loans at the end of 2006 was 1.18% as compared to 1.22% in 2005 and 1.25% in
2004.

Additional information is contained in Tables 12, 13 and 14, and is discussed in Nonperforming and Problem Assets.

Other Income

Noninterest income consists of revenues generated from
a broad range of financial services and activities. The majority of noninterest income is a result of service charges on a growing deposit account base including charges for insufficient funds items and fees charged for nondeposit services such as
safe deposit box rental fees. Mortgage loan origination fees and title insurance commissions also are a significant source of the companys noninterest income. In 2006, mortgage origination fees and title insurance commissions were reduced due
to a decline in residential real estate loan activity and increased competition in the title insurance sector. Noninterest income totaled $1.794 million in 2006, a decrease of $124,000 from the $1.918 million recorded in 2005. Noninterest income in
2004 totaled $1.633 million. Primary sources of noninterest income for the past three years are summarized in Table 3.

Table 3. Sources
of Noninterest Income (thousands)



|                                    |  |      |       |      |   |       |  |   |      
|----------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                    |  | 2006 |       | 2005 |   | 2004 
|Service charges on deposit accounts |  | $    | 887   |      | $ | 859   |  | $ | 760  
|Other service charges and fees      |  |      | 191   |      |   | 179   |  |   | 182  
|Mortgage origination fees           |  |      | 340   |      |   | 407   |  |   | 313  
|Title insurance commissions         |  |      | 181   |      |   | 225   |  |   | 175  
|Safe deposit box rent               |  |      | 20    |      |   | 20    |  |   | 19   
|Gain on the sale of securities      |  |      |      |      |   | 7     |  |   | 1    
|Other income                        |  |      | 175   |      |   | 221   |  |   | 183  
|                                    |  |      |       |      |   |       |  |   |      
|Total noninterest income            |  | $    | 1,794 |      | $ | 1,918 |  | $ | 1,633
|                                    |  |      |       |      |   |       |  |   |      



---

---

Managements Discussion and Analysis



---



Noninterest Expense

Noninterest expense for 2006 increased by $690,000 or 10.4% to $7.3 million. Noninterest expense in 2005 was $6.6 million and $5.8 million in 2004 (see Table 4). The overhead ratio of noninterest expense to adjusted total revenues (net
interest income plus noninterest income excluding securities transactions) was 57.8% in 2006, 56.5% in 2005 and 58.4% in 2004.

The continuing growth of
the Bank has resulted in higher personnel, occupancy, and furniture and equipment expenses. Personnel expenses, including salaries, wages, and employee benefits is the primary noninterest expense of the Company. The increase in salaries and wages
can be attributed to normal increases in compensation paid to employees and also additions to the banking staff as necessary due to the continued growth of the bank. The increase in employee benefits expense is primarily due to the increase in
health benefit costs for employees, which are provided by the Company. The increase in furniture and equipment expense during 2006 was the result of data processing equipment upgrades. Expenses related to foreclosed assets increased in 2005 due to
the sale of other real estate owned property at a loss. Table 4 provides a further breakdown of noninterest expense for the past three years.

Table 4. Noninterest Expense (thousands)



|                                 |  |      |       |      |   |       |  |   |      
|-------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                 |  | 2006 |       | 2005 |   | 2004 
|Salaries & wages                 |  | $    | 3,210 |      | $ | 2,872 |  | $ | 2,523
|Employee benefits                |  |      | 1,029 |      |   | 942   |  |   | 856  
|                                 |  |      |       |      |   |       |  |   |      
|Total personnel expense          |  |      | 4,239 |      |   | 3,814 |  |   | 3,379
|                                 |  |      |      
|Occupancy expense                |  |      | 413   |      |   | 391   |  |   | 360  
|Furniture & equipment            |  |      | 691   |      |   | 570   |  |   | 458  
|Printing & supplies              |  |      | 124   |      |   | 123   |  |   | 115  
|FDIC deposit insurance           |  |      | 27    |      |   | 26    |  |   | 26   
|Professional services            |  |      | 132   |      |   | 102   |  |   | 100  
|Postage                          |  |      | 87    |      |   | 81    |  |   | 82   
|Telephone                        |  |      | 132   |      |   | 124   |  |   | 118  
|Courier fees                     |  |      | 55    |      |   | 51    |  |   | 44   
|Education & seminars             |  |      | 53    |      |   | 41    |  |   | 32   
|Travel expense                   |  |      | 34    |      |   | 27    |  |   | 24   
|Director fees and expense        |  |      | 92    |      |   | 91    |  |   | 71   
|Advertising and public relations |  |      | 188   |      |   | 143   |  |   | 176  
|Insurance                        |  |      | 42    |      |   | 48    |  |   | 26   
|Capital stock tax                |  |      | 157   |      |   | 140   |  |   | 118  
|Outside services                 |  |      | 183   |      |   | 164   |  |   | 155  
|Foreclosed assets, net           |  |      | 3     |      |   | 37    |  |   | 1    
|Other operating expense          |  |      | 663   |      |   | 652   |  |   | 549  
|                                 |  |      |       |      |   |       |  |   |      
|Total noninterest expense        |  | $    | 7,315 |      | $ | 6,625 |  | $ | 5,834
|                                 |  |      |       |      |   |       |  |   |      

Income Taxes

Income tax expense is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) 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. The deferred tax assets and liabilities represent the future Federal income tax return consequences of those differences, which will be taxable or deductible, depending when
the assets and liabilities are recovered or settled.



---

---

Managements Discussion and Analysis



---



Income tax expense (substantially all Federal) was $1.6 million in 2006, $1.4 million in 2005 and $1.0 million for
2004 representing 31.1%, 31.0% and 30.1% of income before income taxes, respectively. Tax expense has increased as a result of increased earnings.

The
Banks deferred income tax benefits and liabilities result primarily from temporary differences (discussed above) in provisions for loan losses, depreciation, deferred compensation, deferred income, pension expense, and investment security
discount accretion.

At December 31, 2006, the Company had a net deferred income tax asset of approximately $735,000, which was included in other
assets, compared to a net deferred income tax asset of $344,000 at December 31, 2005 which also was included in other assets. The deferred income tax asset in 2006 consisted primarily of a deferred tax benefit of a $689,000 temporary difference
in provision for loan losses and a $343,000 temporary difference in defined benefit plan offset by a $240,000 temporary difference in depreciation and a $186,000 temporary difference in accrued pension cost.

Earning Assets

Average earning assets increased $24.6 million in
2006 from the 2005 average of $206.6 million. Total average earning assets represented 93.5% and 92.0% of total average assets in 2006 and 2005, respectively. The percent mix of average earning assets changed in 2006 with increases in average loans,
investment securities, and federal funds sold. Average non-earning assets were reduced in 2006 as a result of lower cash reserve requirements. Higher interest rates resulted in higher earnings credits thereby lowering the required cash balances at
correspondent banks. A summary of average assets for the past three years is shown in Table 5.

Table 5. Average Asset Mix (thousands)



|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|----------------------- |  | -------------- | ------- | - | ----- | - | -------------- | ---- | ------- |  | - | -------------- | - | - | - | ------- |  | ----- | -
|                        |  | 2006           |         |   | 2005  |   |                | 2004 |        
|                        |  | AverageBalance |         | % |       |   | AverageBalance |      | %       |  |   | AverageBalance |   | % |  
|Earning assets:         |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Loans, net              |  | $              | 194,081 |   | 78.5  | % |                | $    | 175,862 |  | $ | 78.3           | % |   | $ | 158,934 |  | 76.9  | %
|Investment securities   |  |                | 29,852  |   | 12.1  | % |                |      | 26,027  |  |   | 11.6           | % |   |   | 24,075  |  | 11.6  | %
|Federal funds sold      |  |                | 6,996   |   | 2.8   | % |                |      | 4,534   |  |   | 2.0            | % |   |   | 3,639   |  | 1.8   | %
|Deposits in other banks |  |                | 242     |   | 0.1   | % |                |      | 188     |  |   | 0.1            | % |   |   | 208     |  | 0.1   | %
|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Total earning assets    |  |                | 231,171 |   | 93.5  | % |                |      | 206,611 |  |   | 92.0           | % |   |   | 186,856 |  | 90.4  | %
|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Nonearning assets:      |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Cash and due from banks |  |                | 6,540   |   | 2.6   | % |                |      | 8,404   |  |   | 3.8            | % |   |   | 10,752  |  | 5.2   | %
|Premises and equipment  |  |                | 5,694   |   | 2.3   | % |                |      | 5,825   |  |   | 2.6            | % |   |   | 5,713   |  | 2.8   | %
|Other assets            |  |                | 3,935   |   | 1.6   | % |                |      | 3,670   |  |   | 1.6            | % |   |   | 3,311   |  | 1.6   | %
|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Total nonearning assets |  |                | 16,169  |   | 6.5   | % |                |      | 17,899  |  |   | 8.0            | % |   |   | 19,776  |  | 9.6   | %
|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  
|Total assets            |  | $              | 247,340 |   | 100.0 | % |                | $    | 224,510 |  |   | 100.0          | % |   | $ | 206,632 |  | 100.0 | %
|                        |  |                |         |   |       |   |                |      |         |  |   |                |   |   |   |         |  |       |  

Loans

Average
net loans totaled $194.1 million during 2006, an increase of $18.2 million or 10.3% above 2005. This reflects the continuing efforts to grow the loan portfolio prudently. A significant portion of the loan portfolio, $170.5 million or 80.4%, is made
up of loans secured by various types of real estate. Total loans secured by 1-4 family residential properties represented 29.9% of total loans at the end of 2006 while nonfarm/nonresidential properties made up 28.8%.

The Bank makes both consumer and commercial loans to all neighborhoods within its market area, including the low- and moderate-income areas. Our market area is generally
defined to be all or portions of the Botetourt, Roanoke and Rockbridge counties of Virginia and the cities of Lexington, Buena Vista and Roanoke, Virginia. The



---

---

Managements Discussion and Analysis



---



Bank places emphasis on consumer based installment loans and commercial loans to small and medium sized businesses. Aggressive pricing and competition from
unregulated organizations have also been a factor when generating new loans. The amounts of loans outstanding by type for the last five years, and the maturity distribution of variable and fixed rate loans as of year-end 2006 are presented in Table
6 and Table 7, respectively.

Table 6. Loan Portfolio Summary (thousands)



|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|--------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                        |  | 2006 |         | 2005 |   | 2004    |  | 2003 |         | 2002
|Commercial, financial and agricultural1 |  | $    | 101,211 |      | $ | 96,630  |  | $    | 88,404  |      |   | 74,649  |  | $ | 54,878 
|Real estate, construction               |  |      | 31,418  |      |   | 16,412  |  |      | 23,194  |      |   | 18,834  |  |   | 15,352 
|Real estate, mortgage                   |  |      | 63,461  |      |   | 56,320  |  |      | 43,931  |      |   | 38,560  |  |   | 31,818 
|Installment loans to individuals, other |  |      | 15,952  |      |   | 16,257  |  |      | 15,518  |      |   | 13,960  |  |   | 13,711 
|Leases                                  |  |      | 1       |      |   | 5       |  |      | 40      |      |   | 74      |  |   | 126    
|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                                   |  | $    | 212,043 |      | $ | 185,624 |  | $    | 171,087 |      | $ | 146,077 |  | $ | 115,885
|                                        |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        

---

|(1) | Includes commercial real estate
|--- | -------------------------------

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and
government regulation also influence interest rates. On average, loans yielded 7.9% in 2006 compared to an average yield of 7.3% in 2005 and 6.7% in 2004.

Table 7. Maturity Schedule of Loans (thousands)



|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|---------------------------------- |  | ----------------- | ------- | ------------------------------------ | ------ | --------------------------- | - | ------ | ------ | ----- | - | ------ |  | - | ------- |  | ----- | -
|                                   |  | 2006              |        
|                                   |  | OtherReal Estate1 |         | Commercial Financial andAgricultural |        | Construction andDevelopment |   | Others |        | Total |  
|                                   |  |                   |         |                                      | Amount |                             | % |       
|Fixed rate loans:                  |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  | $                 | 3,426   |                                      | $      | 876                         |   | $      | 1,193  |       | $ | 2,578  |  | $ | 8,073   |  | 3.8   | %
|Over three months to twelve months |  |                   | 14,583  |                                      |        | 2,590                       |   |        | 4,631  |       |   | 1,609  |  |   | 23,413  |  | 11.1  | %
|Over twelve months to three years  |  |                   | 1,613   |                                      |        | 3,279                       |   |        | 1,330  |       |   | 3,903  |  |   | 10,125  |  | 4.8   | %
|Over three years to five years     |  |                   | 2,351   |                                      |        | 3,603                       |   |        | 1,090  |       |   | 4,209  |  |   | 11,253  |  | 5.3   | %
|Over five years to fifteen years   |  |                   | 10,329  |                                      |        | 370                         |   |        | 154    |       |   | 445    |  |   | 11,298  |  | 5.3   | %
|Over fifteen years                 |  |                   | 2,797   |                                      |        |                            |   |        | 22     |       |   |       |  |   | 2,819   |  | 1.3   | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Total fixed rate loans             |  |                   | 35,099  |                                      |        | 10,718                      |   |        | 8,420  |       |   | 12,744 |  |   | 66,981  |  | 31.6  | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Variable rate loans:               |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  |                   | 35,577  |                                      |        | 10,968                      |   |        | 19,227 |       |   | 3,361  |  |   | 69,133  |  | 32.6  | %
|Over three months to twelve months |  |                   | 7,700   |                                      |        | 930                         |   |        | 315    |       |   | 101    |  |   | 9,046   |  | 4.3   | %
|Over twelve months to three years  |  |                   | 31,700  |                                      |        | 1,302                       |   |        | 679    |       |   |       |  |   | 33,681  |  | 15.9  | %
|Over three years to five years     |  |                   | 26,904  |                                      |        | 1,329                       |   |        | 2,777  |       |   | 805    |  |   | 31,815  |  | 15.0  | %
|Over five years to fifteen years   |  |                   | 573     |                                      |        |                            |   |        |       |       |   | 814    |  |   | 1,387   |  | 0.6   | %
|Over fifteen years                 |  |                   |        |                                      |        |                            |   |        |       |       |   |       |  |   |        |  |      | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Total variable rate loans          |  |                   | 102,454 |                                      |        | 14,529                      |   |        | 22,998 |       |   | 5,081  |  |   | 145,062 |  | 68.4  | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Total loans:                       |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Three months or less               |  |                   | 39,003  |                                      |        | 11,844                      |   |        | 20,420 |       |   | 5,939  |  |   | 77,206  |  | 36.4  | %
|Over three months to twelve months |  |                   | 22,283  |                                      |        | 3,520                       |   |        | 4,946  |       |   | 1,710  |  |   | 32,459  |  | 15.4  | %
|Over twelve months to three years  |  |                   | 33,313  |                                      |        | 4,581                       |   |        | 2,009  |       |   | 3,903  |  |   | 43,806  |  | 20.7  | %
|Over three years to five years     |  |                   | 29,255  |                                      |        | 4,932                       |   |        | 3,867  |       |   | 5,014  |  |   | 43,068  |  | 20.3  | %
|Over five years to fifteen years   |  |                   | 10,902  |                                      |        | 370                         |   |        | 154    |       |   | 1,259  |  |   | 12,685  |  | 5.9   | %
|Over fifteen years                 |  |                   | 2,797   |                                      |        |                            |   |        | 22     |       |   |       |  |   | 2,819   |  | 1.3   | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  
|Total loans                        |  | $                 | 137,553 |                                      | $      | 25,247                      |   | $      | 31,418 |       | $ | 17,825 |  | $ | 212,043 |  | 100.0 | %
|                                   |  |                   |         |                                      |        |                             |   |        |        |       |   |        |  |   |         |  |       |  

---

|(1) | Other Real Estate includes
commercial real estate.
|--- | --------------------------------------------------



---

---

Managements Discussion and Analysis



---



Investment Securities

The Bank uses its investment portfolio to provide liquidity for unexpected deposit decreases or increased loan generation, to meet the Banks interest rate sensitivity goals, and to generate income. Management of the investment
portfolio has always been conservative with virtually all investments taking the form of purchases of U.S. Treasury, Government-sponsored enterprises, and State and local bond issues. All securities are high quality. Management views the investment
portfolio as a secondary source of income. Adjustments are sometimes necessary in the portfolio to provide an adequate source of liquidity that can be used to meet funding requirements for loan demand and deposit fluctuations and to control interest
rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at the end of 2006 by major types of investments and maturity ranges.

At December 31, 2006, the market value of the investment portfolio was $26.32 million, representing a $141,000 unrealized appreciation above amortized cost. This
compared to a market value of $29.73 million and a $13,000 unrealized appreciation above amortized cost a year earlier.

Table 8.
Investment Securities (thousands)



|                                                |  |                    |       |   |                             |   |        |                              |  |   |                |   |  |       |      |   |             |   |        |   |  |   |       
|----------------------------------------------- |  | ------------------ | ----- | - | --------------------------- | - | ------ | ---------------------------- |  | - | -------------- | - |  | ----- | ---- | - | ----------- | - | ------ | - |  | - | ------
|December 31, 2006                              
|                                                |  | Amortized Cost Due |       |   |                             |   |        |                             
|                                                |  | In One Year orLess |       |   | After One Through Five Yrs. |   |        | After Five Through Ten Years |  |   | After TenYears |   |  | Total |      |   | MarketValue
|Investment securities:                          |  |                    |       |   |                             |   |        |                              |  |   |                |   |  |       |      |   |             |   |        |   |  |   |       
|Government-sponsored enterprises and Treasuries |  | $                  | 6,048 |   |                             | $ | 10,482 |                              |  | $ |               |   |  | $     |     |   |             | $ | 16,530 |   |  | $ | 16,292
|State and political subs.                       |  |                    | 490   |   |                             |   | 4,975  |                              |  |   | 3,838          |   |  |       | 100  |   |             |   | 9,403  |   |  |   | 9,301 
|Other                                           |  |                    | 250   |   |                             |   |       |                              |  |   |               |   |  |       |     |   |             |   | 250    |   |  |   | 731   
|                                                |  |                    |       |   |                             |   |        |                              |  |   |                |   |  |       |      |   |             |   |        |   |  |   |       
|Total                                           |  | $                  | 6,788 |   |                             | $ | 15,457 |                              |  | $ | 3,838          |   |  | $     | 100  |   |             | $ | 26,183 |   |  | $ | 26,324
|                                                |  |                    |       |   |                             |   |        |                              |  |   |                |   |  |       |      |   |             |   |        |   |  |   |       
|Weighted average yields:1                       |  |                    |       |   |                             |   |        |                              |  |   |                |   |  |       |      |   |             |   |        |   |  |   |       
|Government-sponsored enterprises and Treasuries |  |                    | 4.05  | % |                             |   | 4.18   | %                            |  |   |               | % |  |       |     | % |             |   |        |   |  |   |       
|States and political subs.                      |  |                    | 6.27  | % |                             |   | 5.78   | %                            |  |   | 5.27           | % |  |       | 4.95 | % |             |   |        |   |  |   |       
|Other                                           |  |                    | 6.00  | % |                             |   |       | %                            |  |   |               | % |  |       |     | % |             |   |        |   |  |   |       
|                                                |  |                    |       |   |                             |  
|Total weighted average                          |  |                    | 4.31  | % |                             |   | 4.70   | %                            |  |   | 5.27           | % |  |       | 4.95 | % |             |   | 4.67   | % |  |   |       

---

|1 | Adjusted tax exquivalent yield
|- | ------------------------------



|                                                |  |           |        |              |   |            |  |             |        |  |   |       
|----------------------------------------------- |  | --------- | ------ | ------------ | - | ---------- |  | ----------- | ------ |  | - | ------
|                                                |  | 2005      |        | 2004        
|                                                |  | BookValue |        | Market Value |   | Book Value |  | MarketValue
|Investment securities:                          |  |           |        |              |   |            |  |             |        |  |   |       
|Government-sponsored enterprises and Treasuries |  | $         | 20,076 |              | $ | 19,701     |  | $           | 15,536 |  | $ | 15,442
|States and political subdivisions               |  |           | 9,388  |              |   | 9,394      |  |             | 9,666  |  |   | 9,887 
|Other                                           |  |           | 250    |              |   | 632        |  |             | 250    |  |   | 701   
|                                                |  |           |        |              |   |            |  |             |        |  |   |       
|Total                                           |  | $         | 29,714 |              | $ | 29,727     |  | $           | 25,452 |  | $ | 26,030
|                                                |  |           |        |              |   |            |  |             |        |  |   |       

Deposits

The
Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investments in liquid assets. More specifically, core deposits (total deposits less certificates of deposits in
denominations of $100,000 or more) are the primary funding source. The Banks balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably
utilizing the available deposits by increasing the loan or investment portfolios. Market conditions have resulted in depositors shopping for deposit rates more than in the past and increased customer awareness of interest rates adds to the
importance of rate management. The Banks management must continuously monitor market



---

---

Managements Discussion and Analysis



---



pricing, competitors rates, and internal interest rate spreads, in addition to predicting future loan volume, to maintain the Banks growth and
profitability. The Bank attempts to structure rates to simultaneously promote deposit and asset growth, manage risk, and increase overall profitability of the Bank.

Average total deposits for the year ended December 31, 2006 amounted to $222.4 million which was an increase of $20.1million, or 9.9% over 2005. The percentage of the Banks average deposits that are
interest-bearing decreased to 84.7% in 2006 from 85.2% in 2005. Average demand deposits which earn no interest increased to $34.0 million in 2006 from $30.0 million in 2005 and $26.8 million in 2004. Average deposits and average rates paid for the
past three years are summarized in Table 9.

Table 9. Deposit Mix (thousands)



|                                |  |                |         |             |      |   |                |      |             |  |   |                |   |             |   |         |  |      |  
|------------------------------- |  | -------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | - | -------------- | - | ----------- | - | ------- |  | ---- | -
|                                |  | 2006           |         |             | 2005 |   |                | 2004 |            
|                                |  | AverageBalance |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |   | AverageBalance |   | AverageRate |  
|Interest-bearing deposits:      |  |                |         |             |      |   |                |      |             |  |   |                |   |             |   |         |  |      |  
|NOW accounts                    |  |                | 20,812  |             | 0.15 | % |                | $    | 21,885      |  | $ | 0.10           | % |             | $ | 20,589  |  | 0.10 | %
|Money market                    |  |                | 14,655  |             | 2.73 | % |                |      | 12,861      |  |   | 1.25           | % |             |   | 14,087  |  | 0.98 | %
|Savings                         |  |                | 22,582  |             | 0.50 | % |                |      | 25,592      |  |   | 0.50           | % |             |   | 25,319  |  | 0.50 | %
|Small denomination certificates |  |                | 92,000  |             | 4.12 | % |                |      | 81,926      |  |   | 3.22           | % |             |   | 76,517  |  | 2.99 | %
|Large denomination certificates |  |                | 38,355  |             | 4.46 | % |                |      | 30,117      |  |   | 3.68           | % |             |   | 22,928  |  | 3.30 | %
|                                |  |                |         |             |      |   |                |      |             |  |   |                |   |             |   |         |  |      |  
|Total interest-bearing deposits |  |                | 188,404 |             | 3.21 | % |                |      | 172,381     |  |   | 2.35           | % |             |   | 159,440 |  | 2.09 | %
|Noninteresting-bearing deposits |  |                | 34,030  |             |      |   |                |      | 29,992      |  |   |                |   |             |   | 26,788  |  |      |  
|                                |  |                |         |             |      |   |                |      |             |  |   |                |   |             |   |         |  |      |  
|Total deposits                  |  | $              | 222,434 |             |      |   |                | $    | 202,373     |  |   |                |   |             | $ | 186,228 |  |      |  
|                                |  |                |         |             |      |   |                |      |             |  |   |                |   |             |   |         |  |      |  

The average balance of certificates of deposit issued in denominations of $100,000 or more increased by $8.2
million or 27.2% in 2006. The growth in certificates of deposit issued in denominations of $100,000 or more can be attributed to depositors within our market area. Time deposits held by municipalities and other public funds sources increased to $4.2
million in 2006 from $2.9 million in 2005. The bank had no brokered deposits at December 31, 2006. Managements strategy has been to support loan and investment growth with core deposits in our primary market area and not to solicit
aggressively the more volatile, large denomination brokered certificates of deposit. Table 10 provides maturity information relating to Certificate of Deposits of $100,000 or more at December 31, 2006.

Table 10. Large Time Deposit Maturities (thousands)



|                                                                    |  |   |       
|------------------------------------------------------------------- |  | - | ------
|Analysis of time deposits of $100,000 or more at December 31, 2006: |  |   |       
|                                                                    | 
|Remaining maturity of three months or less                          |  | $ | 5,823 
|Remaining maturity over three through six month                     |  |   | 5,293 
|Remaining maturity over six through twelve month                    |  |   | 15,274
|Remaining maturity over twelve months                               |  |   | 18,006
|                                                                    |  |   |       
|Total time deposits of $100,000 or more                             |  | $ | 44,396
|                                                                    |  |   |       

Capital Adequacy

Stockholders equity was $23.6 million at December 31, 2006, an 8.8% increase over the 2005 year-end total of $21.7 million. The increase was primarily a result of earnings and an increase in the market value of available for sale
securities, partially offset by dividends and the adjustment in other comprehensive income for defined benefit and post retirement health benefits. Average stockholders equity as a percentage of average total assets amounted to 9.3% in 2006
and 9.2% in 2005.



---

---

Managements Discussion and Analysis



---



Regulatory requirements relating to capital adequacy provide minimum risk-based ratios that assess capital adequacy
while encompassing all credit risks, including those related to off-balance sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. The risk-based
capital guidelines require minimum ratios of core (Tier 1) capital (common stockholders equity) to risk-weighted assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to
risk-weighted assets of 8.0%. As of December 31, 2006 the Company and Bank had ratios of Tier 1 capital to risk-weighted assets of 11.9% and 11.2%, respectively, and ratios of total capital to risk-weighted assets of 13.1% and 12.5%,
respectively. These ratios continue to compare favorably to our peer group and are in excess of all regulatory minimum requirements.

Table 11. Year-End Risk-Based Capital (thousands)



|                                                                                |  |              |         |   |                  |   |         |              |  |   |                  |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | ------------ |  | - | ---------------- | - |  | - | ------- | -
|                                                                                |  | 2006         |         |   | 2005             |  
|                                                                                |  | Consolidated |         |   | Bank ofBotetourt |   |         | Consolidated |  |   | Bank ofBotetourt |  
|Tier 1 capital                                                                  |  | $            | 24,311  |   |                  | $ | 22,911  |              |  | $ | 21,671           |   |  | $ | 20,270  |  
|Qualifying allowance for loan losses (limited to 1.25% of risk-weighted assets) |  |              | 2,502   |   |                  |   | 2,502   |              |  |   | 2,271            |   |  |   | 2,271   |  
|                                                                                |  |              |         |   |                  |   |         |              |  |   |                  |   |  |   |         |  
|Total regulatory capital                                                        |  | $            | 26,813  |   |                  | $ | 25,413  |              |  | $ | 23,942           |   |  | $ | 22,541  |  
|                                                                                |  |              |         |   |                  |   |         |              |  |   |                  |   |  |   |         |  
|Total risk-weighted assets                                                      |  | $            | 204,253 |   |                  | $ | 203,989 |              |  | $ | 181,776          |   |  | $ | 181,579 |  
|                                                                                |  |              |         |   |                  |   |         |              |  |   |                  |   |  |   |         |  
|Tier 1 as a percent of risk-weighted assets                                     |  |              | 11.9    | % |                  |   | 11.2    | %            |  |   | 11.9             | % |  |   | 11.2    | %
|Total regulatory capital as a percent of risk-weighted assets                   |  |              | 13.1    | % |                  |   | 12.5    | %            |  |   | 13.2             | % |  |   | 12.4    | %
|Leverage ratio*                                                                 |  |              | 9.8     | % |                  |   | 9.3     | %            |  |   | 9.2              | % |  |   | 8.6     | %

---

|* | Tier 1 capital divided by average total assets for the quarter ended December 31.
|- | ---------------------------------------------------------------------------------

In addition, a minimum leverage ratio of Tier 1 capital to average total assets for the previous quarter is required by federal bank regulators, ranging from 3.0% to 5.0%, subject to the regulators evaluation of
the Banks overall safety and soundness. As of December 31, 2006, the Company and the Bank had ratios of year-end Tier 1 capital to average total assets for the fourth quarter of 2006 of 9.8% and 9.3%, respectively. Table 11 sets forth
summary information with respect to the Company and the Banks capital ratios at December 31, 2006 and 2005. All capital ratio levels indicate that the Company and the Bank are well capitalized.

At December 31, 2006 the Company had 1,241,750 shares of common stock outstanding, which were held by approximately 850 shareholders of record.

Nonperforming and Problem Assets

Certain credit risks are inherent
in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans to minimize interest rate risk and, although a portion of the
loans have been made based upon the value of collateral, it tries to rely primarily on the cash flow of the borrower as the source of repayment rather than the value of the collateral.

The Bank does not accrue interest or accrete discount on any asset (1) which is maintained on a cash basis because of deterioration in the financial condition of the borrower, (2) for which payment in full
of principal or interest is not expected, or (3) upon which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. An asset is well secured
if it is secured (1) by collateral in the



---

---

Managements Discussion and Analysis



---



form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including
accrued interest) in full, or (2) by the guarantee of a financially responsible party. An asset is in the process of collection if collection of the asset is proceeding in due course either (1) through legal action, including
judgement enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal actions that are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near
future.

For purposes of applying the third test for nonaccrual status listed above, the date on which an asset reaches nonaccrual status is determined by
its contractual terms. If the principal or interest on an asset becomes due and unpaid for 90 days or more on a date that falls between report dates and the asset is either considered impaired or less than fully collateralized, the asset is placed
in nonaccrual status as of the date it becomes 90 days past due and it will remain in nonaccrual status until it meets the criteria for restoration to accrual status.

The Bank also attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow
up on exceptions to credit policies.

Nonperforming assets are analyzed in Table 12 for the last five years.

Table 12. Nonperforming Assets



|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                    |  | 2006 |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|Nonaccrual loans                    |  | $    | 1,557,000 |   |      | $ | 308,000   |      |  | $ | 488,000   |   |  | $    | 219,000   |   |  | $ | 771,000   |  
|Loans past due 90 days or more      |  |      | 244,000   |   |      |   | 1,685,000 |      |  |   | 1,127,000 |   |  |      | 876,000   |   |  |   | 1,161,000 |  
|Foreclosed properties               |  |      |          |   |      |   |          |      |  |   | 65,000    |   |  |      | 136,000   |   |  |   | 70,000    |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                    |  | $    | 1,801,000 |   |      | $ | 1,993,000 |      |  | $ | 1,680,000 |   |  | $    | 1,231,000 |   |  | $ | 2,002,000 |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income, original terms     |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonaccrual loans                    |  | $    | 236,886   |   |      | $ | 77,270    |      |  | $ | 54,501    |   |  | $    | 25,150    |   |  | $ | 83,231    |  
|Loans past due 90 days or more      |  |      | 27,167    |   |      |   | 73,958    |      |  |   | 72,261    |   |  |      | 83,997    |   |  |   | 102,350   |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                    |  | $    | 264,053   |   |      | $ | 151,228   |      |  | $ | 126,762   |   |  | $    | 109,147   |   |  | $ | 185,581   |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income, recognized         |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonaccrual loans                    |  | $    | 41,160    |   |      | $ | 140       |      |  | $ | 8,259     |   |  | $    | 1,112     |   |  | $ | 9,034     |  
|Loans past due 90 days or more      |  |      | 18,493    |   |      |   | 78,088    |      |  |   | 33,122    |   |  |      | 44,823    |   |  |   | 58,539    |  
|Total                               |  | $    | 59,653    |   |      | $ | 78,288    |      |  | $ | 41,381    |   |  | $    | 45,935    |   |  | $ | 67,573    |  
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonperforming assets to total loans |  |      | 0.85      | % |      |   | 1.08      | %    |  |   | 0.98      | % |  |      | 0.85      | % |  |   | 1.73      | %
|                                    |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  

The allowance for loan losses is maintained at a level management believes to be adequate to absorb potential
losses. Some of the factors that management considers in determining the appropriate level of the allowance for loan losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume
outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market areas that the Bank serves. Bank regulators also periodically review the Banks loans and other assets to assess
their quality. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.

The provision for loan losses, net charge-offs and the activity in the allowance for loan losses is detailed in Table 13.



---

---

Managements Discussion and Analysis



---



Table 13. Loan Losses



|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                           |  | 2006 |           |   | 2005 |   |           | 2004 |  |   | 2003      |   |  | 2002 |          
|Allowance for loan losses, beginning       |  | $    | 2,271,074 |   |      | $ | 2,131,534 |      |  | $ | 1,688,812 |   |  | $    | 1,413,997 |   |  | $ | 1,303,042 |  
|Provision for loan losses, added           |  |      | 300,000   |   |      |   | 450,000   |      |  |   | 725,000   |   |  |      | 625,000   |   |  |   | 975,000   |  
|                                           |  |      |           |   |     
|Loans charged off                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial, financial and agricultural     |  |      | (58,238   | ) |      |   | (150,221  | )    |  |   | (130,490  | ) |  |      | (283,628  | ) |  |   | (509,480  | )
|Real estate, construction                  |  |      |          |   |      |   | (41,884   | )    |  |   |           |   |  |      |          |   |  |   | (50,029   | )
|Real estate, mortgage                      |  |      | (33,421   | ) |      |   |          |      |  |   | (58,275   | ) |  |      | (11,023   | ) |  |   | (63,698   | )
|Installment loans to individuals           |  |      | (137,305  | ) |      |   | (169,306  | )    |  |   | (150,960  | ) |  |      | (331,700  | ) |  |   | (269,980  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                           |  |      | (228,964  | ) |      |   | (361,411  | )    |  |   | (339,725  | ) |  |      | (626,351  | ) |  |   | (893,187  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Recoveries of loans previously charged off |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Commercial, financial and agricultural     |  |      | 100,000   |   |      |   | 3,601     |      |  |   | 7,778     |   |  |      | 192,258   |   |  |   | 4,952     |  
|Real estate, mortgage                      |  |      | 13,889    |   |      |   | 1,350     |      |  |   | 1,764     |   |  |      | 24,282    |   |  |   | 91        |  
|Installment loans to individuals           |  |      | 46,123    |   |      |   | 46,000    |      |  |   | 47,905    |   |  |      | 59,626    |   |  |   | 24,099    |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                           |  |      | 160,012   |   |      |   | 50,951    |      |  |   | 57,447    |   |  |      | 276,166   |   |  |   | 29,142    |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net charge-offs                            |  |      | (68,952   | ) |      |   | (310,460  | )    |  |   | (282,278  | ) |  |      | (350,185  | ) |  |   | (864,045  | )
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses, ending          |  | $    | 2,502,122 |   |      | $ | 2,271,074 |      |  | $ | 2,131,534 |   |  | $    | 1,688,812 |   |  | $ | 1,413,997 |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loan charge-offs to average loans      |  |      | 0.04%     |   |      |   | 0.18      | %    |  |   | 0.18      | % |  |      | 0.27      | % |  |   | 0.73      | %
|                                           |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  

The loan portfolio also included loans to various borrowers (watch loans) at year-end for which management had
concerns about the ability of the borrowers to continue to comply with present loan repayment terms, and which could result in some of these loans being uncollectible. Total loans on managements watch list on December 31, 2006 amounted to
$8,151,752. Management monitors these loans carefully and has allocated reserves to the extent deemed necessary in the allowance for loan losses.

The
allowance for loan losses was 1.18% of gross loans outstanding at December 31, 2006. This represents an increase of $231,048 above the reserve at December 31, 2005. Management realizes that general economic trends greatly affect loan
losses and no assurances can be made about future losses. Management does, however, consider the allowance for loan losses to be adequate at December 31, 2006.



---

---

Managements Discussion and Analysis



---



The allocation of the reserve for loan losses is detailed in Table 14 below:

Table 14. Allocation of the Reserve for Loan Losses (thousands)



|                                        |  |        |       |          |      |       |        |      |          |       |      |        |   |          |   |       |        |       |          |  |   |        |  |          |   |  |   |       |  |       |  
|--------------------------------------- |  | ------ | ----- | -------- | ---- | ----- | ------ | ---- | -------- | ----- | ---- | ------ | - | -------- | - | ----- | ------ | ----- | -------- |  | - | ------ |  | -------- | - |  | - | ----- |  | ----- | -
|                                        |  | 2006   |       |          | 2005 |       |        | 2004 |          |       | 2003 |        |   | 2002     |  
|Balance at end of period applicable to  |  | Amount |       | Percent1 |      |       | Amount |      | Percent1 |       |      | Amount |   | Percent1 |   |       | Amount |       | Percent1 |  |   | Amount |  | Percent1 |  
|Commercial, financial and agricultural  |  | $      | 1,418 |          |      | 47.8  | %      |      | $        | 1,330 |      | 52.1   | % |          | $ | 1,145 |        | 51.7  | %        |  | $ | 859    |  | 51.1     | % |  | $ | 652   |  | 47.3  | %
|Real estate, construction               |  |        | 269   |          |      | 14.8  | %      |      |          | 265   |      | 8.8    | % |          |   | 199   |        | 13.5  | %        |  |   | 135    |  | 12.9     | % |  |   | 148   |  | 13.2  | %
|Real estate, mortgage                   |  |        | 187   |          |      | 29.9  | %      |      |          | 175   |      | 30.3   | % |          |   | 356   |        | 25.7  | %        |  |   | 458    |  | 26.4     | % |  |   | 324   |  | 27.6  | %
|Installment loans to individuals, other |  |        | 628   |          |      | 7.5   | %      |      |          | 501   |      | 8.8    | % |          |   | 432   |        | 9.1   | %        |  |   | 236    |  | 9.5      | % |  |   | 290   |  | 11.8  | %
|Leases                                  |  |        |      |          |      |      | %      |      |          |      |      |       | % |          |   |      |        |      | %        |  |   | 1      |  | 0.1      | % |  |   |      |  | 0.1   | %
|                                        |  |        |       |          |      |       |        |      |          |       |      |        |   |          |   |       |        |       |          |  |   |        |  |          |   |  |   |       |  |       |  
|Total                                   |  | $      | 2,502 |          | $    | 100.0 | %      |      | $        | 2,271 |      | 100.0  | % |          | $ | 2,132 |        | 100.0 | %        |  | $ | 1,689  |  | 100.0    | % |  | $ | 1,414 |  | 100.0 | %
|                                        |  |        |       |          |      |       |        |      |          |       |      |        |   |          |   |       |        |       |          |  |   |        |  |          |   |  |   |       |  |       |  

---

|(1) | Represents the percentage of loans in each category to the total loans outstanding.
|--- | -----------------------------------------------------------------------------------

Liquidity and Interest Rate Sensitivity

The principal goals of the Banks asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors
withdrawals or borrowers loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Bank from wide
fluctuations in its net interest income which could result from interest rates changes.

Management must ensure that adequate funds are available at all
times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal funds lines from correspondent banks, borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, as well as
the ability to generate funds through the issuance of long-term debt and equity.

The liquidity ratio (the level of liquid assets divided by total deposits
plus short-term liabilities) is considered to be adequate by management.



---

---

Managements Discussion and Analysis



---



Table 15. Interest Rate Sensitivity (thousands)



|                                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---------- | - | ------- | ----------- |  | - | ------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                            |  | December 31, 2006 Maturities/Repricing |       
|                                                            |  | 1-3Months                              |        |   | 4-12Months |   |         | 13-60Months |  |   | Over 60Months |   |  | Total |       
|Earnings assets:                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|Loans                                                       |  | $                                      | 75,556 |   |            | $ | 38,827  |             |  | $ | 81,820        |   |  | $     | 15,840 |   |  | $ | 212,043 |  
|Investments                                                 |  |                                        | 2,400  |   |            |   | 4,390   |             |  |   | 15,216        |   |  |       | 3,851  |   |  |   | 25,857  |  
|Interest-bearing deposits with banks                        |  |                                        | 163    |   |            |   |        |             |  |   |              |   |  |       |       |   |  |   | 163     |  
|Federal funds sold                                          |  |                                        |       |   |            |   |        |             |  |   |              |   |  |       |       |   |  |   |        |  
|                                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|Total                                                       |  | $                                      | 78,119 |   |            | $ | 43,217  |             |  | $ | 97,036        |   |  | $     | 19,691 |   |  | $ | 238,063 |  
|                                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|Interest-bearing deposits:                                  |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|NOW accounts                                                |  | $                                      | 5,396  |   |            | $ |        |             |  | $ | 16,187        |   |  | $     |       |   |  | $ | 21,583  |  
|Money market                                                |  |                                        | 1,932  |   |            |   |        |             |  |   | 5,795         |   |  |       |       |   |  |   | 7,727   |  
|Savings                                                     |  |                                        | 10,553 |   |            |   |        |             |  |   | 10,553        |   |  |       |       |   |  |   | 21,106  |  
|Certificates of deposit                                     |  |                                        | 19,468 |   |            |   | 71,334  |             |  |   | 52,243        |   |  |       |       |   |  |   | 143,045 |  
|Federal funds purchased                                     |  |                                        | 1,341  |   |            |   |        |             |  |   |              |   |  |       |       |   |  |   | 1,341   |  
|                                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|Total                                                       |  | $                                      | 38,690 |   |            | $ | 71,334  |             |  | $ | 84,778        |   |  | $     |       |   |  | $ | 194,802 |  
|                                                            |  |                                        |        |   |            |   |         |             |  |   |               |   |  |       |        |   |  |   |         |  
|Interest sensitivity gap                                    |  | $                                      | 39,429 |   |            | $ | (28,117 | )           |  | $ | 12,258        |   |  | $     | 19,691 |   |  | $ | 43,261  |  
|Cumulative interest sensitivity gap                         |  | $                                      | 39,429 |   |            | $ | 11,312  |             |  | $ | 23,570        |   |  | $     | 43,261 |   |  | $ | 43,261  |  
|Ratio of sensitivity gap to total earning assets            |  |                                        | 16.56  | % |            |   | (11.81  | )%          |  |   | 5.15          | % |  |       | 8.27   | % |  |   | 18.17   | %
|Cumulative ratio of sensitivity gap to total earning assets |  |                                        | 16.56  | % |            |   | 4.75    | %           |  |   | 9.90          | % |  |       | 18.17  | % |  |   | 18.17   | %

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense
as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that
will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates. Table 15 shows the sensitivity of the Banks balance sheet on December 31, 2006. This table reflects the sensitivity of
the balance sheet as of that specific date and is not necessarily indicative of the position on other dates. At December 31, 2006, the Bank appeared to be asset-sensitive with earning assets exceeding interest-bearing liabilities subject to
changes in interest rates. Included in the interest-bearing liabilities subject to interest rate changes within three months are a portion of NOW accounts, money market accounts, and savings accounts which historically have not been as
interest-sensitive as other types of interest-bearing deposits. A larger portion of these accounts are included in the thirteen to sixty month time period due to the fact that they are not considered as interest rate sensitive as other deposit
liabilities. The Bank appears to be liability-sensitive in the four to twelve month time horizon and asset-sensitive in the thirteen to sixty month time horizon.

Matching sensitive positions alone does not ensure that the Bank has no interest rate risk. All banks have interest rate risk. The repricing characteristics of assets are different from the repricing characteristics of funding sources such
as deposits. Thus, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.

The following table shows key financial ratios that often are used to compare the performance of financial institutions.



---

---

Managements Discussion and Analysis



---



Table 16. Key Financial Ratios



|                                 |  |       |   |  |       |   |  |       |  
|-------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                 |  | 2006  |   |  | 2005  |   |  | 2004  |  
|Return on average assets         |  | 1.41  | % |  | 1.43  | % |  | 1.17  | %
|Return on average equity         |  | 15.18 | % |  | 15.60 | % |  | 12.95 | %
|Average equity to average assets |  | 9.26  | % |  | 9.17  | % |  | 8.97  | %
|Dividend payout ratio            |  | 25.69 | % |  | 23.10 | % |  | 23.63 | %



---

|Item 7 | 
|------ | 

Report of Independent Registered Public
Accounting Firm

Board of Directors and Stockholders

Botetourt Bankshares, Inc.

Buchanan, Virginia

We
have audited the consolidated balance sheets of Botetourt Bankshares, Inc. and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of income, changes in stockholders equity and comprehensive income and
cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing 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 Botetourt Bankshares, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2006, in conformity with accounting principles generally accepted in the United States of America.



|                      
|----------------------
|/s/ Elliott Davis, LLC
|Galax, Virginia       
|March 26, 2007        



---

---

Consolidated Balance Sheets

December 31, 2006 and 2005

---



|                                                                                                                                                 |  |      |             |   |      |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | -----------
|                                                                                                                                                 |  | 2006 |             |   | 2005
|Assets                                                                                                                                           |  |      |             |   |      |   |            
|                                                                                                                                                 |  |     
|Cash and due from banks                                                                                                                          |  | $    | 8,258,003   |   |      | $ | 8,985,579  
|Interest-bearing deposits with banks                                                                                                             |  |      | 163,151     |   |      |   | 291,648    
|Federal funds sold                                                                                                                               |  |      |            |   |      |   | 6,752,000  
|Investment securities available for sale                                                                                                         |  |      | 24,798,980  |   |      |   | 27,940,163 
|Investment securities held to maturity (fair value approximates $1,525,353 in 2006 and $1,787,702 in 2005)                                       |  |      | 1,539,933   |   |      |   | 1,809,776  
|Restricted equity securities                                                                                                                     |  |      | 524,600     |   |      |   | 474,000    
|Loans, net of allowance for loan losses of $2,502,122 in 2006 and $2,271,074 in 2005                                                             |  |      | 209,541,312 |   |      |   | 183,352,611
|Property and equipment, net                                                                                                                      |  |      | 5,625,914   |   |      |   | 5,784,284  
|Accrued income                                                                                                                                   |  |      | 1,513,122   |   |      |   | 1,222,811  
|Other assets                                                                                                                                     |  |      | 2,417,302   |   |      |   | 1,920,863  
|                                                                                                                                                 |  |      |             |   |      |   |            
|Total assets                                                                                                                                     |  | $    | 254,382,317 |   |      | $ | 238,533,735
|                                                                                                                                                 |  |      |             |   |      |   |            
|Liabilities and Stockholders Equity                                                                                                             |  |      |             |   |      |   |            
|                                                                                                                                                 |  |     
|Liabilities                                                                                                                                      |  |      |             |   |      |   |            
|Noninterest-bearing deposits                                                                                                                     |  | $    | 33,768,568  |   |      | $ | 31,365,352 
|Interest-bearing deposits                                                                                                                        |  |      | 193,460,839 |   |      |   | 184,477,729
|                                                                                                                                                 |  |      |             |   |      |   |            
|Total deposits                                                                                                                                   |  |      | 227,229,407 |   |      |   | 215,843,081
|                                                                                                                                                 |  |     
|Federal funds purchased                                                                                                                          |  |      | 1,341,000   |   |      |   |           
|Accrued interest payable                                                                                                                         |  |      | 943,449     |   |      |   | 548,317    
|Other liabilities                                                                                                                                |  |      | 1,245,669   |   |      |   | 407,292    
|                                                                                                                                                 |  |      |             |   |      |   |            
|Total liabilities                                                                                                                                |  |      | 230,759,525 |   |      |   | 216,798,690
|                                                                                                                                                 |  |      |             |   |      |   |            
|Commitments and contingencies                                                                                                                    |  |      |            |   |      |   |           
|                                                                                                                                                 |  |     
|Stockholders equity                                                                                                                             |  |      |             |   |      |   |            
|Common stock, $1.00 par value; 2,500,000 shares authorized; 1,241,750 and 1,240,121 shares issued and outstanding in 2006 and 2005,
respectively |  |      | 1,241,750   |   |      |   | 1,240,121  
|Additional paid-in capital                                                                                                                       |  |      | 1,546,984   |   |      |   | 1,510,751  
|Retained earnings                                                                                                                                |  |      | 21,544,114  |   |      |   | 18,960,299 
|Accumulated other comprehensive income (loss)                                                                                                    |  |      | (710,056    | ) |      |   | 23,874     
|                                                                                                                                                 |  |      |             |   |      |   |            
|Total stockholders equity                                                                                                                       |  |      | 23,622,792  |   |      |   | 21,735,045 
|                                                                                                                                                 |  |      |             |   |      |   |            
|Total liabilities and stockholders equity                                                                                                       |  | $    | 254,382,317 |   |      | $ | 238,533,735
|                                                                                                                                                 |  |      |             |   |      |   |            

See Notes to Consolidated Financial Statements



---

---

Consolidated Statements of Income

Years ended December 31, 2006, 2005 and 2004

---



|                                                    |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2006 |            | 2005 |   | 2004      
|Interest income                                     |  |      |            |      |   |            |  |   |           
|Loans and fees on loans                             |  | $    | 15,401,475 |      | $ | 12,743,231 |  | $ | 10,715,312
|Federal funds sold                                  |  |      | 339,821    |      |   | 158,555    |  |   | 55,295    
|Investment securities:                              |  |      |            |      |   |            |  |   |           
|Taxable                                             |  |      | 786,534    |      |   | 569,211    |  |   | 520,900   
|Exempt from federal income tax                      |  |      | 371,941    |      |   | 371,339    |  |   | 380,673   
|Dividend income                                     |  |      | 43,369     |      |   | 33,247     |  |   | 27,249    
|Deposits with banks                                 |  |      | 12,103     |      |   | 5,422      |  |   | 2,481     
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest income                               |  |      | 16,955,243 |      |   | 13,881,005 |  |   | 11,701,910
|                                                    |  |      |            |      |   |            |  |   |           
|Interest expense                                    |  |      |            |      |   |            |  |   |           
|Deposits                                            |  |      | 6,047,705  |      |   | 4,052,837  |  |   | 3,325,837 
|Federal funds purchased                             |  |      | 35,943     |      |   | 16,848     |  |   | 13,751    
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest expense                              |  |      | 6,083,648  |      |   | 4,069,685  |  |   | 3,339,588 
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income                                 |  |      | 10,871,595 |      |   | 9,811,320  |  |   | 8,362,322 
|                                                    |  |      |           
|Provision for loan losses                           |  |      | 300,000    |      |   | 450,000    |  |   | 725,000   
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income after provision for loan losses |  |      | 10,571,595 |      |   | 9,361,320  |  |   | 7,637,322 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest income                                  |  |      |            |      |   |            |  |   |           
|Service charges on deposit accounts                 |  |      | 886,511    |      |   | 859,425    |  |   | 760,277   
|Other service charges and fees                      |  |      | 191,211    |      |   | 178,603    |  |   | 181,832   
|Mortgage origination fees                           |  |      | 340,376    |      |   | 407,115    |  |   | 313,079   
|Commissions on title services                       |  |      | 181,085    |      |   | 224,748    |  |   | 174,729   
|Net realized gains on sales of securities           |  |      |           |      |   | 7,198      |  |   | 656       
|Other income                                        |  |      | 194,539    |      |   | 241,332    |  |   | 202,010   
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest income                            |  |      | 1,793,722  |      |   | 1,918,421  |  |   | 1,632,583 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest expense                                 |  |      |            |      |   |            |  |   |           
|Salaries and employee benefits                      |  |      | 4,238,694  |      |   | 3,814,394  |  |   | 3,378,528 
|Occupancy                                           |  |      | 412,882    |      |   | 391,494    |  |   | 359,963   
|Equipment                                           |  |      | 690,582    |      |   | 569,671    |  |   | 458,379   
|Foreclosed assets, net                              |  |      | 2,559      |      |   | 36,665     |  |   | 1,059     
|Advertising and public relations                    |  |      | 188,055    |      |   | 142,994    |  |   | 176,090   
|Outside services                                    |  |      | 183,042    |      |   | 163,507    |  |   | 154,746   
|Other general and administrative                    |  |      | 1,599,559  |      |   | 1,506,416  |  |   | 1,305,226 
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest expense                           |  |      | 7,315,373  |      |   | 6,625,141  |  |   | 5,833,991 
|                                                    |  |      |            |      |   |            |  |   |           
|Income before income taxes                          |  |      | 5,049,944  |      |   | 4,654,600  |  |   | 3,435,914 
|                                                    |  |      |           
|Income tax expense                                  |  |      | 1,572,889  |      |   | 1,444,578  |  |   | 1,035,716 
|                                                    |  |      |            |      |   |            |  |   |           
|Net income                                          |  | $    | 3,477,055  |      | $ | 3,210,022  |  | $ | 2,400,198 
|                                                    |  |      |            |      |   |            |  |   |           
|Basic earnings per share                            |  | $    | 2.80       |      | $ | 2.60       |  | $ | 1.95      
|                                                    |  |      |            |      |   |            |  |   |           
|Diluted earnings per share                          |  | $    | 2.80       |      | $ | 2.60       |  | $ | 1.95      
|                                                    |  |      |            |      |   |            |  |   |           
|Basic weighted average shares outstanding           |  |      | 1,240,755  |      |   | 1,235,657  |  |   | 1,232,645 
|                                                    |  |      |            |      |   |            |  |   |           
|Diluted weighted average shares outstanding         |  |      | 1,243,622  |      |   | 1,236,967  |  |   | 1,233,356 
|                                                    |  |      |            |      |   |            |  |   |           

See Notes to Consolidated Financial Statements



---

---

Consolidated Statements of Changes in
Stockholders Equity and Comprehensive Income

Years ended December 31, 2006, 2005 and 2004

---



|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ----------------- | --------- | -------- | -------- | --------- | ----------------------------- | ------------- | ---------- | - | ----- | - | -------- | - |  | - | ---------- | -
|                                                                                                              |        | Common Stock |        | AdditionalPaid-In |           | Retained |          |           | AccumulatedOtherComprehensive |               |            |   |      
|                                                                                                              | Shares |              | Amount |                   | Capital   |          | Earnings |           |                               | Income (Loss) |            |   | Total |  
|Balance, December 31, 2003                                                                                    |        | 1,230,924    |        | $                 | 1,230,924 |          | $        | 1,328,190 |                               | $             | 14,658,543 |   |       | $ | 540,203  |   |  | $ | 17,757,860 |  
|                                                                                                              |        |              |        |                   |           |         
|Net income                                                                                                    |        |             |        |                   |          |          |          |          |                               |               | 2,400,198  |   |       |   |         |   |  |   | 2,400,198  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(87,570)  |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (169,990 | ) |  |   | (169,990   | )
|Reclassified securities gains realized, net of taxes of $(223)                                                |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (433     | ) |  |   | (433       | )
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   | 2,229,775  |  
|                                                                                                              |        |              |        |                   |           |         
|Dividends declared ($.46 per share)                                                                           |        |             |        |                   |          |          |          |          |                               |               | (567,063   | ) |       |   |         |   |  |   | (567,063   | )
|Stock issued                                                                                                  |        | 1,821        |        |                   | 1,821     |          |          | 33,780    |                               |               |           |   |       |   |         |   |  |   | 35,601     |  
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Balance, December 31, 2004                                                                                    |        | 1,232,745    |        |                   | 1,232,745 |          |          | 1,361,970 |                               |               | 16,491,678 |   |       |   | 369,780  |   |  |   | 19,456,173 |  
|                                                                                                              |        |              |        |                   |           |         
|Net income                                                                                                    |        |             |        |                   |          |          |          |          |                               |               | 3,210,022  |   |       |   |         |   |  |   | 3,210,022  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(175,747) |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (341,155 | ) |  |   | (341,155   | )
|Reclassified securities gains realized, net of taxes of $(2,447)                                              |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (4,751   | ) |  |   | (4,751     | )
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   | 2,864,116  |  
|                                                                                                              |        |              |        |                   |           |         
|Dividends declared ($.60 per share)                                                                           |        |             |        |                   |          |          |          |          |                               |               | (741,401   | ) |       |   |         |   |  |   | (741,401   | )
|Stock issued                                                                                                  |        | 7,376        |        |                   | 7,376     |          |          | 148,781   |                               |               |           |   |       |   |         |   |  |   | 156,157    |  
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Balance, December 31, 2005                                                                                    |        | 1,240,121    |        |                   | 1,240,121 |          |          | 1,510,751 |                               |               | 18,960,299 |   |       |   | 23,874   |   |  |   | 21,735,045 |  
|                                                                                                              |        |              |        |                   |           |         
|Net income                                                                                                    |        |             |        |                   |          |          |          |          |                               |               | 3,477,055  |   |       |   |         |   |  |   | 3,477,055  |  
|Net change in unrealized appreciation on investment securities available for sale, net of taxes of $(40,717)  |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | 79,041   |   |  |   | 79,041     |  
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Total comprehensive income                                                                                    |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   | 3,556,096  |  
|                                                                                                              |        |              |        |                   |           |         
|Adjustment to initially apply FASB Statement No. 158:                                                         |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Defined benefit pension plan, net of taxes of $(342,655)                                                      |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (665,153 | ) |  |   | (665,153   | )
|Post retirement health, net of taxes of $(76,149)                                                             |        |             |        |                   |          |          |          |          |                               |               |           |   |       |   | (147,818 | ) |  |   | (147,818   | )
|Dividends declared ($0.72 per share)                                                                          |        |             |        |                   |          |          |          |          |                               |               | (893,240   | ) |       |   |         |   |  |   | (893,240   | )
|Stock issued                                                                                                  |        | 1,629        |        |                   | 1,629     |          |          | 36,233    |                               |               |           |   |       |   |         |   |  |   | 37,862     |  
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  
|Balance, December 31, 2006                                                                                    |        | 1,241,750    |        | $                 | 1,241,750 |          | $        | 1,546,984 |                               | $             | 21,544,114 |   |       | $ | (710,056 | ) |  | $ | 23,622,792 |  
|                                                                                                              |        |              |        |                   |           |          |          |           |                               |               |            |   |       |   |          |   |  |   |            |  

See Notes to Consolidated Financial Statements



---

---

Consolidated Statements of Cash Flows

Years ended December 31, 2006, 2005 and 2004

---



|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | 2006 |             |   | 2005 |   |             | 2004 | 
|Cash flows from operating activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                              |  | $    | 3,477,055   |   |      | $ | 3,210,022   |      |  | $ | 2,400,198   |  
|Adjustments to reconcile net income to net cash provided by operations: |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                           |  |      | 619,055     |   |      |   | 573,746     |      |  |   | 517,045     |  
|Provision for loan losses                                               |  |      | 300,000     |   |      |   | 450,000     |      |  |   | 725,000     |  
|Deferred income taxes                                                   |  |      | (13,681     | ) |      |   | (122,372    | )    |  |   | (139,185    | )
|Net realized losses on sales of assets                                  |  |      | 989         |   |      |   | 30,621      |      |  |   | 22,323      |  
|Accretion of discount on securities, net of amortization of premiums    |  |      | (7,925      | ) |      |   | (6,712      | )    |  |   | (8,449      | )
|Changes in assets and liabilities:                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Accrued income                                                          |  |      | (290,311    | ) |      |   | (241,128    | )    |  |   | 7,959       |  
|Other assets                                                            |  |      | (181,327    | ) |      |   | (547,606    | )    |  |   | 303,735     |  
|Accrued interest payable                                                |  |      | 395,132     |   |      |   | 153,745     |      |  |   | 25,753      |  
|Other liabilities                                                       |  |      | (434,115    | ) |      |   | (263,144    | )    |  |   | 472,176     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                               |  |      | 3,864,872   |   |      |   | 3,237,172   |      |  |   | 4,326,555   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net (increase) decrease in interest-bearing deposits with banks         |  |      | 128,497     |   |      |   | (96,948     | )    |  |   | 54,775      |  
|Net (increase) decrease in federal funds sold                           |  |      | 6,752,000   |   |      |   | (2,970,000  | )    |  |   | (3,782,000  | )
|Purchases of investment securities  held to maturity                   |  |      | (200,000    | ) |      |   | (200,000    | )    |  |   | (675,000    | )
|Purchases of investment securities  available for sale                 |  |      | (4,026,292  | ) |      |   | (6,258,126  | )    |  |   | (8,253,947  | )
|Purchases of restricted equity securities                               |  |      | (50,600     | ) |      |   | (34,300     | )    |  |   | (69,500     | )
|Maturities of investment securities  held to maturity                  |  |      | 470,000     |   |      |   | 650,000     |      |  |   | 850,000     |  
|Maturities of investment securities  available for sale                |  |      | 7,295,000   |   |      |   | 760,000     |      |  |   | 11,150,500  |  
|Sale of investment securities  available for sale                      |  |      |            |   |      |   | 800,500     |      |  |   | 500,156     |  
|Net increase in loans                                                   |  |      | (26,568,701 | ) |      |   | (14,918,653 | )    |  |   | (25,292,677 | )
|Purchases of property and equipment, net                                |  |      | (343,311    | ) |      |   | (473,972    | )    |  |   | (844,552    | )
|Proceeds from sales of property and equipment                           |  |      | 9,011       |   |      |   | 1,600       |      |  |   |            |  
|Proceeds from sales of foreclosed assets                                |  |      | 70,000      |   |      |   | 88,500      |      |  |   | 80,000      |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                   |  |      | (16,464,396 | ) |      |   | (22,651,399 | )    |  |   | (26,282,245 | )
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in noninterest-bearing deposits                            |  |      | 2,403,216   |   |      |   | 3,575,150   |      |  |   | 3,417,204   |  
|Net increase in interest-bearing deposits                               |  |      | 8,983,110   |   |      |   | 19,620,455  |      |  |   | 15,827,404  |  
|Net increase (decrease) in federal funds purchased                      |  |      | 1,341,000   |   |      |   |            |      |  |   | (3,971,000  | )
|Common stock issued                                                     |  |      | 37,862      |   |      |   | 156,157     |      |  |   | 35,601      |  
|Dividends paid                                                          |  |      | (893,240    | ) |      |   | (741,401    | )    |  |   | (567,063    | )
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                               |  |      | 11,871,948  |   |      |   | 22,610,361  |      |  |   | 14,742,146  |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                    |  |      | (727,576    | ) |      |   | 3,196,134   |      |  |   | (7,213,544  | )
|                                                                        |  |      |            
|Cash and due from banks, beginning                                      |  |      | 8,985,579   |   |      |   | 5,789,445   |      |  |   | 13,002,989  |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and due from banks, ending                                         |  | $    | 8,258,003   |   |      | $ | 8,985,579   |      |  | $ | 5,789,445   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of cash flow information                        |  |      |             |   |      |   |             |      |  |   |             |  
|Interest paid                                                           |  | $    | 5,688,516   |   |      | $ | 3,915,940   |      |  | $ | 3,313,835   |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Taxes paid                                                              |  | $    | 1,642,740   |   |      | $ | 1,984,432   |      |  | $ | 527,000     |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of noncash activities                           |  |      |             |   |      |   |             |      |  |   |             |  
|Other real estate acquired in settlement of loans                       |  | $    | 80,000      |   |      | $ | 71,450      |      |  | $ |            |  
|                                                                        |  |      |             |   |      |   |             |      |  |   |             |  

See Notes to Consolidated Financial Statements



---

---

Notes to Consolidated Financial Statements



---



Note 1. Organization and Summary of Significant Accounting Policies

Organization

Botetourt Bankshares, Inc. (the Company) is a
Virginia bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, Bank of Botetourt (the Bank). The Bank is a Virginia state chartered bank subject to regulation by the Bureau of Financial
Institutions and the Federal Deposit Insurance Corporation. The Bank provides full banking services through eight branch offices in Botetourt, Roanoke and Rockbridge counties. The Bank has a wholly-owned subsidiary, Buchanan Service Corporation,
which conducts its operations through a minority interest in an insurance company, a minority interest in an investment company, majority interests in two title insurance companies and as an agent for sale of life and disability insurance.

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

Critical Accounting Policy

Management believes the policy with respect to the methodology for the determination of the allowance for loan losses involves a high degree of
complexity. Management must 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.
This critical policy and its application are periodically reviewed with the Audit Committee and Board of Directors.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank, and Buchanan Service Corporation. All significant intercompany
transactions and balances have been eliminated in consolidation.

Business Segments

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

Use of Estimates

The preparation of 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, 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. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

Substantially all of the Companys loan portfolio consists of loans in its market area. Accordingly, the ultimate collectibility of a substantial portion of the
Companys loan portfolio is susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.



---

---

Notes to Consolidated Financial Statements



---



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

Use of Estimates, continued

While management uses available
information to recognize loan losses, future additions to the allowance 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
Companys allowance for loan losses. Such agencies may require additions to the allowance 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 allowance for loan losses may change materially in the near term.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption
cash and due from banks.

Interest-bearing Deposits with Banks

Interest-bearing deposits with banks are carried at cost.

Investment Securities

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

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

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 charge-offs and the allowance for loan losses. Loan origination
fees and costs are not capitalized and recognized as an adjustment to the yield on the related loan as management does not consider such deferrals to be material to the Companys financial position or results of operations.

Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period 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.



---

---

Notes to Consolidated Financial Statements



---



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

Loans Receivable, continued

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 meet required payments, 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 impaired, for which an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loan is lower than its carrying value. The general
component covers non-impaired 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 Company does not separately identify individual consumer and residential loans for impairment disclosures.



---

---

Notes to Consolidated Financial Statements



---



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

Property and Equipment

Land is carried at cost. Buildings,
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 or lease terms:



|                           |  |      
|-------------------------- |  | -----
|                           |  | Years
|Buildings and improvements |  | 10-50
|Furniture and equipment    |  | 3-10 

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations, gains and losses on sale, and changes in the valuation allowance are included in
net expenses from foreclosed assets.

Intangible Assets

Intangible assets consist of computer software and a deposit purchase premium which are being amortized over three and fifteen years, respectively, using the straight-line method. At December 31, 2006 and 2005, accumulated amortization
was $660,628 and $543,254, respectively. Related amortization expense was $117,374, $91,179 and $60,981 for the three-year period ended December 31, 2006. Intangible assets are classified as other assets on the balance sheet.

Stock-based Compensation

The Company maintains a stock-based
compensation plan that provides for grants of stock options to selected employees. This plan has been presented to and approved by the Companys stockholders. On January 1, 2006, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R establishes accounting requirements for share-based
compensation to employees and carries forward prior guidance on accounting for awards to non-employees. SFAS No. 123R requires that stock-based compensation be recognized as compensation cost in the income statement based on fair values of
options granted on the measurement date, which is generally the date of the grant. The Company transitioned to SFAS No. 123R using the modified prospective application method (modified prospective application). As permitted under
modified prospective application, as it is applicable to the Company, SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for
options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant. The following pro forma information presents net income, earnings per share, and diluted earnings per share for the years
ended December 31, 2005 and 2004, as if the fair value method of SFAS No. 123 had been used to measure compensation cost for stock based compensation plans. For purposes of these pro forma disclosures, the estimated fair value of options
is charged to expense at date of grant as all options are fully vested upon issue.



---

---

Notes to Consolidated Financial Statements



---



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

Stock-based Compensation, continued



|                                                              |  |      |           |   |      |   |           |  
|------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                              |  | 2005 |           |   | 2004 |  
|Net income                                                    |  | $    | 3,210,022 |   |      | $ | 2,400,198 |  
|Less pro forma expense related to options granted, net of tax |  |      | (4,459    | ) |      |   | (13,860   | )
|                                                              |  |      |           |   |      |   |           |  
|Pro forma net income                                          |  | $    | 3,205,563 |   |      | $ | 2,386,338 |  
|                                                              |  |      |           |   |      |   |           |  
|Pro forma net income per share:                               |  |      |           |   |      |   |           |  
|Basicas reported                                             |  | $    | 2.60      |   |      | $ | 1.95      |  
|                                                              |  |      |           |   |      |   |           |  
|Basicpro forma                                               |  | $    | 2.59      |   |      | $ | 1.94      |  
|                                                              |  |      |           |   |      |   |           |  
|Dilutedas reported                                           |  | $    | 2.60      |   |      | $ | 1.95      |  
|                                                              |  |      |           |   |      |   |           |  
|Dilutedpro forma                                             |  | $    | 2.59      |   |      | $ | 1.93      |  
|                                                              |  |      |           |   |      |   |           |  

Employee Benefit Plans

A noncontributory defined benefit pension plan is provided for all employees who meet eligibility requirements. To be eligible, an employee must be 21 years of age and have completed one year of service. Plan benefits
are based on final average compensation and years of service. The funding policy is to contribute the maximum deductible for federal income tax purposes. The Company also provides a qualified 401(k) retirement savings plan. All full-time employees
are eligible to participate on a voluntary basis, after completing their first year of service. All employees may elect to make pretax contributions up to the maximum amount allowed by the Internal Revenue Service. The first six percent (6%) of
employee contributions are matched fifty percent (50%) by the Company. The Company sponsors a post retirement health care plan for certain retired employees.

The Company adopted Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, (SFAS No. 158) as of December 31, 2006. SFAS
No. 158 requires the Company to recognize the overfunded or underfunded status of all of its post retirement benefit plans in its balance sheet and to recognize changes in the funded status in comprehensive income. Prior to the adoption of SFAS
No. 158 in 2006, the Company recognized the expense related to its post retirement health care plan as costs were incurred. The adoption of SFAS No. 158 had the following incremental effect on the balance sheet as of December 31,
2006:



|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|------------------------------------ |  | --------------------------------- | ----------- | ----------- | - | -------- | -------------------------------- |  | - | ----------- | -
|                                     |  | BeforeApplication ofStatement 158 |             | Adjustments |   |          | AfterApplication ofStatement 158 | 
|Other assets                         |  | $                                 | 2,605,214   |             | $ | (187,912 | )                                |  | $ | 2,417,302   |  
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|Total assets                         |  | $                                 | 254,570,229 |             | $ | (187,912 | )                                |  | $ | 254,382,317 |  
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|Other liabilities                    |  | $                                 | 620,610     |             | $ | 625,059  |                                  |  | $ | 1,245,669   |  
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|Total liabilities                    |  | $                                 | 230,134,466 |             | $ | 625,059  |                                  |  | $ | 230,759,525 |  
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|Accumulated other comprehensive loss |  | $                                 | 102,915     |             | $ | (812,971 | )                                |  | $ | (710,056    | )
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  
|Total shareholders equity           |  | $                                 | 24,435,763  |             | $ | (812,971 | )                                |  | $ | 23,622,792  |  
|                                     |  |                                   |             |             |   |          |                                  |  |   |             |  

Advertising and Public Relations Expense

The Company expenses advertising and public relations costs as they are incurred.



---

---

Notes to Consolidated Financial Statements



---



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

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 Company, (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.

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 taxes 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, defined benefit plan and post-retirement benefits are 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 liabilities or assets are 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.

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 using the Treasury Stock Method.

Comprehensive Income

Comprehensive income reflects the change in the Companys equity during the year arising from transactions
and events other than investments by, and distributions to, stockholders. 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

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. Related fees are recorded when they are incurred or received.



---

---

Notes to Consolidated Financial Statements



---



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

Fair Value of Financial Instruments

SFAS 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. SFAS 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 cash equivalents approximate their fair values.

Interest-bearing
deposits with bank and federal funds sold: The carrying amounts of interestbearing deposits with banks and federal funds sold approximate their fair values.

Available for sale and held to maturity investment 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.

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.

Federal funds purchased: The carrying amounts of federal funds purchased
approximate fair value.

Reclassification

Certain reclassifications have been made to the prior years 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.



---

---

Notes to Consolidated Financial Statements



---



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

Recent Accounting Pronouncements

In February 2006, the
Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in
SFAS No. 133 Implementation Issue No. Dl, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 permits fair value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 155 on
January 1, 2007 with no material impact to its financial position, results of operations and cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 on January 1, 2007 and determined that it will have no impact on its financial position, reported results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 is effective for the Company on January 1,
2008 and is not expected to have a significant impact on the Companys financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends SFAS No. 87 and SFAS No. 106 to require recognition of the
overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS
No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date
 the date at which the benefit obligation and plan assets are measured  is required to be the companys fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15,
2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158 in December 2006. See Note 11.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5, Accounting for Purchases of Life InsuranceDetermining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance
policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract
assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-5 on
January 1, 2007 with no material impact to its financial position, results of operations and cash flows.



---

---

Notes to Consolidated Financial Statements



---



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

Recent Accounting Pronouncements, continued

In September 2006,
the SEC issued Staff Accounting Bulletin (SAB) 108. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the
current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a companys balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach,
and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has adopted SAB 108 and determined that
it had no impact on the reported results of operations or financial conditions.

Other accounting standards that have been issued or proposed by the FASB
or other standards-setting bodies are not expected to have a material impact on the Companys financial position, results of operations and cash flows.

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 $1,800,000 and $3,375,000 for the periods including December 31, 2006 and 2005, respectively.

Note 3. Investment Securities

Debt and equity securities have been classified in the consolidated balance sheets according to
managements intent. The carrying amount of securities and their approximate fair values at December 31 follow:



|                                 |  |               |            |                 |   |                  |  |           |         |  |   |           
|-------------------------------- |  | ------------- | ---------- | --------------- | - | ---------------- |  | --------- | ------- |  | - | ----------
|2006                             |  | AmortizedCost |            | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|Available for sale:              |  |               |            |                 |   |                  |  |           |         |  |   |           
|U.S. Treasury securities         |  | $             | 2,996,996  |                 | $ | 218              |  | $         | 14,810  |  | $ | 2,982,404 
|Government-sponsored enterprises |  |               | 12,283,146 |                 |   | 6,305            |  |           | 216,771 |  |   | 12,072,680
|State and municipal securities   |  |               | 9,112,905  |                 |   | 36,822           |  |           | 137,286 |  |   | 9,012,441 
|Corporate securities             |  |               | 250,001    |                 |   | 481,454          |  |           |        |  |   | 731,455   
|                                 |  |               |            |                 |   |                  |  |           |         |  |   |           
|                                 |  | $             | 24,643,048 |                 | $ | 524,799          |  | $         | 368,867 |  | $ | 24,798,980
|                                 |  |               |            |                 |   |                  |  |           |         |  |   |           
|Held to maturity:                |  |               |            |                 |   |                  |  |           |         |  |   |           
|Government-sponsored enterprises |  | $             | 1,250,000  |                 | $ |                 |  | $         | 12,752  |  | $ | 1,237,248 
|State and municipal securities   |  |               | 289,933    |                 |   | 51               |  |           | 1,879   |  |   | 288,105   
|                                 |  |               |            |                 |   |                  |  |           |         |  |   |           
|                                 |  | $             | 1,539,933  |                 | $ | 51               |  | $         | 14,631  |  | $ | 1,525,353 
|                                 |  |               |            |                 |   |                  |  |           |         |  |   |           



---

---

Notes to Consolidated Financial Statements



---



Note 3. Investment Securities, continued



|                                 |  |               |            |                 |   |                  |  |            |         |  |   |           
|-------------------------------- |  | ------------- | ---------- | --------------- | - | ---------------- |  | ---------- | ------- |  | - | ----------
|2005                             |  | AmortizedCost |            | UnrealizedGains |   | UnrealizedLosses |  | Fair Value
|Available for sale:              |  |               |            |                 |   |                  |  |            |         |  |   |           
|U.S. Treasury securities         |  | $             | 6,243,312  |                 | $ | 7,441            |  | $          | 37,475  |  | $ | 6,213,278 
|Government-sponsored enterprises |  |               | 12,782,075 |                 |   |                 |  |            | 318,402 |  |   | 12,463,673
|State and municipal securities   |  |               | 8,628,601  |                 |   | 88,682           |  |            | 87,199  |  |   | 8,630,084 
|Corporate securities             |  |               | 250,001    |                 |   | 446,877          |  |            | 63,750  |  |   | 633,128   
|                                 |  |               |            |                 |   |                  |  |            |         |  |   |           
|                                 |  | $             | 27,903,989 |                 | $ | 543,000          |  | $          | 506,826 |  | $ | 27,940,163
|                                 |  |               |            |                 |   |                  |  |            |         |  |   |           
|Held to maturity:                |  |               |            |                 |   |                  |  |            |         |  |   |           
|Government-sponsored enterprises |  | $             | 1,050,000  |                 | $ |                 |  | $          | 26,319  |  | $ | 1,023,681 
|State and municipal securities   |  |               | 759,776    |                 |   | 4,603            |  |            | 358     |  |   | 764,021   
|                                 |  |               |            |                 |   |                  |  |            |         |  |   |           
|                                 |  | $             | 1,809,776  |                 | $ | 4,603            |  | $          | 26,677  |  | $ | 1,787,702 
|                                 |  |               |            |                 |   |                  |  |            |         |  |   |           

Government-sponsored enterprises, commonly referred to as U.S. Agencies, include investments in Federal Farm
Credit Banks, Federal Home Loan Banks, and Federal National Mortgage Association bonds.

Restricted equity securities, which are carried at cost, consist
of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB), and The Community Bankers Bank which are upstream correspondents of the Bank. 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 borrows from the FHLB. Both the Banks stock in The Community Bankers Bank and the FHLB are restricted in the fact that the stock may only be repurchased by that
company.

Investment securities with amortized cost of approximately $2,800,000 and $2,300,000 at December 31, 2006 and 2005, respectively, were
pledged as collateral on public deposits and for other purposes as required or permitted by law.

Gross realized gains and losses for the years ended
December 31 are as follows:



|                |  |      |   |      |   |       |      |  |   |    
|--------------- |  | ---- | - | ---- | - | ----- | ---- |  | - | ---
|                |  | 2006 |   | 2005 |   |       | 2004
|Realized gains  |  | $    |  |      | $ | 7,948 |      |  | $ | 656
|Realized losses |  |      |  |      |   | (750  | )    |  |   |   
|                |  |      |   |      |   |       |      |  |   |    
|                |  | $    |  |      | $ | 7,198 |      |  | $ | 656
|                |  |      |   |      |   |       |      |  |   |    

The scheduled maturities of securities available-for-sale and securities held-to-maturity at December 31,
2006, were as follows:



|                                       |  |                    |            |                  |   |               |  |            |           |  |   |          
|-------------------------------------- |  | ------------------ | ---------- | ---------------- | - | ------------- |  | ---------- | --------- |  | - | ---------
|                                       |  | Available for Sale |            | Held to Maturity
|                                       |  | AmortizedCost      |            | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                |  | $                  | 5,748,105  |                  | $ | 5,722,229     |  | $          | 1,039,933 |  | $ | 1,032,000
|Due after one year through five years  |  |                    | 14,956,866 |                  |   | 14,744,417    |  |            | 500,000   |  |   | 493,353  
|Due after five years through ten years |  |                    | 3,838,076  |                  |   | 3,768,988     |  |            |          |  |   |         
|Due after ten years                    |  |                    | 100,001    |                  |   | 563,346       |  |            |          |  |   |         
|                                       |  |                    |            |                  |   |               |  |            |           |  |   |          
|                                       |  | $                  | 24,643,048 |                  | $ | 24,798,980    |  | $          | 1,539,933 |  | $ | 1,525,353
|                                       |  |                    |            |                  |   |               |  |            |           |  |   |          



---

---

Notes to Consolidated Financial
Statements



---



Note 3. Investment Securities, continued

The following tables detail unrealized losses and related fair values in the Banks investment securities portfolio. This information is aggregated by the length of time that individual securities have been in a
continuous unrealized loss position as of December 31.



|                                      |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | ---------- | ----------------- | - | ---------- |  | ---------------- | ---------- | ---------- | - | ---------------- |  | - | ---------- |  | - | -------
|                                      |  | Less Than 12 Months |            | 12 Months or More |   | Total     
|                                      |  | Fair Value          |            | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |            | Fair Value |   | UnrealizedLosses
|2006                                  |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|U.S. Treasury securities              |  |                     | $1,489,436 |                   | $ | 8,972      |  | $                | 992,863    |            | $ | 5,838            |  | $ | 2,482,299  |  | $ | 14,810 
|Government-sponsored enterprises      |  |                     | 1,688,840  |                   |   | 11,159     |  |                  | 10,614,782 |            |   | 218,364          |  |   | 12,303,622 |  |   | 229,523
|State and municipal securities        |  |                     | 2,412,509  |                   |   | 26,828     |  |                  | 3,543,969  |            |   | 112,337          |  |   | 5,956,478  |  |   | 139,165
|Corporate securities                  |  |                     |           |                   |   |           |  |                  |           |            |   |                 |  |   |           |  |   |       
|                                      |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 5,590,785  |                   | $ | 46,959     |  | $                | 15,151,614 |            | $ | 336,539          |  | $ | 20,742,399 |  | $ | 383,498
|                                      |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|                                      |  |                     |           
|                                      |  | Less Than 12 Months |            | 12 Months or More |   | Total     
|                                      |  | Fair Value          |            | UnrealizedLosses  |   | Fair Value |  | UnrealizedLosses |            | Fair Value |   | UnrealizedLosses
|2005                                  |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|U.S. Treasury securities              |  | $                   | 2,481,939  |                   | $ | 14,089     |  | $                | 2,475,576  |            | $ | 23,386           |  | $ | 4,957,515  |  | $ | 37,475 
|Government-sponsored enterprises      |  |                     | 7,042,557  |                   |   | 91,098     |  |                  | 6,444,797  |            |   | 253,623          |  |   | 13,487,354 |  |   | 344,721
|State and municipal securities        |  |                     | 2,013,748  |                   |   | 38,283     |  |                  | 1,322,623  |            |   | 49,274           |  |   | 3,336,371  |  |   | 87,557 
|Corporate securities                  |  |                     | 186,250    |                   |   | 63,750     |  |                  |           |            |   |                 |  |   | 186,250    |  |   | 63,750 
|                                      |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 11,724,494 |                   | $ | 207,220    |  | $                | 10,242,996 |            | $ | 326,283          |  | $ | 21,967,490 |  | $ | 533,503
|                                      |  |                     |            |                   |   |            |  |                  |            |            |   |                  |  |   |            |  |   |        

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 presented in the table above
to be temporary in nature.

The Company does not believe that gross unrealized losses as of December 31, 2006, which is comprised of 78 investment
securities, represent an other-than-temporary impairment. The gross unrealized losses reported relate to investment securities issued by the United States Treasury, Government-sponsored enterprises, and various state and municipal securities. Total
gross unrealized losses, which represent 3.5% of the amortized cost basis of the Companys total investment securities, were attributable to changes in interest rates due to market conditions and not due to the credit quality of the investment
securities. The Company has both the intent and ability to hold the investment securities for a period of time necessary to recover the amortized cost.



---

---

Notes to Consolidated Financial Statements



---



Note 4. Loans Receivable

The major components of loans in the consolidated balance sheets at December 31 are as follows (in thousands):



|                                  |  |      |         |   |      |   |         |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                  |  | 2006 |         |   | 2005 |  
|Commercial                        |  | $    | 25,400  |   |      | $ | 19,975  |  
|Real estate:                      |  |      |         |   |      |   |         |  
|Construction and land development |  |      | 31,418  |   |      |   | 16,412  |  
|Residential, 1-4 families         |  |      | 63,461  |   |      |   | 56,320  |  
|Residential, 5 or more families   |  |      | 4,630   |   |      |   | 130     |  
|Farmland                          |  |      | 9,922   |   |      |   | 10,439  |  
|Nonfarm, nonresidential           |  |      | 61,060  |   |      |   | 65,541  |  
|Agricultural                      |  |      | 199     |   |      |   | 545     |  
|Consumer                          |  |      | 13,884  |   |      |   | 14,034  |  
|Leases                            |  |      | 1       |   |      |   | 5       |  
|Other                             |  |      | 2,068   |   |      |   | 2,223   |  
|                                  |  |      |         |   |      |   |         |  
|                                  |  |      | 212,043 |   |      |   | 185,624 |  
|                                  |  |     
|Allowance for loan losses         |  |      | (2,502  | ) |      |   | (2,271  | )
|                                  |  |      |         |   |      |   |         |  
|                                  |  | $    | 209,541 |   |      | $ | 183,353 |  
|                                  |  |      |         |   |      |   |         |  

Loans receivable include $71,000 and $92,000 in overdraft demand deposit accounts at December 31, 2006 and
2005, respectively.

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Balance, beginning                |  | $    | 2,271,074 |   |      | $ | 2,131,534 |      |  | $ | 1,688,812 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 300,000   |   |      |   | 450,000   |      |  |   | 725,000   |  
|Recoveries of amounts charged off |  |      | 160,012   |   |      |   | 50,951    |      |  |   | 57,447    |  
|Amounts charged off               |  |      | (228,964  | ) |      |   | (361,411  | )    |  |   | (339,725  | )
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                   |  | $    | 2,502,122 |   |      | $ | 2,271,074 |      |  | $ | 2,131,534 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  



---

---

Notes to Consolidated Financial Statements



---



Note 5. Allowance for Loan Losses, continued

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



|                                                        |  |      |           |      |   |           |  |   |          
|------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                        |  |      |           | 2006 |   | 2005     
|Impaired loans without a valuation allowance            |  |      |           |      | $ | 228,599   |  | $ |         
|Impaired loans with a valuation allowance               |  |      |           |      |   | 1,685,841 |  |   | 778,211  
|                                                        |  |      |           |      |   |           |  |   |          
|Total impaired loans                                    |  |      |           |      | $ | 1,914,440 |  | $ | 778,211  
|                                                        |  |      |           |      |   |           |  |   |          
|Valuation allowance related to impaired loans           |  |      |           |      | $ | 384,600   |  | $ | 49,191   
|                                                        |  |      |           |      |   |           |  |   |          
|                                                        |  |      |          
|                                                        |  |      |           | 2006 |   | 2005     
|Nonaccrual loans                                        |  |      |           |      | $ | 1,556,790 |  | $ | 308,372  
|Loans past due more than ninety days still accruing     |  |      |           |      |   | 244,009   |  |   | 1,685,402
|                                                        |  |      |           |      |   |           |  |   |          
|                                                        |  |      |           |      | $ | 1,800,799 |  | $ | 1,993,774
|                                                        |  |      |           |      |   |           |  |   |          
|                                                        |  |      |          
|                                                        |  | 2006 |           | 2005 |   | 2004     
|Average investment in impaired loans                    |  | $    | 1,027,832 |      | $ | 471,153   |  | $ | 407,982  
|                                                        |  |      |           |      |   |           |  |   |          
|Interest income recognized for the year                 |  | $    | 125,954   |      | $ | 21,304    |  | $ | 8,259    
|                                                        |  |      |           |      |   |           |  |   |          
|Interest income recognized on a cash basis for the year |  | $    | 3,077     |      | $ |          |  | $ | 259      
|                                                        |  |      |           |      |   |           |  |   |          

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

Note 6. Property and Equipment

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



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2006 |           | 2005
|Land                          |  | $    | 1,121,389 |      | $ | 1,121,389
|Buildings and improvements    |  |      | 4,910,138 |      |   | 4,900,382
|Furniture and equipment       |  |      | 2,865,433 |      |   | 2,557,833
|                              |  |      |           |      |   |          
|                              |  |      | 8,896,960 |      |   | 8,579,604
|Less accumulated depreciation |  |      | 3,271,046 |      |   | 2,795,320
|                              |  |      |           |      |   |          
|                              |  | $    | 5,625,914 |      | $ | 5,784,284
|                              |  |      |           |      |   |          

Depreciation expense for 2006, 2005, and 2004 was $600,400, $555,091, and $498,391 respectively.

Lessee Activities

The Bank began leasing out a portion of a
branch facility to a third party in June 2003. The lease expires May 2007 and calls for annual lease payments of $22,370 plus cleaning services. Rental income received related to this facility in 2006, 2005, and 2004 was $26,412, $28,887, and
$29,587 respectively.

The Bank leased storage space in its Loan Administration Center. The month-to-month lease was executed by a third party in November
2004 and called for monthly payments of $100 while in effect. This arrangement was terminated effective July 2006.

The Bank leases office space to
Mountain Valley Title Insurance Agency, LLC in the amount of $6,000 annually and paid quarterly and to Rockbridge Title Services, LLC in the amount of $6,000 annually and paid quarterly. These terms began in July 2005. Both of these companies are
related party interests.



---

---

Notes to Consolidated Financial Statements



---



Note 6. Property and Equipment, continued

Lessee Activities, continued

Aggregate rental income for 2006, 2005 and 2004 was $39,012, $35,887 and $32,469
respectively.

Lessor Activities

The Bank leases
a parking lot adjacent to one of its branch banking facilities under an operating lease which expired April 4, 2006. The lease is in the process of re-negotiation. No anticipated payment is included in the following table. The bank also has an
equipment lease contract which expires in March 2007. The remaining balance, payable in the first quarter of 2007, is $648.

The Bank also leases three
locations for automated teller machines. Two lease agreements, originated in 2006, with a five year term expiring in March 2011, call for annual lease payments of $600 each. The third lease was originated in December 2006 with a two year term and
annual lease payments of $1,800.

Aggregate rental expense for 2006, 2005 and 2004 was $3,916, $2,243 and $5,910 respectively. Future minimum commitments
under noncancellable leases are as follows:



|           |  |   |      
|---------- |  | - | -----
|2007       |  | $ | 3,648
|2008       |  |   | 3,000
|2009       |  |   | 1,200
|2010       |  |   | 1,200
|2011       |  |   | 300  
|Thereafter |  |   |     
|           |  |   |      
|           |  | $ | 9,348
|           |  |   |      

Note 7. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2006 and 2005 was $44,396,168 and $33,826,201 respectively.

At December 31, 2006, the scheduled maturities of time deposits are as follows:



|           |  |   |            
|---------- |  | - | -----------
|2007       |  | $ | 90,802,048 
|2008       |  |   | 13,764,314 
|2009       |  |   | 10,173,382 
|2010       |  |   | 23,258,682 
|2011       |  |   | 5,046,544  
|Thereafter |  |   |           
|           |  |   |            
|           |  | $ | 143,044,970
|           |  |   |            

Note 8. Short-Term Debt

The Company has established various credit facilities to provide additional liquidity if and as needed. At December 31, 2006, these included unsecured lines of credit of approximately $17,000,000 and a secured
line of credit of approximately $10,000,000 with correspondent banks. At December 31, 2006, $1,341,000 of federal funds purchased were outstanding. No amounts were outstanding at December 31, 2005.



---

---

Notes to Consolidated Financial Statements



---



Note 9. Fair Values of Financial Instruments

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



|                                          |  |                   |         |                   |   |                |  |            |         |  |   |        
|----------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                          |  | December 31, 2006 |         | December 31, 2005
|                                          |  | CarryingAmount    |         | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial assets                          |  |                   |         |                   |   |                |  |            |         |  |   |        
|Cash and cash equivalents                 |  | $                 | 8,258   |                   | $ | 8,258          |  | $          | 8,986   |  | $ | 8,986  
|Interest-bearing deposits with banks      |  |                   | 163     |                   |   | 163            |  |            | 292     |  |   | 292    
|Federal funds sold                        |  |                   |        |                   |   |               |  |            | 6,752   |  |   | 6,752  
|Investment securities, available for sale |  |                   | 24,799  |                   |   | 24,799         |  |            | 27,940  |  |   | 27,940 
|Investment securities, held to maturity   |  |                   | 1,540   |                   |   | 1,525          |  |            | 1,810   |  |   | 1,788  
|Restricted equity securities              |  |                   | 525     |                   |   | 525            |  |            | 474     |  |   | 474    
|Loans, net of allowance for loan losses   |  |                   | 209,541 |                   |   | 199,097        |  |            | 183,353 |  |   | 172,337
|Financial liabilities                     |  |                   |         |                   |   |                |  |            |         |  |   |        
|Deposits                                  |  |                   | 227,229 |                   |   | 225,412        |  |            | 215,843 |  |   | 212,983
|Federal funds purchased                   |  |                   | 1,341   |                   |   | 1,341          |  |            |        |  |   |       

Note 10. Earnings Per Share

The following table details the computation of basic and diluted earnings per share for each year ended December 31.



|                                                    |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | 2006 |           | 2005 |   | 2004     
|Net income available to common shareholders         |  | $    | 3,477,055 |      | $ | 3,210,022 |  | $ | 2,400,198
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding          |  |      | 1,240,755 |      |   | 1,235,657 |  |   | 1,232,645
|Effect of dilutive securities, options              |  |      | 2,867     |      |   | 1,310     |  |   | 711      
|                                                    |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding, diluted |  |      | 1,243,622 |      |   | 1,236,967 |  |   | 1,233,356
|                                                    |  |      |           |      |   |           |  |   |          
|Basic earnings per share                            |  | $    | 2.80      |      | $ | 2.60      |  | $ | 1.95     
|                                                    |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                          |  | $    | 2.80      |      | $ | 2.60      |  | $ | 1.95     
|                                                    |  |      |           |      |   |           |  |   |          

Note 11. Benefit Plans

Stock Based Compensation

The Companys 1999 Stock Option Plan (the Plan) provides for the issuance of 10,000
options to its employees to purchase shares of the Companys common stock. The options can have an original term of up to ten years with an exercise price equal to the market price of the common stock on the date of grant, as defined by the
Plan. The options vest immediately upon grant but may not be exercised for six months after issue. It is the Companys policy to issue new shares of stock for exercised options. At December 31, 2006, the weighted average remaining
contractual life of the outstanding options was 59 months. At December 31, 2006, all options reserved under the plan had been granted.

The fair value
of the Companys stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value
estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of stock options granted but are not considered by the model. Because the Companys stock options have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of
the fair value of its stock options at the time of grant.



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Stock Based Compensation, continued

All outstanding options vested prior to January 1, 2006, therefore,
consistent with the prospective application methodology, no compensation expense was recognized in 2006. There was no unrecognized compensation cost at December 31, 2006 and the adoption of SFAS No. 123R has had no effect on the financial
statements.

A summary of the Companys stock option activity, and related information for the years ended December 31, is as follows:



|                           |  |                    |   |  |                        |  
|-------------------------- |  | ------------------ | - |  | ---------------------- | -
|                           |  | AvailableFor Grant |   |  | Granted andOutstanding |  
|Balance, December 31, 2003 |  | 1,300              |   |  | 8,400                  |  
|Granted                    |  |                   |   |  |                       |  
|Exercised                  |  |                   |   |  |                       |  
|Forfeited                  |  |                   |   |  |                       |  
|                           |  |                    |   |  |                        |  
|Balance, December 31, 2004 |  | 1,300              |   |  | 8,400                  |  
|Granted                    |  | (1,300             | ) |  | 1,300                  |  
|Exercised                  |  |                   |   |  | (200                   | )
|Forfeited                  |  |                   |   |  |                       |  
|                           |  |                    |   |  |                        |  
|Balance, December 31, 2005 |  |                   |   |  | 9,500                  |  
|Granted                    |  |                   |   |  |                       |  
|Exercised                  |  |                   |   |  | (1,250                 | )
|Forfeited                  |  |                   |   |  |                       |  
|                           |  |                    |   |  |                        |  
|Balance, December 31, 2006 |  |                   |   |  | 8,250                  |  
|                           |  |                    |   |  |                        |  



---

---

Notes to Consolidated Financial
Statements



---



Note 11. Benefit Plans, continued

Stock Based Compensation, continued

Additional information relating to the Incentive Plan is detailed below:



|                                                                           |  |      |       |      |   |       |      |  |   |      
|-------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | ---- |  | - | -----
|                                                                           |  | 2006 |       | 2005 |   |       | 2004
|Outstanding options at December 31:                                        |  |      |       |      |   |       |      |  |   |      
|Exercise price, beginning of the year(1)                                   |  | $    | 22.07 |      | $ | 21.62 |      |  | $ | 21.62
|Exercise price, end of year(1)                                             |  |      | 22.33 |      | $ | 22.07 |      |  | $ | 21.62
|Contractual term remaining in months(1)                                    |  |      | 59    |      |   | 71    |      |  |   | 83   
|                                                                           |  |      |      
|Exercisable options outstanding at December 31:                            |  |      |       |      |   |       |      |  |   |      
|Number                                                                     |  |      | 8,250 |      |   | 9,500 |      |  |   | 8,400
|Exercise price(1)                                                          |  | $    | 22.33 |      | $ | 22.07 |      |  | $ | 21.62
|Contractual term remaining in months(1)                                    |  |      | 59    |      |   | 71    |      |  |   | 83   
|                                                                           |  |      |      
|Weighted average exercise price of options:                                |  |      |       |      |   |       |      |  |   |      
|Granted during the year                                                    |  | $    |      |      | $ | 25.00 |      |  | $ |     
|Exercised during the year                                                  |  | $    | 20.36 |      | $ | 22.00 |      |  | $ |     
|Forfeited during the year                                                  |  | $    |      |      | $ |      |      |  | $ |     
|Expired during the year                                                    |  | $    |      |      | $ |      |      |  | $ |     
|                                                                           |  |      |      
|Significant assumptions used in determining fair value of options granted: |  |      |       |      |   |       |      |  |   |      
|Risk-free interest rate                                                    |  |      | n/a   |      |   | 4.29  | %    |  |   | n/a  
|Expected life in years                                                     |  |      | n/a   |      |   | 10    |      |  |   | n/a  
|Expected dividends                                                         |  |      | n/a   |      |   | 2.35  | %    |  |   | n/a  
|Expected volatility                                                        |  |      | n/a   |      |   | 13.68 | %    |  |   | n/a  
|Grant-date fair value:                                                     |  |      |       |      |   |       |      |  |   |      
|Options granted during the year                                            |  | $    |      |      | $ | 4,459 |      |  | $ |     

---

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

The intrinsic value for options outstanding, all exercisable at December 31, 2006, was $195,278. The intrinsic value for options exercised during 2006 was $25,250. The cash received from exercised options during
2006 was $25,450.



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Defined Benefit Pension Plan

The Bank has a qualified, noncontributory, Defined Benefit Pension Plan,
sponsored by the Virginia Bankers Association, covering all eligible employees with six months of service who have attained the age of twenty-one. Contributions to the plan are based on computations by independent actuarial consultants. The
plans assets include common stock, fixed income securities, short-term investments and cash. The benefits are primarily based on years of service and earnings. The following table is a summary of the plans funded status for
September 30, 2006 and 2005, and the assumptions and components of net periodic benefit costs for the three years in the period ended September 30, 2006.



|                                                                                         |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                         |  | 2006 |            |   | 2005 |  
|Change in benefit obligation                                                             |  |      |            |   |      |   |            |  
|Benefit obligation at beginning of year                                                  |  | $    | 3,468,404  |   |      | $ | 2,686,644  |  
|Service cost                                                                             |  |      | 272,727    |   |      |   | 238,929    |  
|Interest cost                                                                            |  |      | 199,225    |   |      |   | 161,038    |  
|Actuarial loss                                                                           |  |      | 22,859     |   |      |   | 481,191    |  
|Benefits paid                                                                            |  |      | (43,050    | ) |      |   | (99,398    | )
|                                                                                         |  |      |            |   |      |   |            |  
|Benefit obligation at end of year                                                        |  | $    | 3,920,165  |   |      | $ | 3,468,404  |  
|                                                                                         |  |      |            |   |      |   |            |  
|Change in plan assets                                                                    |  |      |            |   |      |   |            |  
|Fair value of plan assets at beginning of year                                           |  | $    | 2,410,373  |   |      | $ | 2,022,410  |  
|Actual return on plan assets                                                             |  |      | 226,793    |   |      |   | 332,628    |  
|Employer contribution                                                                    |  |      | 187,572    |   |      |   | 154,733    |  
|Benefits paid                                                                            |  |      | (43,050    | ) |      |   | (99,398    | )
|                                                                                         |  |      |            |   |      |   |            |  
|Fair value of plan assets at end of year                                                 |  | $    | 2,781,688  |   |      | $ | 2,410,373  |  
|                                                                                         |  |      |            |   |      |   |            |  
|Change in prepaid (accrued) benefit cost                                                 |  |      |            |   |      |   |            |  
|Prepaid (accrued) benefit cost, beginning                                                |  | $    | (13,978    | ) |      | $ | 85,033     |  
|Contributions                                                                            |  |      | 187,572    |   |      |   | 154,733    |  
|Pension cost                                                                             |  |      | (304,263   | ) |      |   | (253,744   | )
|                                                                                         |  |      |            |   |      |   |            |  
|Prepaid (accrued) benefit cost, September 30                                             |  | $    | (130,669   | ) |      | $ | (13,978    | )
|                                                                                         |  |      |            |   |      |   |            |  
|Funded status                                                                            |  |      |            |   |      |   |            |  
|Funded status, September 30                                                              |  | $    | (1,138,477 | ) |      | $ | (1,058,031 | )
|Unrecognized transitional net assets                                                     |  |      | (958       | ) |      |   | (1,915     | )
|Unrecognized prior service costs                                                         |  |      | 7,644      |   |      |   | 9,174      |  
|Unrecognized net actuarial loss                                                          |  |      | 1,001,122  |   |      |   | 1,036,794  |  
|Contribution paid, December                                                              |  |      | 676,818    |   |      |   | 187,572    |  
|                                                                                         |  |      |            |   |      |   |            |  
|Net amount recognized, December 31                                                       |  | $    | 546,149    |   |      | $ | 173,594    |  
|                                                                                         |  |      |            |   |      |   |            |  
|Recognized on balance sheet                                                              |  |      |            |   |      |   |            |  
|Other assets                                                                             |  | $    | 342,655    |   |      | $ | 173,594    |  
|Other liabilities                                                                        |  |      | (461,659   | ) |      |   |           |  
|Accumulated other comprehensive loss, net of tax                                         |  |      | 665,153    |   |      |   |           |  
|                                                                                         |  |      |            |   |      |   |            |  
|Net amount recognized, December 31                                                       |  | $    | 546,149    |   |      | $ | 173,594    |  
|                                                                                         |  |      |            |   |      |   |            |  
|Recognized in accumulated other comprehensive loss from initial adoption of SFAS No. 158 |  |      |            |   |      |   |            |  
|Net loss                                                                                 |  | $    | 1,001,122  |   |      | $ |           |  
|Prior service cost                                                                       |  |      | 7,644      |   |      |   |           |  
|Net obligation at transition                                                             |  |      | (958       | ) |      |   |           |  
|Deferred tax asset                                                                       |  |      | (342,655   | ) |      |   |           |  
|                                                                                         |  |      |            |   |      |   |            |  
|                                                                                         |  | $    | 665,153    |   |      | $ |           |  
|                                                                                         |  |      |            |   |      |   |            |  



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Defined Benefit Pension Plan, continued



|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------ |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                 |  | 2006 |          |   | 2005 |   |          | 2004 | 
|Components of net periodic benefit cost          |  |      |          |   |      |   |          |      |  |   |          |  
|Service cost                                     |  | $    | 272,727  |   |      | $ | 238,929  |      |  | $ | 204,329  |  
|Interest cost                                    |  |      | 199,225  |   |      |   | 161,038  |      |  |   | 146,083  |  
|Expected return on plan assets                   |  |      | (204,575 | ) |      |   | (171,679 | )    |  |   | (121,027 | )
|Amortization                                     |  |      | 573      |   |      |   | 573      |      |  |   | 573      |  
|Recognized net actuarial (gain) loss             |  |      | 36,313   |   |      |   | 24,883   |      |  |   | 26,079   |  
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net periodic benefit cost                        |  | $    | 304,263  |   |      | $ | 253,744  |      |  | $ | 256,037  |  
|                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Weighted-average assumptions at September 30     |  |      |          |   |      |   |          |      |  |   |          |  
|                                                 |  |      |         
|                                                 |  | 2006 |          |   | 2005 |   |          | 2004 | 
|Discount rate used for net periodic pension cost |  |      | 5.75     | % |      |   | 6.00     | %    |  |   | 6.00     | %
|Discount rate used for disclosure                |  |      | 6.00     | % |      |   | 5.75     | %    |  |   | 6.00     | %
|Expected return on plan assets                   |  |      | 8.50     | % |      |   | 8.50     | %    |  |   | 8.50     | %
|Rate of compensation increase                    |  |      | 5.00     | % |      |   | 5.00     | %    |  |   | 5.00     | %

The accumulated benefit obligation for the defined benefit pension plan was $2,035,947 and $1,818,178 at
December 31, 2006 and 2005.

No contributions are expected to be paid prior to September 30, 2007.

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



|                |  |   |        
|--------------- |  | - | -------
|10/1/06-9/30/07 |  | $ | 12,955 
|10/1/07-9/30/08 |  |   | 12,952 
|10/1/08-9/30/09 |  |   | 19,478 
|10/1/09-9/30/10 |  |   | 19,586 
|10/1/10-9/30/11 |  |   | 19,887 
|10/1/11-9/30/16 |  |   | 732,199

Long term rate of return

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

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



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Defined Benefit Pension Plan, continued

Asset allocation

The pension plans weighted-average asset allocations at September 30, 2006 and 2005, by asset category are as follows:



|                            |  |      |   |  |      |  
|--------------------------- |  | ---- | - |  | ---- | -
|                            |  | 2006 |   |  | 2005 |  
|Asset Category              |  |      |   |  |      |  
|Mutual funds  fixed income |  | 21   | % |  | 19   | %
|Mutual funds  equity       |  | 71   | % |  | 81   | %
|Other                       |  | 8    | % |  | 0    | %
|                            |  |      |   |  |      |  
|Total                       |  | 100  | % |  | 100  | %
|                            |  |      |   |  |      |  

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing
return, with a targeted asset allocation of 25% fixed income and 75% equities. The Investment Manager selects fund managers with demonstrated experience and expertise and funds with demonstrated historical performance for the implementation of the
Plans investment strategy. The Investment Manager considers both actively and passively managed investment strategies and allocates funds across the asset classes to develop an efficient investment structure.

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

Post Retirement Health Insurance

The Company sponsors a post retirement health care plan for certain retired employees. The health
plan has an annual limitation (a cap) on the dollar amount of the employers share of the cost of covered benefits incurred by a plan participant. The retiree is responsible, therefore, for the amount by which the cost of the
benefit coverage under the plan incurred during a year exceeds that cap. No health care cost increases have been factored into the health plans actuarial calculations due to this cap. The plan was frozen at December 31, 2006 with coverage
continuing for existing participants in the plan as of that date and two announced retirements occurring in 2007. The following tables summarize the Banks post retirement plan obligations, assets, funded status, and the assumptions and
components of net periodic benefit costs using a measurement date of December 31, 2006. For periods prior to the adoption of SFAS No. 158, balance sheet items were considered to be insignificant and expenses were recorded at cost.



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Post Retirement Health Insurance, continued



|                                                                                         |  |      |          |  
|---------------------------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                                         |  | 2006 |         
|Change in benefit obligation                                                             |  |      |          |  
|Benefit obligation at beginning of year                                                  |  | $    | 235,546  |  
|Interest cost                                                                            |  |      | 13,422   |  
|Actuarial loss                                                                           |  |      | 3,143    |  
|Benefits paid                                                                            |  |      | (23,700  | )
|                                                                                         |  |      |          |  
|Benefit obligation at end of year                                                        |  | $    | 228,411  |  
|                                                                                         |  |      |          |  
|Change in plan assets                                                                    |  |      |          |  
|Fair value of plan assets at beginning of year                                           |  | $    |         |  
|Employer contribution                                                                    |  |      | 23,700   |  
|Benefits paid                                                                            |  |      | (23,700  | )
|                                                                                         |  |      |          |  
|Fair value of plan assets at end of year                                                 |  | $    |         |  
|                                                                                         |  |      |          |  
|Funded status                                                                            |  |      |          |  
|Funded status, December 31                                                               |  | $    | (228,411 | )
|Unrecognized transition obligation                                                       |  |      | 220,824  |  
|Unrecognized actuarial loss                                                              |  |      | 3,143    |  
|                                                                                         |  |      |          |  
|Net amount recognized                                                                    |  | $    | (4,444   | )
|                                                                                         |  |      |          |  
|Recognized on balance sheet                                                              |  |      |          |  
|Other assets                                                                             |  | $    | 76,149   |  
|Other liabilities                                                                        |  |      | (228,411 | )
|Accumulated other comprehensive loss                                                     |  |      | 147,818  |  
|                                                                                         |  |      |          |  
|Net amount recognized                                                                    |  | $    | (4,444   | )
|                                                                                         |  |      |          |  
|Recognized in accumulated other comprehensive loss from initial adoption of SFAS No. 158 |  |      |          |  
|Unrecognized prior service cost                                                          |  | $    | 220,824  |  
|Unrecognized net loss                                                                    |  |      | 3,143    |  
|Deferred tax asset                                                                       |  |      | (76,149  | )
|                                                                                         |  |      |          |  
|                                                                                         |  | $    | 147,818  |  
|                                                                                         |  |      |          |  
|Components of net periodic benefit cost                                                  |  |      |          |  
|Interest cost                                                                            |  | $    | 13,422   |  
|Amortization of net obligation at transition                                             |  |      | 14,722   |  
|                                                                                         |  |      |          |  
|Net periodic postretirement benefit cost                                                 |  | $    | 28,144   |  
|                                                                                         |  |      |          |  

The Bank expects to recognize amortization of transition obligation of $14,722 in 2007.



---

---

Notes to Consolidated Financial Statements



---



Note 11. Benefit Plans, continued

Post Retirement Health Insurance, continued

The discount rate in determining the benefit relating to the
untrended post retirement health care plan at December 31, 2006, was assumed to be 6.00%.

Employer contributions are expected to be $24,165 in 2007.

Estimated future benefit payments to the plan are as follows:



|          |  |   |       
|--------- |  | - | ------
|2007      |  | $ | 25,702
|2008      |  |   | 23,792
|2009      |  |   | 20,395
|2010      |  |   | 19,940
|2011      |  |   | 19,456
|2011-2016 |  |   | 89,067

Deferred Compensation Plan

Funded deferred compensation plans have been adopted for certain members of the Board of Directors and Executive employees. The corresponding assets and liabilities accounts at December 31, 2006 were valued at
$101,516 for the Director Plan and $228,381 for the Executive Plan and are held by a third party through the Virginia Bankers Association.

Profit
Sharing/Thrift Plan

The Company provides a profit sharing/thrift plan for its employees to which contributions are made at the discretion of the
Board of Directors. The plan also allows for pretax employee contributions of up to the maximum allowed by the IRS. The Company will match up to 50% of the first 6% contributed by the employee. Employer contributions to the plan amounted to
$108,485, $124,991, and $108,575 in 2006, 2005, and 2004, respectively.

Note 12. Income Taxes

Current and Deferred Income Tax Components

The components of
income tax expense (all Federal) are as follows:



|         |  |      |           |   |      |   |           |      |  |   |           |  
|-------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|         |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Current  |  | $    | 1,586,570 |   |      | $ | 1,566,950 |      |  | $ | 1,174,901 |  
|Deferred |  |      | (13,681   | ) |      |   | (122,372  | )    |  |   | (139,185  | )
|         |  |      |           |   |      |   |           |      |  |   |           |  
|         |  | $    | 1,572,889 |   |      | $ | 1,444,578 |      |  | $ | 1,035,716 |  
|         |  |      |           |   |      |   |           |      |  |   |           |  

Rate Reconciliation

A reconciliation of income tax expense computed at the statutory federal income tax rate to income tax expense included in the statements of income follows:



|                              |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                              |  | 2006 |           |   | 2005 |   |           | 2004 | 
|Tax at statutory federal rate |  | $    | 1,716,981 |   |      | $ | 1,582,564 |      |  | $ | 1,168,211 |  
|Tax exempt interest income    |  |      | (133,270  | ) |      |   | (129,743  | )    |  |   | (138,693  | )
|Other                         |  |      | (10,822   | ) |      |   | (8,243    | )    |  |   | 6,198     |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  
|                              |  | $    | 1,572,889 |   |      | $ | 1,444,578 |      |  | $ | 1,035,716 |  
|                              |  |      |           |   |      |   |           |      |  |   |           |  



---

---

Notes to Consolidated Financial
Statements



---



Note 12. Income Taxes, continued

Deferred Income Tax Analysis

The significant components of net deferred tax assets (all Federal) at
December 31 are summarized as follows:



|                                                             |  |      |           |   |      |   |          |  
|------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | -------- | -
|                                                             |  | 2006 |           |   | 2005 |  
|Deferred tax assets                                          |  |      |           |   |      |   |          |  
|Allowance for loan losses                                    |  | $    | 688,718   |   |      | $ | 598,117  |  
|Deferred compensation                                        |  |      | 87,802    |   |      |   | 81,834   |  
|Defined benefit plan                                         |  |      | 342,655   |   |      |   |         |  
|Post retirement health benefits                              |  |      | 76,149    |   |      |   |         |  
|Other                                                        |  |      | 29,829    |   |      |   | 24,774   |  
|                                                             |  |      |           |   |      |   |          |  
|Deferred tax assets                                          |  |      | 1,225,153 |   |      |   | 704,725  |  
|                                                             |  |      |           |   |      |   |          |  
|Deferred tax liabilities                                     |  |      |           |   |      |   |          |  
|Net unrealized appreciation on securities available for sale |  |      | (53,017   | ) |      |   | (12,299  | )
|Depreciation                                                 |  |      | (239,847  | ) |      |   | (276,090 | )
|Accretion of discount on investment securities               |  |      | (3,751    | ) |      |   | (3,391   | )
|Accrued pension costs                                        |  |      | (185,691  | ) |      |   | (65,761  | )
|Other                                                        |  |      | (7,356    | ) |      |   | (3,459   | )
|                                                             |  |      |           |   |      |   |          |  
|Deferred tax liabilities                                     |  |      | (489,662  | ) |      |   | (361,000 | )
|                                                             |  |      |           |   |      |   |          |  
|Net deferred tax asset                                       |  | $    | 735,491   |   |      | $ | 343,725  |  
|                                                             |  |      |           |   |      |   |          |  

Note 13. Commitments and Contingencies

Litigation

In the normal course of business the Company is involved in various legal proceedings. After
consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material to the consolidated financial statements.

Financial Instruments with Off-Balance-Sheet Risk

The Company 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 consolidated balance sheets.

The Companys exposure to credit loss in the event of
nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments. A summary of commitments at December 31 is as follows:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2006 |            | 2005
|Commitments to extend credit |  | $    | 35,176,000 |      | $ | 35,576,000
|Standby letters of credit    |  |      | 3,374,000  |      |   | 2,467,000 
|                             |  |      |            |      |   |           
|                             |  | $    | 38,550,000 |      | $ | 38,043,000
|                             |  |      |            |      |   |           



---

---

Notes to Consolidated Financial Statements



---



Note 13. Commitments and Contingencies, 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 Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary 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 Company 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 Company deems necessary.

Concentrations of Credit Risk

Substantially all of the
Companys loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Companys market area and such customers are generally depositors of the Bank. Investments in state and municipal securities
involve governmental entities within and outside the Companys market area. The concentrations of credit by type of loan are set forth in the Loans Receivable note. The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Company, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of approximately $2,500,000.
Although the Company has a reasonably diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon economic conditions in and around Botetourt, Roanoke and Rockbridge counties. The Company
has a loan concentration relating to construction and land development, lumber and timber, and hotel and motels. Total loans and loan commitments to these industrial groups amounted to approximately $46,000,000, $7,000,000, and $10,000,000
respectively at December 31, 2006.

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

Note 14. Regulatory Restrictions

Dividends

The Companys dividend payments are made 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 Company (on a consolidated basis) 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 Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



---

---

Notes to Consolidated Financial Statements



---



Note 14. Regulatory Restrictions, continued

Capital Requirements, continued

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2006, that the Company and the Bank met all capital adequacy requirements to which they are subject.

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

The Company and Banks actual capital amounts and ratios are also presented in the table (in thousands).



|                                         |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|---------------------------------------- |  | ------ | ------ | ----- | ------------------------------------ | - | ------ | --------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                         |  | Actual |        |       | Minimum For CapitalAdequacy Purposes |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount |        | Ratio |                                      |   | Amount |                                                                       | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2006:                       |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 26,813 |       | 13.1                                 | % |        | $                                                                     | 16,340 |  | 8.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 25,413 |       | 12.5                                 | % |        | $                                                                     | 16,319 |  | 8.0 | %      |  | $     | 20,399 |  | 10.0 | %
|Tier 1 Capital (to Risk-Weighted Assets) |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 24,311 |       | 11.9                                 | % |        | $                                                                     | 8,170  |  | 4.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 22,911 |       | 11.2                                 | % |        | $                                                                     | 8,160  |  | 4.0 | %      |  | $     | 12,239 |  | 6.0  | %
|Tier 1 Capital (to Average Assets)       |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 24,311 |       | 9.8                                  | % |        | $                                                                     | 9,904  |  | 4.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 22,911 |       | 9.3                                  | % |        | $                                                                     | 9,850  |  | 4.0 | %      |  | $     | 12,313 |  | 5.0  | %
|                                         |  |        |        |       |                                      |  
|December 31, 2005:                       |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 23,942 |       | 13.2                                 | % |        | $                                                                     | 14,542 |  | 8.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 22,541 |       | 12.4                                 | % |        | $                                                                     | 14,526 |  | 8.0 | %      |  | $     | 18,158 |  | 10.0 | %
|Tier 1 Capital (to Risk-Weighted Assets) |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 21,671 |       | 11.9                                 | % |        | $                                                                     | 7,271  |  | 4.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 20,270 |       | 11.2                                 | % |        | $                                                                     | 7,263  |  | 4.0 | %      |  | $     | 10,895 |  | 6.0  | %
|Tier 1 Capital (to Average Assets)       |  |        |        |       |                                      |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                             |  | $      | 21,671 |       | 9.7                                  | % |        | $                                                                     | 9,429  |  | 4.0 | %      |  |       | n/a    |  | n/a  |  
|Bank of Botetourt                        |  | $      | 20,270 |       | 9.1                                  | % |        | $                                                                     | 9,375  |  | 4.0 | %      |  | $     | 11,719 |  | 5.0  | %



---

---

Notes to Consolidated Financial
Statements



---



Note 14. Regulatory Restrictions, continued

Intercompany Transactions

The Banks legal lending limit on loans to the Company 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 the loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $2,300,000 at December 31, 2006. No 23A transactions were deemed to
exist between the Company and the Bank at December 31, 2006.

Note 15. Transactions with Related Parties

The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve
more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:



|                   |  |      |            |   |      |   |            |  
|------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                   |  | 2006 |            |   | 2005 |  
|Balance, beginning |  | $    | 2,267,229  |   |      | $ | 1,039,702  |  
|                   |  |     
|New loans          |  |      | 7,228,840  |   |      |   | 7,492,825  |  
|Repayments         |  |      | (7,368,830 | ) |      |   | (6,265,298 | )
|                   |  |      |            |   |      |   |            |  
|Balance, ending    |  | $    | 2,127,239  |   |      | $ | 2,267,229  |  
|                   |  |      |            |   |      |   |            |  

Deposit transactions at December 31, 2006 and 2005 were insignificant.



---

---

Notes to Consolidated Financial Statements



---



Note 16. Parent Company Financial Information

Condensed financial information of Botetourt Bankshares, Inc. is presented as follows:

Balance Sheets

December 31, 2006 and 2005



|                                              |  |      |            |   |      |   |           
|--------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                              |  | 2006 |            |   | 2005
|Assets                                        |  |      |            |   |      |   |           
|Cash and due from banks                       |  | $    | 33,076     |   |      | $ | 40,019    
|Investment securities held to maturity        |  |      | 1,350,000  |   |      |   | 1,350,000 
|Investment in affiliate bank at equity        |  |      | 22,222,747 |   |      |   | 20,333,753
|Other assets                                  |  |      | 16,969     |   |      |   | 12,363    
|                                              |  |      |            |   |      |   |           
|Total assets                                  |  | $    | 23,622,792 |   |      | $ | 21,736,135
|                                              |  |      |            |   |      |   |           
|Liabilities                                   |  |      |            |   |      |   |           
|Income tax payable                            |  | $    |           |   |      | $ | 1,090     
|                                              |  |      |            |   |      |   |           
|Total liabilities                             |  |      |           |   |      |   | 1,090     
|                                              |  |      |            |   |      |   |           
|Stockholders equity                          |  |      |            |   |      |   |           
|Common stock                                  |  |      | 1,241,750  |   |      |   | 1,240,121 
|Additional paid-in capital                    |  |      | 1,546,984  |   |      |   | 1,510,751 
|Retained earnings                             |  |      | 21,544,114 |   |      |   | 18,960,299
|Accumulated other comprehensive income (loss) |  |      | (710,056   | ) |      |   | 23,874    
|                                              |  |      |            |   |      |   |           
|Total stockholders equity                    |  |      | 23,622,792 |   |      |   | 21,735,045
|                                              |  |      |            |   |      |   |           
|Total liabilities and stockholders equity    |  | $    | 23,622,792 |   |      | $ | 21,736,135
|                                              |  |      |            |   |      |   |           

Statements of Income

For the years ended December 31, 2006, 2005 and 2004



|                                                                    |  |      |           |   |      |   |           |  |   |          
|------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | ---------
|                                                                    |  | 2006 |           |   | 2005 |   | 2004     
|Income                                                              |  |      |           |   |      |   |           |  |   |          
|Dividends from affiliate bank                                       |  | $    | 893,240   |   |      | $ | 741,401   |  | $ | 742,063  
|Interest on taxable securities                                      |  |      | 41,624    |   |      |   | 34,024    |  |   | 31,718   
|Interest on tax exempt securities                                   |  |      | 6,303     |   |      |   | 12,400    |  |   | 12,400   
|                                                                    |  |      |           |   |      |   |           |  |   |          
|                                                                    |  |      | 941,167   |   |      |   | 787,825   |  |   | 786,181  
|                                                                    |  |      |           |   |      |   |           |  |   |          
|Expenses                                                            |  |      |           |   |      |   |           |  |   |          
|Operating expenses                                                  |  |      | 53,629    |   |      |   | 31,409    |  |   | 29,807   
|                                                                    |  |      |           |   |      |   |           |  |   |          
|Income before taxes and equity in undistributed income of affiliate |  |      | 887,538   |   |      |   | 756,416   |  |   | 756,374  
|                                                                    |  |      |          
|Income tax (benefit) expense                                        |  |      | (4,455    | ) |      |   | 1,090     |  |   | 870      
|                                                                    |  |      |           |   |      |   |           |  |   |          
|Income before equity in undistributed income of affiliate           |  |      | 891,993   |   |      |   | 755,326   |  |   | 755,504  
|                                                                    |  |      |          
|Equity in undistributed income of affiliate                         |  |      | 2,585,062 |   |      |   | 2,454,696 |  |   | 1,644,694
|                                                                    |  |      |           |   |      |   |           |  |   |          
|Net income                                                          |  | $    | 3,477,055 |   |      | $ | 3,210,022 |  | $ | 2,400,198
|                                                                    |  |      |           |   |      |   |           |  |   |          



---

---

Notes to Consolidated Financial
Statements



---



Note 16. Parent Company Financial Information, continued

Statements of Cash Flows

For the years ended December 31, 2006, 2005 and 2004



|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                  |  | 2006 |            |   | 2005 |   |            | 2004 | 
|Cash flows from operating activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                        |  | $    | 3,477,055  |   |      | $ | 3,210,022  |      |  | $ | 2,400,198  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|Equity in undistributed income of affiliate                                       |  |      | (2,585,062 | ) |      |   | (2,454,696 | )    |  |   | (1,644,694 | )
|Net increase (decrease) in other liabilities                                      |  |      | (1,090     | ) |      |   | 276        |      |  |   | 814        |  
|Net (increase) decrease in other assets                                           |  |      | (4,606     | ) |      |   | 418        |      |  |   | (1,595     | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                         |  |      | 886,297    |   |      |   | 756,020    |      |  |   | 754,723    |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Purchases of investment securities                                                |  |      | (200,000   | ) |      |   | (200,000   | )    |  |   | (675,000   | )
|Maturities of investment securities                                               |  |      | 200,000    |   |      |   | 200,000    |      |  |   | 475,000    |  
|Increase in investment in Bank                                                    |  |      | (37,862    | ) |      |   | (156,157   | )    |  |   | (35,601    | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                             |  |      | (37,862    | ) |      |   | (156,157   | )    |  |   | (235,601   | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Dividends paid                                                                    |  |      | (893,240   | ) |      |   | (741,401   | )    |  |   | (567,063   | )
|Common stock issued                                                               |  |      | 37,862     |   |      |   | 156,157    |      |  |   | 35,601     |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used by financing activities                                             |  |      | (855,378   | ) |      |   | (585,244   | )    |  |   | (531,462   | )
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and due from banks                                |  |      | (6,943     | ) |      |   | 14,619     |      |  |   | (12,340    | )
|Cash and cash equivalents, beginning                                              |  |      | 40,019     |   |      |   | 25,400     |      |  |   | 37,740     |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, ending                                                 |  | $    | 33,076     |   |      | $ | 40,019     |      |  | $ | 25,400     |  
|                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  

Note 17. Subsequent Event

The company declared a first quarter $0.20 dividend per common share on February 10, 2007 to shareholders of record on January 24, 2007.



---

---

Stockholder Information



---



Annual Meeting

The annual meeting of stockholders will be held at 2:30 p.m. on Wednesday, May 16, 2007, at the Buchanan Theatre, Main Street, Buchanan, Virginia.

Requests for Information

Requests for information should be directed to Mr. H. Watts Steger, III
at Botetourt Bankshares, Inc., Post Office Box 339, Buchanan, Virginia, 24066; telephone (540) 591-5000.



|                                                                                          |  |                                                                        
|----------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|Independent Auditors                                                                      |  | Stock Transfer Agent                                                   
|Elliott Davis, LLC Certified Public Accountants Post Office Box 760 Galax, Virginia 24333 |  | Botetourt Bankshares, Inc. Post Office Box 339 Buchanan, Virginia 24066

Federal Deposit Insurance Corporation

The Bank is a member of the FDIC. This statement has not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.



|                                                                  |  |                                                                              
|----------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|Banking
Offices                                                  
|Buchanan Office 19747 Main Street - Buchanan (540) 254-1721       |  | Loan Administration Center 21 Stoney Battery Road - Troutville (540) 966-3850
|                                                                  | 
|Daleville Office 670 Roanoke Road - Daleville (540) 992-4777      |  | Peters Creek Office 3130 Peters Creek Road - Roanoke (540) 777-2010          
|                                                                  | 
|Eagle Rock Office 58 Railroad Avenue - Eagle Rock (540) 884-2265  |  | Fairfield Office 5905 North Lee Highway - Fairfield (540) 377-5270           
|                                                                  | 
|Troutville Office 5462 Lee Highway - Troutville (540) 966-3850    |  | Investment Securities 5462 Lee Highway - Troutville (540) 473-1224           
|                                                                  | 
|Bonsack Office 3801 Challenger Avenue - Roanoke (540) 777-2265    |  | Mortgage Centers Daleville & Bonsack (540) 966-5626 Lexington (540) 463-5626 
|                                                                  | 
|Lexington Office 65 East Midland Trail - Lexington (540) 463-7224 |  | Operations Center 19800 Main Street - Buchanan (540) 473-1173                

www.bankofbotetourt.com

info@bankofbotetourt.com



---

|Item 8. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

On November 14, 2006, the Audit Committee of the Board of Directors of Botetourt Bankshares, Inc. (the Company) was notified by the
Companys independent accountants, Larrowe & Company, PLC (Larrowe), that it was merging with the firm of Elliott Davis, LLC, effective on that November 17, and that it would no longer operate or provide audit services
as a separate entity. At a meeting held on November 14, 2006, the Companys Audit Committee approved Chairman Williamson to sign the forthcoming engagement letter of Elliott Davis, LLC, the successor firm in the merger, to serve as the
Companys independent accountants for the fiscal year ended December 31, 2006.

The Company engaged Larrowe as its independent
accountants for the fiscal years ended December 31, 2005 and 2004. Larrowes reports on the Companys consolidated financial statements for those two years did not contain any adverse opinion or disclaimer of opinion, nor were the
opinions expressed in the reports qualified or modified as to uncertainty, audit scope, or accounting principles. During the most recent two fiscal years and the interim period preceding the Audit Committees decision to engage Elliott Davis as
the Companys new independent accountants, there were no disagreements with Larrowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Larrowe, would have caused Larrowe to make reference to the subject matter of the disagreement in connection with its report.

During the two fiscal years ended December 31, 2005 and 2004, and the subsequent interim periods through and including the date of Elliott Davis appointment as the Companys independent accountants, the Company has not
consulted with Elliott Davis on either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Companys consolidated financial statements or
any other matter or reportable event described in Item 304(a)(2)(i) or (ii) of Regulation S-B.

There were no disagreements with
the accountants during 2006.



|Item 8A. | Controls and Procedures
|-------- | -----------------------

Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based on
the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report
effectively and in a timely manner the information required to be disclosed in reports we file under the Exchange Act.



---

No change in our internal controls over financial reporting, or in other factors that could affect those
controls, occurred during our fourth quarter of 2006 that has affected materially, or is reasonably likely to affect materially, our internal control over financial reporting. We are aware of no significant deficiencies or material weaknesses of
internal controls that would require corrective action. However, we review our internal controls regularly, including accounting controls, and may make changes from time to time aimed at enhancing our internal controls and ensuring that our systems
are responsive to bank regulatory requirements and evolve with our business.



|Item 8B. | Other Information
|-------- | -----------------

None.

PART III



|Item 9. | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
|------- | -------------------------------------------------------------------------------------------------------------------------------------

The information as of March 5, 2007 regarding the names, ages, principal occupations and business experience for the past five years for each of the
Companys Directors and executive officers is provided in the Companys proxy materials for the 2007 annual meeting of shareholders, which will be filed pursuant to Schedule 14A and is incorporated herein by reference. During 2006, the
shareholders of Botetourt Bankshares, Inc. approved amending the Articles of Incorporation to divide the board of directors into three equal classes with staggered terms. The effect of this action is one-third of the total board is eligible for
election every year, and directors, will be elected for three year terms.

Report of the Audit Committee

The Audit Committee of the Board of Directors of the Company is currently comprised of three directors, Messers. Moore, Patterson, and Williamson, all of
whom satisfy all of the following criteria: (i) meet the independence requirements set forth in the NASDs definition of independent director, (ii) have not accepted directly or indirectly any consulting, advisory, or
other compensatory fee from the Company or any of its subsidiaries, except for Board fees, (iii) are not affiliated persons of the Company or any of its subsidiaries, and (iv) are competent to read and understand financial statements. The
Board of Directors has determined that Mr. John B. Williamson, III, president of RGC Resources, Inc., a reporting company, qualifies as an audit committee financial expert within the meaning of Item 401 of Regulation S-B
of the Securities Exchange Act. For more information regarding the Audit Committee and the Audit Committee Charter, as well as information relating to activities of the Companys outside auditor and fees paid to that auditor, please see the
Companys proxy statement for its annual meeting of shareholders in 2007, which will be filed pursuant to schedule 14A, which is incorporated by reference to this filing.



---

Code of Ethics

The Corporation has adopted a Code of Business Conduct and Ethics that apply to its directors, executives and employees. Copies of these codes were provided as Exhibits 99.2, 99.3, and 99.4 in the Form 10-KSB filed March, 25, 2004.



|Item 10. | Executive Compensation
|-------- | ----------------------

For more information
regarding the compensation paid in 2006 to the Company and Banks Executive Officers and Directors, please see the Companys proxy statement for its annual meeting of shareholders in 2007, which will be filed pursuant to schedule 14A,
which is incorporated by reference to this filing.

For more information regarding the Compensation Discussion and Analysis and report of
the Compensation Committee, please see the Companys proxy statement for its annual meeting of shareholders in 2007, which will be filed pursuant to schedule 14A, which is incorporated by reference to this filing.



|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

Security Ownership of Management

Information as of March 5, 2007 regarding the number of shares of
Common Stock beneficially owned by each director, by the executive officer and by all directors and executive officers as a group, as well as the number of shares held by each holder of five percent or more of the outstanding common stock of the
Company, is provided in the Companys proxy materials for the 2007 annual meeting of shareholders, which will be filed pursuant to Schedule 14A and is incorporated herein by reference to this filing.

The following table summarizes the equity compensation plan as of December 31, 2006.



---

|                                                            |  |                                                                                           |  |                                                                           |  |                                                                                                                                        
|----------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                                                            |  | Number of securities to beissued upon exercise of outstandingoptions, warrants and
rights |  | Weighted-average exercise price ofoutstanding options, warrants andrights |  | Number of securities remainingavailable for future issuance underequity compensation plans(excluding securities
reflected incolumn (a))
|Plan Category                                               |  | (a)                                                                                       |  | (b)                                                                       |  | (c)                                                                                                                                    
|                                                            |  |                                                                                           | 
|Equity compensation plans approved by security shareholders |  | 8,250                                                                                     |  | $22.33                                                                    |  |                                                                                                                                       
|                                                            |  |                                                                                           | 
|Equity compensation plans not approved by security holders  |  |                                                                                          |  |                                                                          |  |                                                                                                                                       



|Item 12. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

Transactions with Management

Some of the directors and officers of the Company are at present, as in the past, customers of the
Company, and the Company has had and expects to have in the future banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their associates, on substantially the same terms, including interest
rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. These transactions do not involve more than the normal risk of collectibility or present other unfavorable features. The aggregate
outstanding balance of loans to directors, executive officers and their associates, as a group, at December 31, 2006 is provided in the Companys proxy materials for the 2007 annual meeting of shareholders, which will be filed pursuant to
Schedule 14A and is incorporated by reference to this filing.

There are no legal proceedings to which any director, officer, principal
shareholder or associate is a party that would be material and adverse to the Company.



---

For more information regarding Item 407(a) of Regulation S-B, please see the Companys proxy
statement for its annual meeting of shareholders in 2007, which will be filed pursuant to schedule 14A, which is incorporated by reference to this filing.



|Item 13. | Exhibits
|-------- | --------



| | (a) | Exhibits
| | --- | --------



|       |  |                                                                                                                                                                                    
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i).  |  | Restated Articles of Incorporation filed on the Form 10-SB 12G/A on June 22, 2004.                                                                                                 
|       | 
|3(ii). |  | Bylaws filed on the Form 10-SB 12G on April 30, 2002.                                                                                                                              
|       | 
|10*    |  | Change In Control Agreement filed as Exhibit 10.4 on the Form 10-SB 12G on April 30, 2002.                                                                                         
|       | 
|12.    |  | Annual Report to Shareholders (Included as Item 7 in this filing)                                                                                                                  
|       | 
|31.1   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13 a-14(a)                                                                                   
|       | 
|32     |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                            
|       | 
|99.2   |  | Code of Ethics/Conflict of Interest Policy For Board of Directors Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23, 2006.       
|       | 
|99.3   |  | Code of Ethics & Professional Conduct For All Employees Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23, 2006.                 
|       | 
|99.4   |  | Code of Ethics for Chief Executive Officer and Senior Financial Officers Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23,
2006.



|* | Designates a Management Contract
|- | --------------------------------



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

Information
regarding services provided by our independent accountants is included in the Report of the Audit Committee, which is referenced in Item 9 and is provided in the Companys proxy materials for the 2007 annual meeting of shareholders, which
will be filed pursuant to Schedule 14A and is incorporated by reference to this filing.



---

SIGNATURES

In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, we have caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.



|                     |  |                            |  |                                                   |  | 
|-------------------- |  | -------------------------- |  | ------------------------------------------------- |  | 
|                     |  | BOTETOURT BANKSHARES, INC. |  |                                                  
|                     |  |                            | 
|Date: March 29, 2007 |  | By:                        |  | /s/ H. Watts Steger, III                          |  | 
|                     |  | Name:                      |  | H. Watts Steger, III                              |  | 
|                     |  | Title:                     |  | Chairman and Chief Executive Officer              |  | 
|                     |  |                            | 
|                     |  | By:                        |  | /s/ Michelle A. Alexander                         |  | 
|                     |  | Name:                      |  | Michelle A. Alexander                             |  | 
|                     |  | Title:                     |  | Senior Vice President and Chief Financial Officer |  |