BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2010 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2010

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Virginia	000-50548	20-0500300
(State or other jurisdiction of incorporation or organization)	(Commission file number)	(I.R.S. Employer Identification No.)

828 Main Street, Lynchburg, VA		24504
(Address of principal executive offices)		(Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 3,301,262 shares of Common Stock, par value $2.14 per share, were outstanding at November 12, 2010.

Table of Contents


PART I – FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4T.	Controls and Procedures	32

PART II – OTHER INFORMATION		32

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	[Removed and Reserved]	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

SIGNATURES		34

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts)


	(unaudited) 9/30/2010			(audited) 12/31/2009
Assets

Cash and due from banks	$	10,165		$	10,074
Federal funds sold		10,555			21,231

Total cash and cash equivalents		20,720			31,305


Securities held-to-maturity (fair value of $14,977 in 2010 and $15,277 in 2009)		14,361			15,550
Securities available-for-sale, at fair value		33,599			45,239
Restricted stock, at cost		2,234			2,315
Loans, net of allowance for loan losses of $4,955 in 2010 and $4,288 in 2009		321,124			318,452
Premises and equipment, net		8,931			10,240
Software, net		121			218
Interest receivable		1,606			2,179
Other real estate owned, net of valuation allowance of $131 in 2010 and $0 in 2009		2,751			666
Income taxes receivable		489			628
Deferred tax asset		1,244			1,722
Other assets		8,775			9,167


Total assets	$	415,955		$	437,681


Liabilities and Stockholders’ Equity

Deposits
Noninterest bearing demand		45,275			42,112
NOW, money market and savings		235,820			245,066
Time		83,416			88,594

Total deposits		364,511			375,772

Repurchase agreements		7,312			10,710
FHLB borrowings		10,000			20,000
Capital notes		7,000			7,000
Interest payable		134			200
Other liabilities		678			274

Total liabilities	$	389,635		$	413,956


Stockholders’ equity
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,301,262 as of September 30, 2010 and 2,990,788 as of December 31, 2009		7,065			6,400
Additional paid-in-capital		22,705			20,765
Accumulated other comprehensive income (loss)		397			(502	)
Retained earnings		(3,847	)		(2,938	)

Total stockholders’ equity	$	26,320		$	23,725


Total liabilities and stockholders’ equity	$	415,955		$	437,681

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(dollar amounts in thousands, except per share amounts), unaudited


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2010		2009			2010		2009
Interest Income
Loans	$	4,969	$	4,790		$	14,815	$	13,448
Securities
US Government and agency obligations		281		488			1,046		1,218
Mortgage backed securities		54		2			57		45
Municipals		60		21			190		52
Dividends		2		3			25		20
Other (Corporates)		20		51			85		164
Federal Funds sold		6		10			15		20

Total interest income		5,392		5,365			16,233		14,967


Interest Expense
Deposits
NOW, money market savings		719		1,337			2,648		3,353
Time Deposits		525		812			1,719		2,601
Federal Funds purchased		—		—			2		—
FHLB borrowings		75		144			249		434
Reverse repurchase agreements		30		45			95		151
Capital notes 6% due 4/1/2012		105		105			315		208

Total interest expense		1,454		2,443			5,028		6,747


Net interest income		3,938		2,922			11,205		8,220

Provision for loan losses		600		2,500			1,435		3,433


Net interest income after provision for loan losses		3,338		422			9,770		4,787


Other operating income
Mortgage fee income		460		303			1,073		1,043
Service charges, fees, commissions		186		204			653		817
Other		210		109			620		301
Gain (loss) on sale of securities		98		(149	)		320		(3	)


Total other operating income		954		467			2,666		2,158

Other operating expenses
Salaries and employee benefits		1,759		1,286			5,086		3,999
Occupancy		268		250			745		665

See accompanying notes to these consolidated financial statements


Equipment		296		259			829		783
Supplies		98		97			281		284
Professional, data processing, and other outside expense		401		369			1,182		1,056
Marketing		78		78			231		237
Credit expense		99		95			236		268
Loss on sale of assets		18		10			54		21
Other		539		274			1,377		898

Total other operating expenses		3,556		2,718			10,021		8,211


Income (loss) before income taxes		736		(1,829	)		2,415		(1,266	)

Income tax expense (benefit)		230		(625	)		773		(441	)


Net Income (loss)	$	506	$	(1,204	)	$	1,642	$	(825	)


Weighted average shares outstanding		3,301,262		3,249,813			3,295,813		3,248,150


Income (loss) per common share - basic	$	0.15	$	(0.37	)	$	0.50	$	(0.25	)


Income (loss) per common share - diluted	$	0.15	$	(0.37	)	$	0.49	$	(0.25	)

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2010 and 2009

(dollar amounts in thousands, except per share amounts) (unaudited)


	September 30,
	2010			2009
Cash flows from operating activities
Net income (loss)	$	1,642		$	(825	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Depreciation	$	616		$	655

Net amortization and accretion of premiums and discounts on securities		363			324
(Gain) loss on sale of available for sale securities		(310	)		17
(Gain) on call of held to maturity securities		(10	)		(14	)
Loss on sale of assets		54			21
Provision for loan losses		1,435			3,433
Stock compensation expense		2			5
Provision for deferred income taxes		14			—
(Increase) decrease in interest receivable		573			(565	)
(Increase) in other assets		338			(2,631	)
(Increase) decrease in income taxes receivable		139			(441	)
(Decrease) in interest payable		(66	)		(59	)
Increase in other liabilities		404			40
Write down on other real estate owned	$	131		$	—


Net cash provided by (used in) operating activities	$	5,325		$	(40	)


Cash flows from investing activities
Purchases of securities held to maturity	$	—		$	(16,194	)
Proceeds from maturities and calls of securities held to maturity		1,000			6,000
Purchases of securities available for sale		(31,545	)		(52,630	)
Proceeds from maturities and calls of securities available for sale		6,494			9,000

Proceeds from sale of securities available for sale		38,201			14,550
Purchases of bank owned life insurance		—			(5,000	)
Purchase of Federal Reserve Bank stock		(30	)		(150	)

See accompanying notes to these consolidated financial statements


(Purchase) sale of Federal Home Loan Bank stock		111			(106	)
Origination of loans, net of principal collected		(5,576	)		(38,976	)
Recoveries of loans charged off		284			63
Purchases of premises and equipment		(241	)		(1,431	)


Net cash provided by (used in) investing activities	$	8,698		$	(84,874	)


Cash flows from financing activities
Net increase (decrease) in deposits	$	(11,262	)	$	96,180
Net (decrease) in repurchase agreements		(3,398	)		(3,259	)
Net (decrease) in Federal Home Loan Bank advances		(10,000	)		(1,000	)
Proceeds from exercise of stock options		52			16
Proceeds from sale of senior capital notes		—			7,000


Net cash (used in) provided by financing activities	$	(24,608	)	$	98,937


Increase (decrease) in cash and cash equivalents		(10,585	)		14,023

Cash and cash equivalents at beginning of period	$	31,305		$	15,825


Cash and cash equivalents at end of period	$	20,720		$	29,848


Non cash transactions
Transfer of loans to foreclosed assets	$	1,185		$	2,224
Fair value adjustment for securities		1,363			(151	)


Cash transactions
Cash paid for interest	$	5,094		$	6,806
Cash paid for taxes		1,045			—

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

(dollars in thousands)


	Total Shares Outstanding		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Gain (Loss)			Total

Balance at December 31, 2008		2,810,255	$	6,014	$	19,473	$	(776	)	$	(76	)	$	24,635


Net Income		—		—		—		(642	)		—			(642	)

Changes in unrealized gains on securities available for sale net of deferred taxes of $284		—		—		—		—			(431	)		(431	)

Reclassification adjustment for gains included in net income, net of income tax expense of $2		—		—		—		—			5			5

Comprehensive Income														(1,068	)


5% Stock dividend		140,702		301		1,219		(1,520	)		—			—

Exercise of stock options		39,831		85		68		—			—			153

Stock compensation expense		—		—		5		—			—			5

Balance at December 31, 2009		2,990,788	$	6,400	$	20,765	$	(2,938	)	$	(502	)	$	23,725


Net Income		—		—		—		1,642			—			1,642

Changes in unrealized gains on securities available for sale net of deferred taxes of $464		—		—		—		—			899			899

Comprehensive Income														2,541


10% Stock dividend		298,942		640		1,911		(2,551	)		—			—

Exercise of stock options		11,532		25		27		—			—			52

Stock compensation expense		—		—		2		—			—			2

Balance at September 30, 2010		3,301,262	$	7,065	$	22,705	$	(3,847	)	$	397		$	26,320

See accompanying notes to these consolidated financial statements

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the three and nine months ended September 30, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2009. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2009 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb loss in the existing loan portfolio of Bank of the James (the “Bank”), Financial’s wholly-owned subsidiary. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan losses could result in material changes in Financial’s financial condition and results of operations. The Bank’s policies with respect to the methodology for determining the allowance for loan losses involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3 – Earnings Per Share

All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2010, the 5% stock dividend paid by Financial in July 2009, as well as all prior stock dividends.

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of 1999 Financial (the “1999 Plan”) are considered dilutive. The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2010 and 2009.


	Three months ended September 30,					Nine months ended September 30,
	2010		2009			2010		2009

Net income (loss)	$	506,000	$	(1,204,000	)	$	1,642,000	$	(825,000	)

Weighted average number of shares		3,301,262		3,249,813			3,295,813		3,248,150
Options affect of incremental shares		35,074		—			37,313		—


Weighted average diluted shares		3,336,336		3,249,813			3,333,126		3,248,150


Basic EPS (weighted avg shares)	$	0.15	$	(0.37	)	$	0.50	$	(0.25	)


Diluted EPS (Including Option Shares)	$	0.15	$	(0.37	)	$	0.49	$	(0.25	)

For the three month and nine months ended September 30, 2010 there were 205,548 option shares that had an exercise price higher than the market price on September 30, 2010. These shares were not included in calculating the diluted earnings per because their effect was anti-dilutive. Because there was a net loss in the three and nine month period ended September 30, 2009, no option shares were included in calculating the diluted earnings per share.

Note 4 – Stock Based Compensation

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.

The amount of stock-based compensation included within the non-interest expense category for the three and nine months ended September 30, 2010 is $0 and $2,000, respectively, which had no material impact on basic and diluted earnings per share for the same periods.

Stock option plan activity for the nine months ended September 30, 2010 is summarized below:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Average Intrinsic Value

Options outstanding, January 1, 2010		319,555		$	7.96
Exercised		(11,532	)		4.51
Forfeited		—		$	—

Options outstanding, September 30, 2010		308,023		$	8.09		3.47	$	275,673

Options exercisable, September 30, 2010		308,023		$	8.09		3.47	$	275,673

Intrinsic value is calculated by subtracting exercise price of option shares from the market price of underlying shares and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is less than the market price on a given date.

As of September 30, 2010 all compensation expense related to the foregoing stock option plan has been recognized. The Company’s ability to grant additional options shares under the 1999 Plan has expired.

Note 5 – Stock Dividend

On May 18, 2010, the Board of Directors of the Company declared a 10% stock dividend. The stock dividend was paid on July 23, 2010 to shareholders of record as of June 21, 2010. Following the stock dividend, the number of outstanding shares increased by approximately 299,000. The dividend required a reclassification of retained earnings effective May 18, 2010 in the amount of $2,551,000. Of this amount, $640,000 was reclassified as common stock and $1,911,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders’ equity. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 6 – Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

The following table summarizes the Company’s financial assets that were measured at fair value on a recurring basis during the period (in thousands):


			Carrying Value at September 30, 2010
Description	Balance as of September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	33,599	$	—	$	33,599	$	—


			Carrying Value at December 31, 2009
Description	Balance as of December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities	$	45,239	$	—	$	45,239	$	—

Loans held for sale

Loans held for sale are required to be measured in a lower of cost or fair value. Under ASC 820, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At September 30, 2010, the Company had no loans held for sale.

Impaired loans

ASC 820 applies to loans measured for impairment using the practical expedients permitted by ASC 310 “Impairment of a Loan,” including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

All impaired loans are classified as Level 3 unless an appraisal has been obtained within the previous twelve months, in which case they are classified as Level 2.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

The following table summarizes the Company’s impaired loans and OREO measured at fair value on a nonrecurring basis during the period (in thousands).


			Carrying Value at September 30, 2010
Description	Balance as of September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	11,191	$	—	$	1,817	$	9,374
Other real estate owned	$	2,751	$	—	$	2,751	$	—


			Carrying Value at December 31, 2009
Description	Balance as of December 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	12,857	$	—	$	2,636	$	10,221
Other real estate owned	$	666	$	—	$	—	$	666

All OREO properties are classified as Level 3 unless an appraisal has been obtained within the previous twelve months, in which case they are classified as Level 2.

Financial Instruments

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments are as follows (in thousands):


	September 30, 2010				December 31, 2009
	Carrying Amounts		Approximate Fair Values		Carrying Amounts		Approximate Fair Values
Financial assets
Cash and due from banks	$	10,165	$	10,165	$	10,074	$	10,074
Federal funds sold		10,555		10,555		21,231		21,231
Securities
Available-for-sale		33,599		33,599		45,239		45,239
Held-to-maturity		14,361		14,977		15,550		15,277
Loans, net		321,124		324,367		318,452		320,936
Interest receivable		1,606		1,606		2,179		2,179

Financial liabilities
Deposits	$	364,511	$	362,397	$	375,772	$	375,020
FHLB borrowings		10,000		10,279		20,000		20,250
Repurchase agreements		7,312		7,312		10,710		10,710
Capital notes		7,000		7,000		7,000		7,000
Interest payable		134		134		200		200

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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

Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank’s overall interest rate risk.

Note 7 – Capital Notes

Financial has issued capital notes in the amount $7,000,000 (the “Notes”). The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first quarterly interest payment on the Notes was paid on July 1, 2009. No principal payments are due until the Notes mature on April 1, 2012. On the maturity date the principal and all accrued but unpaid interest on the Notes will be due and payable

Note 8 – Investments

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2010 and December 31, 2009 (amounts in thousands):


	Amortized		September 30, 2010 Gross Unrealized
	Costs		Gains		(Losses)			Fair Value
Held-to-Maturity
US Gov’t & Agency obligations	$	14,361	$	616	$	—		$	14,977


Available-for-Sale
US Gov’t & Agency obligations	$	15,330	$	414	$	—		$	15,744
Mortgage-backed securities		12,807		29		(38	)		12,798
Municipals		3,827		222		(22	)		4,027
Other		1,033		—		(3	)		1,030

	$	32,997	$	665	$	(63	)	$	33,599


	Amortized		December 31, 2009 Gross Unrealized
	Costs		Gains		(Losses)			Fair Value
Held-to-Maturity
US Gov’t & Agency obligations	$	15,550	$	—	$	(273	)	$	15,277


Available-for-Sale
US Gov’t & Agency obligations	$	38,958	$	37	$	(553	)	$	38,442
Mortgage-backed securities		220		—		(7	)		213
Municipals		3,822		11		(211	)		3,622
Other		2,999		11		(48	)		2,962

	$	45,999	$	59	$	(819	)	$	45,239

The following table shows the gross unrealized losses and fair value of the Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the date indicated (amounts in thousands):


	Less than 12 months				More than 12 months				Total
September 30, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
Mortgage-backed securities	$	7,499	$	33	$	149	$	5	$	7,648	$	38
Municipals		1,001		18		621		4		1,622		22
Other		—		—		1,030		3		1,030		3

Total	$	8,500	$	51	$	1,800	$	12	$	10,300	$	63


	Less than 12 months				More than 12 months				Total
December 31, 2009	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
U.S. agency obligations	$	47,677	$	826	$	—	$	—	$	47,677	$	826
Mortgage-backed securities		—		—		220		7		220		7
Municipals		3,104		194		239		17		3,343		211
Other		1,466		12		1,033		36		2,499		48

Total	$	52,247	$	1,032	$	1,492	$	60	$	53,739	$	1,092

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover the security’s entire amortized cost basis (even if Financial does not intend to sell the security).

At September 30, 2010, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of September 30, 2010, the Bank owned 10 securities that were being evaluated for other than temporary impairment. 6 of these securities were S&P rated AAA, 3 were S&P rated AA, and 1 was S&P rated A. As of September 30, 2010, 6 of these securities were obligations of government sponsored entities, 3 were municipal bank-qualified issues, and 1 was issued by a publicly traded United States corporation. The securities issued by publicly traded corporations are classified as “Other” in the tables set forth above.

Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because the Bank expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.

Note 9 – Subsequent Event

In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 10 – Recent Accounting Pronouncements

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140”, was adopted into Codification in December 2009 through the issuance of

Accounting Standards Update (ASU) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 was effective for transfers on or after January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance relating to variable interest entities. The new guidance, which was issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 was effective as of January 1, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residual method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 addresses both the interaction of the requirements of Topic 855 with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provisions related to subsequent events. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU,

such as the allowance rollforward and modification disclosures, will be required for periods beginning or after December 15, 2010. The Company is currently assessing the impact that ASU 2010-20 will have on its consolidated financial statements.

On September 15, 2010, the SEC issued Release No. 33-9142, “Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.” This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

On September 17, 2010, the SEC issued Release No. 33-9144, “Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis.” This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosures,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the James Financial Group, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

GENERAL

Critical Accounting Policies

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

The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 Contingencies, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) ASC 310 Impairment of a Loan, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 – “Selected Loan Loss Allowance Methodology and Documentation Issues” and the Federal Financial Institutions Examination Council’s interagency guidance, “Interagency Policy Statement on the Allowance for Loan and Lease Losses” (the “FFIEC Policy Statement”). See “Management Discussion and Analysis Results of Operations – Allowance for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.

Overview

Financial is a bank holding company with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) on October 3, 2003 to serve as a bank holding company of the Bank. Financial had no business until January 1, 2004 when it acquired the common stock of the Bank through a statutory share exchange on a one-for-one basis. The Bank, through its BOTJ Investment Services Division, offers brokerage, fixed and variable annuity products, and related services to the public through a third-party broker-dealer and, through its BOTJ Mortgage Division, originates residential mortgages. The Bank also wholly-owns BOTJ Insurance, Inc. (“BOTJ Insurance”) through which we act as an agent for insurance and annuity products. In addition, Financial owns BOTJ Investment Group, Inc. The Bank (and BOTJ Insurance) and BOTJ Investment Group, Inc. are our only subsidiaries and primary assets. Financial conducts its business through the following lines: community banking through the Bank, insurance agency services through BOTJ Insurance, mortgage origination through the Mortgage Division of the Bank, and securities brokerage services through the Investment Services Division of the Bank.

Financial declared a 10% stock dividend on May 18, 2010 which was paid on July 23, 2010 to shareholders of record on June 21, 2010.

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell

County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area.

The Bank’s principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.com.

In April 2006, we began providing securities brokerage services to Bank customers and others through BOTJ Investment Group, Inc. Since March 2010 we have been providing those services through the Investment Services Division of the Bank. The Investment Services Division provides the services through an agreement with a third party, registered broker-dealer. Under this agreement, the broker-dealer may operate service centers in one or more branches of the Bank, which centers are staffed by at least one dual employee of the Bank and the broker-dealer. As of the date hereof, the Investment Services Division’s only center is located in the Church Street office. The Bank receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, we have been providing these services and conducting business for approximately four years and the financial impact on the consolidated financials of the Company has been minimal.

BOTJ Insurance was incorporated under the laws of the Commonwealth of Virginia in 2008. In September 2008, BOTJ Insurance began offering its services to the public from space in the Main Street Branch. Currently BOTJ Insurance is a stand-alone agency with no employees.

Our operating results depend primarily upon the Bank’s net interest income, which is determined by the difference between (i) interest and dividend income on earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. The Bank’s net income also is affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and controlling costs.

The Bank now services its banking customers through the following nine full service branch locations in the Region 2000 area.

•

The main office located at 828 Main Street in Lynchburg (opened October 2004) (the “Main Street Office”),

•

A branch located at 615 Church Street in Lynchburg (opened July 1999) (the “Church Street Branch”),

•

A branch located at 5204 Fort Avenue in Lynchburg (opened November 2000) (the “Fort Avenue Branch”),

•

A branch located on South Amherst Highway in Amherst County (opened June 2002) (the “Madison Heights Branch”),

•

A branch located at 17000 Forest Road in Forest (opened February 2005) (the “Forest Branch”),

•

A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (opened April 2006) (the “Boonsboro Branch”),

•

A branch located at 164 South Main Street, Amherst, Virginia (opened January 2007) (the “Amherst Branch”), and

•

A branch located at 1405 Ole Dominion Boulevard in the City of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the “Bedford Branch”).

•

A branch located at 1110 Main Street, Altavista, Virginia (relolcated from temporary branch in June 2009) (the “Altavista Branch”).

The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia 24503.

In addition, the Bank, through its mortgage division, originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 1152 Hendricks Store Road, Moneta, Virginia.

The Investment Services Division operates primarily out of its office located at the Church Street Branch.

The Bank continuously evaluates areas located within Region 2000 to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the Bank intends to open a location on property that it previously purchased at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has determined that the existing structures on the Timberlake site are insufficient for use as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to 2011. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit this property will be between $1,300,000 and $1,700,000.

Although the Bank cannot predict with certainty the financial impact of each new branch, management generally anticipates that each new branch will become profitable within 12 to 18 months of operation.

Subject to terms acceptable to the Bank, the Bank may consider entering into sale-leaseback arrangements for one or more of its branches.

Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months. Future branch openings are subject to regulatory approval.

OFF-BALANCE SHEET ARRANGEMENTS

The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and or use these commitments.

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


	September 30, 2010 (in thousands)
Commitments to extend credit	$	52,962
Letters of Credit		3,402


Total	$	56,364

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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit 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 loans to customers. Collateral is required in instances that the Bank deems necessary.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2010 and December 31, 2009 and the results of operations of Financial for the three and nine month periods ended September 30, 2010 and 2009. This discussion should be read in conjunction with the financial statements included elsewhere herein and should be read in the context of the length of time for which the Bank has been operating.

All financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Financial Condition Summary

September 30, 2010 as Compared to December 31, 2009

Total assets were $415,955,000 on September 30, 2010 compared with $437,681,000 at December 31, 2009, a decrease of 4.96%. The decrease in total assets is due primarily to a decrease in cash, cash equivalents, and available-for-sale securities resulting from a decrease in deposits, as explained in the following paragraph and the repayment of a Federal Home Loan Bank of Atlanta (FHLBA) advance in the amount of $10,000,000.

Total deposits decreased from $375,772,000 as of December 31, 2009 to $364,511,000 on September 30, 2010, a decrease of 3.00%. Total deposits began to decrease shortly after March 1, 2010, the date on which the Bank reduced the rate paid on its “2010 Savings Account” from a guaranteed minimum of 3.00% APY to the current 1.25% APY. Effective November 1, 2010, the Bank further reduced the rate on the 2010 Savings Account from 1.25% APY to 1.00% APY The Bank lowered the rate to decrease its cost of funds and anticipates that while deposits may decrease further as a result of this

rate reduction, the Bank’s net interest margin and the cost of funds will improve. The balance of non-FDIC insured sweep accounts (repurchase agreements) decreased to $7,312,000 on September 30, 2010 from $10,710,000 on December 31, 2009 in large part because of a decrease in interest rates paid on these accounts.

To complement deposits in funding asset growth and due to the attractive rates on these funds, the Bank has funded past asset growth with short to medium term advances from the FHLBA. As of September 30, 2010, the principal balance of FHLBA borrowings was $10,000,000 as compared to $20,000,000 on December 31, 2009. On February 5, 2010, a $10,000,000 advance matured and was repaid to FHLBA, which accounts for the decrease. The remaining $10,000,000 in FHLBA advances begin to mature in 2013.

Total loans increased to $326,079,000 on September 30, 2010 from $322,740,000 on December 31, 2009. Loans, net of unearned income and allowance, increased to $321,129,000 on September 30, 2010 from $318,452,000 on December 31, 2009, an increase of 0.84%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):


	September 30, 2010					December 31, 2009					September 30, 2009
	Amount		Percentage			Amount		Percentage			Amount		Percentage
Commercial	$	58,967		18.00	%	$	60,045		18.60	%	$	60,901		19.29	%
Real estate construction		27,192		8.34	%		32,149		9.96	%		35,131		11.13	%
Real estate mortgage		178,965		54.88	%		169,220		52.43	%		161,916		51.29	%
Consumer		58,178		17.85	%		58,756		18.21	%		55,568		17.60	%
Other		3,047		0.93	%		2,570		0.80	%		2,154		0.68	%

Total loans	$	326,079		100.00	%	$	322,740		100.00	%	$	315,670		100.00	%

Total nonperforming assets, which consist of non-accrual loans and other real estate owned (“OREO”) increased to $9,731,000 on September 30, 2010 from $7,207,000 on December 31, 2009. Non-accrual loans increased to $6,980,000 on September 30, 2010 from $5,687,000 on December 31, 2009. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses”, management has provided for the anticipated losses on these loans in the loan loss reserve and consequently does not anticipate that the increase in non-accrual loans will have a material impact on the financial condition of the Bank.

OREO represents real property owned by the Bank acquired either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. On December 31, 2009, the Bank was carrying 4 OREO properties on its books at a value of $666,000. During the quarter ended September 30, 2010, the Bank acquired 8 additional OREO properties that are being carried on the books at a value of $1,303,000. Thus, as of September 30, 2010, the Bank was carrying 12 OREO properties on its books at a value of $2,751,000. Since September 30, 2010, the Bank has added no additional OREO properties. The OREO properties are available for sale and are being actively marketed.

The following tables set forth information regarding impaired and non-accrual loans as of September 30, 2010 and December 31, 2009:


	Impaired & Non-Accrual Loans
	(dollars in thousands)
	September 30, 2010		December 31, 2009
Impaired loans without a valuation allowance	$	20,806	$	28,689
Impaired loans with a valuation allowance		14,123		14,938

Total impaired loans	$	34,929	$	43,627

Valuation allowance related to impaired loans	$	2,932	$	2,081
Total non-accrual loans	$	6,980	$	5,687
Total loans past due ninety days or more and still accruing	$	—	$	854

The decrease in impaired loans as reflected in the above table was a result of the continual evaluation of the loan portfolio in light of current economic conditions and the value of the underlying collateral securing loans. The results of the evaluation led management to downgrade certain relationships which resulted in a $600,000 provision in the third quarter. The allowance for loan losses is discussed in more detail below.


	Average Investment in Impaired Loans
	(dollars in thousands)
	Period Ended
	September 30, 2010		December 31, 2009

Average investment in impaired loans	$	40,350	$	30,642

Interest income recognized on impaired loans	$	1,238	$	2,039

Interest income recognized on a cash basis on impaired loans	$	1,357	$	1,932

No non-accrual loans were excluded from impaired loan disclosure under current accounting rules at September 30, 2010 and December 31, 2009. The amount of troubled debt restructurings (“TDR”) included at September 30, 2010 and December 31, 2009 was $1,413,000 and $741,000, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $781,000 and $641,000, through September 30, 2010 and December 31, 2009, respectively. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.

Cash and cash equivalents decreased to $20,720,000 on September 30, 2010 from $31,305,000 on December 31, 2009. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This decrease is due in part to a decrease in the balance in 2010 Savings Accounts, routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.

Securities held-to-maturity decreased slightly to $14,361,000 on September 30, 2010 from $15,550,000 on December 31, 2009. Securities available-for-sale decreased to $33,599,000 on September 30, 2010 from $45,239,000 on December 31, 2009. During the nine months ended September 30, 2010 the Bank received $6,494,000 in proceeds from maturities and/or calls of securities available-for-sale and has received proceeds from sale of securities available-for sale totaling $38,201,000. The Bank purchased $31,545,000 in securities available-for-sale during the same period. The decrease from December 31, 2009 in securities available-for-sale was primarily due to the liquidation of those securities to accommodate withdrawals from the 2010 Savings Accounts following the reduction in the rate paid on those accounts.

Financial’s investment in FHLBA stock totaled $1,426,000 at September 30, 2010, as compared to $1,537,000 on December 31, 2009. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Effective August 17, 2010, the FHLBA resumed the repurchase of Subclass B2 activity-based stock. In the quarter ended September 30, 2010, the FHLBA repurchased $111,000 of its stock from the Bank.

At September 30, 2010, Financial had liquid assets of approximately $54,319,000 in the form of cash and available-for-sale investments. Management believes that liquid assets were adequate at September 30, 2010. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

In connection with a private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the “Notes”) in 2009. The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. No principal payments are due until April 1, 2012, the date on which the Notes mature and the principal and all accrued but unpaid interest on the Notes will be due and payable. During the three months ended September 30, 2010, Financial made an interest payment on the Notes totaling $105,000.

Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity.

At September 30, 2010, the Bank had a leverage ratio of 7.73%, a Tier 1 risk-based capital ratio of 10.05% and a total risk-based capital ratio of 11.31%. As of September 30, 2010 and December 31, 2009 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of September 30, 2010 and December 31, 2009:

Bank Level Only Capital Ratios


	September 30, 2010		December 31, 2009
Analysis of Capital (in 000’s)
Tier 1 Capital:
Common stock	$	3,742	$	3,742
Surplus		19,325		19,323
Retained earnings		8,751		6,825

Total Tier 1 capital	$	31,818	$	29,890


Tier 2 Capital:
Allowance for loan losses	$	3,968	$	4,036

Total Tier 2 Capital:	$	3,968		4,036

Total risk-based capital	$	35,786	$	33,926


Risk weighted assets	$	316,462	$	322,662

Average total assets	$	411,828	$	434,110


	Actual						Regulatory Benchmarks
	September 30, 2010			December 31, 2009			For Capital Adequacy Purposes			For Well Capitalized Purposes
Capital Ratios:
Tier 1 capital to average total assets ratio (leverage ratio)		7.73	%		6.89	%		4.00	%		5.00	%
Tier 1 risk based capital ratio		10.05	%		9.26	%		4.00	%		6.00	%
Total risk-based capital ratio		11.31	%		10.51	%		8.00	%		10.00	%

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $500,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis would no longer be comparable to the capital ratios of the Bank because the proceeds of the private placement do not qualify as equity capital on a consolidated basis.

Results of Operations

Comparison of the three and nine Months Ended September 30, 2010 and 2009

Earnings Summary

Financial had net income of $506,000 and $1,642,000 for the three and nine months ended September 30, 2010 respectively, compared to a net loss of $1,204,000 and $825,000 for the comparable periods in 2009. The basic and diluted earnings per common share for the three months ended September 30, 2010 were $0.15 compared to basic and diluted loss per share of $0.37 for the same period in 2009. The basic and diluted earnings per common share for the nine months ended September 30, 2010 were $0.50 and $0.49, respectively, compared with a basic and diluted loss per share of $0.25 for the same period in 2009. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2010, the 5% stock dividend paid by Financial in July 2009 and all prior stock dividends.

The increase in net income was due in large part to a decrease in the interest paid on 2010 Savings Accounts and certificates of deposit.

These operating results represent an annualized return on stockholders’ equity of 7.91% and 8.87% for the three and nine months ended September 30, 2010, compared with an annualized negative return of 18.42% and 4.31% in the same periods in 2009. The Company had an annualized return on average assets for the three and nine months ended September 30, 2010 of 0.49% and 0.53%, respectively, compared with an annualized negative return of 1.16% and 0.28% for the same periods in 2009.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $5,392,000 and $16,233,000 for the three and nine months ended September 30, 2010 from $5,365,000 and $14,967,000 for the same periods in 2009, an increase of 0.50% and 8.46% from the same periods in 2009. The rate on total average earning assets increased slightly from 5.51% and 5.57% for the three and nine month periods ended September 30, 2009 to 5.62% and 5.66% for the three and nine months ended September 30, 2010 in part because the Bank invested a greater percentage of its earning assets in loans and investment securities rather than federal funds. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2010 and may negatively impact our interest income.

Interest expense decreased to $1,454,000 and $5,028,000 for the three and nine months ended September 30, 2010 from $2,443,000 and $6,747,000 for the same periods in 2009, decreases 40.48% and 25.48%, respectively. The decreases in interest expense resulted in large part from a decrease in both the balances of the 2010 Savings Account and the rate paid on those balances.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2010 was $3,938,000 and $11,205,000 compared with $2,922,000 and $8,220,000 for the same periods in 2009. The net interest margin increased to 4.10 % and 3.91% for the three and nine months ended September 30, 2010 from 3.00% and 3.06% in the same periods a year ago. The increase in net interest income for the three and nine months ended September 30, 2010 as compared with the comparable three and nine months in 2009 was due to a decrease in the average rate paid on deposits, primarily resulting from a decrease in the balance in and rate paid on the 2010 Savings Account.

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 30.

Non-Interest Income

Non-interest income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency, increased to $856,000 (exclusive of a gain of $98,000 on the sale of securities) and $2,346,000 (exclusive of a gain of $320,000 on the sale of securities) for the three and nine months ended September 30, 2010 from $616,000 (exclusive of a loss of $149,000 on the sale of securities) and $2,161,000 (exclusive of a loss of $3,000 on the sale of securities) for the comparable periods in 2009. This increase for the three and nine months ended September 30, 2010 as compared to the same periods last year was due primarily to increased mortgage originations resulting from the low interest rate environment as well as increased income earned on the bank-owned life insurance portfolio.

The Bank, through the Mortgage Division, originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. As part of the Bank’s overall risk

management strategy, all of the loans originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions. The Mortgage Division assumes no credit or interest rate risk on these mortgages.

Management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2010. Management expects that low rates coupled with the Mortgage Division’s reputation in Region 2000 will allow us to continue to grow revenue at the Mortgage Division. Revenue from mortgage origination fees increased in both the three and nine month periods ended September 30, 2010 as compared to the same periods for 2009. Management believes that regulatory pressure may result in a decreased number of competitors to the Mortgage Division and this could result in an increase in market share.

We anticipate that Investment Services Division and the Mortgage Division will continue to contribute non-interest income in the remainder of 2010.

In September, 2008, the Company began operating BOTJ Insurance, Inc. (“BOTJ Insurance”), a wholly-owned subsidiary of the Bank. Currently BOTJ Insurance is a stand-alone agency with no employees. Management does not expect BOTJ Insurance to have a material impact on non-interest income in the foreseeable future.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2010 increased to $3,556,000 and $10,021,000, or 30.83% and 22.04%, from $2,718,000 and $8,211,000 for the comparable periods in 2009. These increases in non-interest expense from the comparable periods in 2009 can be attributed to increased compensation and occupancy expenses and an increase in the FDIC assessment.

Total personnel expense was $1,759,000 and $5,086,000 for the three and nine month periods ended September 30, 2010 as compared to $1,286,000 and $3,999,000 for the same periods in 2009. Compensation for some employees of the Mortgage Division and Investment Division is commission-based and therefore subject to fluctuation. In addition, the application of current accounting rules had the effect of reducing personnel expense. Current accounting rules require the incremental direct costs of originating and closing a loan to be deferred and amortized over the life of the loan adjusting the net yield. This deferral of loan costs had the effect of deferring approximately $105,000 and $306,000 in salary expense, respectively, during the three and nine months ended September 30, 2010 as compared with a deferred salary expense of $304,000 and $903,000 for the same periods in 2009. After adding back the cost deferral under current accounting rules, our total salary and benefit expense increased by $274,000 and $490,000 for the three and nine month periods ended September 30, 2010 from the comparable periods in 2009.

The Bank also had increases in depreciation expense and other operating expenses, all of which are related to the growth of the Bank’s fixed asset base and increased market coverage in Region 2000.

During the quarter ended September 30, 2010, the FDIC premium expense increased to $291,000 from $138,000 for the three months ended September 30, 2009. FDIC Assessment payments have increased in large part because of i) FDIC coverage on accounts has increased from $100,000 to $250,000; ii) the FDIC is charging additional premiums for participation in the Transactional Account Guarantee Program (TAGP); and iii) an increase in the total base assessment rates needed to replenish the fund.

Allowance for Loan Losses

The provision to the allowance for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $600,000 and $1,435,000 to the allowance for loan loss for the three and nine months ended September 30, 2010 compared to provision of $2,500,000 and $3,433,000 for the comparable periods in 2009.

The decrease in the loan loss provision for the quarter ended September 30, 2010 as compared to the same quarter in 2009 was due to the following two factors:

•

In 2009, the quality of certain assets, primarily commercial development loans and residential speculative housing construction loans, were impacted by a decline in the value of the collateral supporting the loan. Management’s initial evaluation of these assets classes resulted in the increased provision in the quarter ended September 30, 2009.

•

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. The analysis resulted in a decrease in the provision for the quarter ended September 30, 2010 as compared to the same quarter in 2009.

Management believes that the current allowance for loan loss of $4,955,000 (or 1.52% of total loans) at September 30, 2010 is adequate.

The following sets forth the reconciliation of the allowance for loan loss:


	Three months ended September 30, (in thousands)						Nine months ended September 30, (in thousands)
	2010			2009			2010			2009
Balance, beginning of period	$	4,708		$	3,323		$	4,288		$	2,859
Provision for loan losses		600			2,500			1,435			3,433
Loans charged off		(363	)		(555	)		(1,052	)		(1,055	)
Recoveries of loans charged off		10			32			284			63

Net Charge Offs		(353	)		(523	)		(768	)		(992	)

Balance, end of period	$	4,955		$	5,300		$	4,955		$	5,300

Net charge offs decreased from $523,000 for the three months ended September 30, 2009 to $353,000 for the same period in 2010. Net charge offs decreased from $992,000 for the nine months ended September 30, 2009 to $768,000 for the same period in 2010. Charged off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. The decreased balance as of September 30, 2010 as compared to September 30, 2009 reflects the charge-offs that occurred in the fourth quarter of 2009.

Income Taxes

For the three and nine months ended September 30, 2010, Financial had an income tax expense of $230,000 and $773,000, respectively.

Legislation

The FDIC imposed an emergency special assessment of 5 basis points on all insured financial institutions, based on assets minus Tier 1 capital as of September 30, 2009. This special assessment of $180,000 was accrued and expensed in the second quarter of 2009 but paid by us on September 30, 2009. Subsequently, the FDIC required insured financial institutions to prepay three years of regular FDIC premiums to recapitalize the insurance fund. We made this payment in December 2009, but are amortizing the prepayment over a three year period.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) was signed into law. The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that are significantly larger than Financial. The Dodd-Frank Reform Act directs applicable regulatory authorities to promulgate regulations implementing its provisions, and its effect on Financial and on the financial services industry as a whole will be clarified as those regulations are issued. Major elements of the Dodd-Frank Reform Act include:

•

A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum Deposit Insurance Fund reserve requirement for banks having consolidated assets in excess of $10 billion from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits.

•

New disclosure and other requirements relating to executive compensation and corporate governance.

•

Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

•

The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

•

The development of regulations to limit debit card interchange fees.

•

The future elimination of trust preferred securities as a permitted element of Tier 1 capital.

•

The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

•

The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

•

Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC.

•

Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

•

The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.

Financial continues to evaluate the potential impact of the Dodd-Frank Reform Act.

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended September 30, 2010 and 2009


	2010								2009
	Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid			Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid
ASSETS

Loans, including fees	$	327,354		$	4,969		6.02	%	$	311,175		$	4,790		6.11	%
Federal funds sold		9,361			6		0.25	%		16,184			10		0.25	%
Securities		41,913			415		3.94	%		56,288			562		3.96	%
Federal agency equities		2,200			2		0.18	%		2,198			3		0.54	%
CBB equity		116			—		—			116			—		—


Total earning assets		380,944			5,392		5.62	%		385,961			5,365		5.51	%


Allowance for loan losses		(4,788	)							(3,247	)
Non-earning assets		35,690								34,640


Total assets	$	411,846							$	417,354


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Demand interest bearing	$	56,626		$	145		1.02	%	$	44,403		$	126		1.13	%
Savings		175,902			574		1.29	%		169,008			1,211		2.84	%
Time deposits		82,057			525		2.54	%		96,650			812		3.33	%


Total interest bearing deposits		314,585			1,244		1.57	%		310,061			2,149		2.75	%

Other borrowed funds
Repurchase agreements		8,581			30		1.39	%		12,314			45		1.45	%
Other borrowings		10,000			75		2.98	%		20,000			144		2.86	%
Capital Notes		7,000			105		6.00	%		7,000			105		6.00	%

Total interest-bearing liabilities		340,166			1,454		1.70	%		349,375			2,443		2.77	%

Non-interest bearing deposits		46,060								42,483
Other liabilities		231								422


Total liabilities		386,457								392,280

Stockholders’ equity		25,389								25,074


Total liabilities and Stockholder’s equity	$	411,846							$	417,354


Net interest earnings				$	3,938							$	2,922


Net interest margin							4.10	%							3.00	%


Interest spread							3.92	%							2.74	%

Net Interest Margin Analysis

Average Balance Sheets

For the Nine Months Ended September 30, 2010 and 2009


	2010								2009
	Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid			Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid
ASSETS

Loans, including fees	$	327,336		$	14,815		6.05	%	$	298,043		$	13,448		6.03	%
Federal funds sold		7,593			15		0.26	%		12,829			20		0.21	%
Securities		45,879			1,378		4.02	%		46,181			1,479		4.28	%
Federal agency equities		2,200			25		1.46	%		2,099			20		1.27	%
CBB equity		116			—		—			116			—		—


Total earning assets		383,124			16,233		5.66	%		359,268			14,967		5.57	%


Allowance for loan losses		(4,599	)							(3,073	)
Non-earning assets		34,806								31,949


Total assets	$	413,331							$	388,144


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
Demand interest bearing	$	52,791		$	428		1.08	%	$	44,852		$	378		1.13	%
Savings		180,292			2,220		1.65	%		139,785			2,975		2.85	%
Time deposits		83,416			1,719		2.76	%		98,627			2,601		3.53	%


Total interest bearing deposits		316,499			4,367		1.84	%		283,264			5,954		2.81	%

Other borrowed funds
Fed funds purchased		315			2		0.85	%		—			—		—
Repurchase agreements		8,967			95		1.42	%		12,797			151		1.58	%
Other borrowings		11,282			249		2.95	%		20,381			434		2.85	%
Capital Notes		7,000			315		6.00	%		4,676			208		5.95	%

Total interest-bearing liabilities		344,063			5,028		1.95	%		321,118			6,747		2.81	%

Non-interest bearing deposits		44,370								39,495
Other liabilities		161								2,636


Total liabilities		388,594								363,249

Stockholders’ equity		24,737								24,895


Total liabilities and Stockholder’s equity	$	413,331							$	388,144


Net interest earnings				$	11,205							$	8,220


Net interest margin							3.91	%							3.06	%


Interest spread							3.71	%							2.76	%

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T.

Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes during the quarter ended September 30, 2010, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

The Bank is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

Item 1A.

Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 26, 2010.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

[Removed and Reserved]

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

The following are filed as Exhibits to this Form 10-Q:


Exhibit No.		Description of Exhibit
31.1		Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010

32.1		Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 12, 2010

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BANK OF THE JAMES FINANCIAL GROUP, INC.

Date: November 12, 2010	By	/S/ Robert R. Chapman III Robert R. Chapman III, President (Principal Executive Officer)

Date: November 12, 2010	By	/S/ J. Todd Scruggs J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Index of Exhibits


Exhibit No.		Description of Exhibit
31.1		Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 12, 2010

32.1		Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated November 12, 2010