BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2016 March (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 March 31, 2016

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Virginia	001-35402	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). x 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: 4,378,436 shares of Common Stock, par value $2.14 per share, were outstanding at May 9, 2016.

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	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	50

PART II – OTHER INFORMATION		51

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	51

SIGNATURES		52

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) (2016 unaudited)


	March 31, 2016		December 31, 2015
Assets
Cash and due from banks	$	16,104	$	15,952
Federal funds sold		3,580		12,703

Total cash and cash equivalents		19,684		28,655
Securities held-to-maturity (fair value of $2,643 in 2016 and $2,649 in 2015)		2,517		2,519
Securities available-for-sale, at fair value		37,763		35,996
Restricted stock, at cost		1,373		1,313
Loans, net of allowance for loan losses of $4,750 in 2016 and $4,683 in 2015		433,701		430,445
Loans held for sale		3,706		1,964
Premises and equipment, net		9,861		10,007
Interest receivable		1,235		1,248
Cash value - bank owned life insurance		9,846		9,781
Other real estate owned, net of valuation allowance		2,355		1,965
Income taxes receivable		678		1,096
Deferred tax asset, net		1,071		1,399
Other assets		821		755

Total assets	$	524,611	$	527,143

Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand	$	92,769	$	91,325
NOW, money market and savings		234,817		232,864
Time		145,865		143,421

Total deposits		473,451		467,610
Capital notes		—		10,000
Interest payable		81		61
Other liabilities		1,623		1,276

Total liabilities	$	475,155	$	478,947

Commitments and Contingencies
Stockholders’ equity

See accompanying notes to these consolidated financial statements


	March 31, 2016		December 31, 2015
Preferred stock; authorized 1,000,000 shares; none issued and outstanding as of March 31, 2016 and December 31, 2015	$	—	$	—
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,378,436 as of March 31, 2016 and December 31, 2015		9,370		9,370
Additional paid-in-capital		31,495		31,495
Retained earnings		8,544		7,920
Accumulated other comprehensive income (loss)		47		(589	)

Total stockholders’ equity	$	49,456	$	48,196

Total liabilities and stockholders’ equity	$	524,611	$	527,143

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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


	For the Three Months Ended March 31,
	2016		2015
Interest Income
Loans	$	4,978	$	4,628
Securities
US Government and agency obligations		139		140
Mortgage backed securities		52		10
Municipals - taxable		34		25
Municipals - tax exempt		10		10
Dividends		6		5
Other (Corporates)		6		1
Interest bearing deposits		6		2
Federal Funds sold		4		5

Total interest income		5,235		4,826

Interest Expense
Deposits
NOW, money market savings		136		122
Time Deposits		400		332
Federal Funds purchased		4		1
FHLB borrowings		—		25
Capital notes		8		150

Total interest expense		548		630

Net interest income		4,687		4,196
Provision for loan losses		200		100

Net interest income after provision for loan losses		4,487		4,096

Noninterest income
Gain on sales of loans held for sale, net		491		523
Service charges, fees and commissions		372		318
Increase in cash value of life insurance		65		67
Other		15		10
Gain on sales of available-for-sale securities, net		65		29

Total noninterest income		1,008		947

Noninterest expenses
Salaries and employee benefits		2,237		2,083
Occupancy		332		289
Equipment		319		299
Supplies		119		96
Professional, data processing, and other outside expense		662		486

See accompanying notes to these consolidated financial statements


	For the Three Months Ended March 31,
	2016		2015
Marketing		119		76
Credit expense		83		73
Other real estate expenses		1		5
FDIC insurance expense		92		74
Other		226		199

Total noninterest expenses		4,190		3,680

Income before income taxes		1,305		1,363
Income tax expense		418		436

Net Income	$	887	$	927

Weighted average common shares outstanding - basic		4,378,436		3,371,616

Weighted average common shares outstanding - diluted		4,378,436		3,371,616

Earnings per common share - basic	$	0.20	$	0.27

Earnings per common share - diluted	$	0.20	$	0.27

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2016 and 2015

(dollar amounts in thousands) (unaudited)


	For the Three Months Ended March 31,
	2016			2015
Net Income	$	887		$	927

Other comprehensive income:
Unrealized gains on securities available-for-sale		1,029			338
Tax effect		(350	)		(115	)
Reclassification adjustment for gains included in net income (1)		(65	)		(29	)
Tax effect (2)		22			10

Other comprehensive income, net of tax		636			204

Comprehensive income	$	1,523		$	1,131

(1)	Gains are included in “gain on sales of available-for-sale securities, net” on the consolidated statements of income.

(2)	The tax effect on these reclassifications is reflected in “income tax expense” on the consolidated statements of income.

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(dollar amounts in thousands) (unaudited)


	For the Three Months Ended March 31,
	2016			2015
Cash flows from operating activities
Net Income	$	887		$	927
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		196			193
Net amortization and accretion of premiums and discounts on securities		35			12
(Gain) on sales of available-for-sale securities		(65	)		(29	)
(Gain) on sales of loans held for sale		(491	)		(523	)
Provision for loan losses		200			100
(Increase) in cash value of life insurance		(65	)		(67	)
Decrease in interest receivable		13			82
(Increase) in other assets		(66	)		(142	)
Decrease in income taxes receivable		418			437
Increase in interest payable		20			24
Increase in other liabilities		347			36
Proceeds from sales of loans held for sale		14,984			17,178
Origination of loans held for sale		(16,235	)		(17,367	)

Net cash provided by operating activities	$	178		$	861

Cash flows from investing activities
Purchases of securities available-for-sale	$	(5,715)		$	(5,740)
Proceeds from maturities, calls and paydowns of securities available-for-sale		381			1,000
Proceeds from sale of securities available-for-sale		4,563			5,360
(Purchase) redemption of Federal Home Loan Bank stock		(60	)		426
Origination of loans, net of principal collected		(3,846	)		(10,224	)
Purchases of premises and equipment		(50	)		(82	)

Net cash (used in) investing activities	$	(4,727)		$	(9,260)

Cash flows from financing activities
Net increase in deposits	$	5,841		$	39,309
Net (decrease) in federal funds purchased		—			(3,189	)
Net (decrease) in Federal Home Loan Bank advances		—			(10,000	)
Dividends paid to common stockholders		(263	)		(169	)
Retirement of capital notes		(10,000	)		—

Net cash (used in) provided by financing activities	$	(4,422)		$	25,951

(Decrease) increase in cash and cash equivalents		(8,971	)		17,552
Cash and cash equivalents at beginning of period	$	28,655		$	12,743

Cash and cash equivalents at end of period	$	19,684		$	30,295

See accompanying notes to these consolidated financial statements


	For the Three Months Ended March 31,
	2016		2015
Non cash transactions
Transfer of loans to other real estate owned	$	390	$	1,125
Fair value adjustment for securities		964		309
Cash transactions
Cash paid for interest	$	528	$	606
Cash paid for taxes		—		—

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2016 and 2015

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


	Total Shares Outstanding		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2014		3,371,616	$	7,215	$	22,919	$	5,031		$	(389)	$	34,776

Net Income		—		—		—		927			—		927
Dividends paid on common stock ($0.05 per share)		—		—		—		(169	)		—		(169	)
Other comprehensive income		—		—		—		—			204		204

Balance at March 31, 2015		3,371,616	$	7,215	$	22,919	$	5,789		$	(185)	$	35,738

Balance at December 31, 2015		4,378,436	$	9,370	$	31,495	$	7,920		$	(589)	$	48,196

Net Income		—		—		—		887			—		887
Dividends paid on common stock ($0.06 per share)		—		—		—		(263	)		—		(263	)
Other comprehensive income		—		—		—		—			636		636

Balance at March 31, 2016		4,378,436	$	9,370	$	31,495	$	8,544		$	47	$	49,456

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 March 31, 2016 and for the three months ended March 31, 2016 and 2015 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, 2015. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2015 included in Financial’s Annual Report on Form 10-K. Results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The Company’s primary market area consists of the area commonly referred to as Region 2000 which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently, the Company has expanded into Charlottesville, Roanoke, and Harrisonburg.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s estimate of an amount that is adequate to absorb probable losses inherent in the 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, 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 Common Share (EPS)

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 in calculating diluted earnings per share. The following is a summary of the earnings per share calculation for the three months ended March 31, 2016 and 2015.

Note 3 – Earnings Per Share (continued)


	Three Months Ended March 31,
	2016		2015
Net income	$	887,000	$	927,000
Basic EPS weighted average shares outstanding		4,378,436		3,371,616
Incremental shares attributable to stock options		—		—

Diluted EPS weighted average shares outstanding		4,378,436		3,371,616

Basic earnings per common share	$	0.20	$	0.27

Diluted earnings per common share	$	0.20	$	0.27

The following table sets forth the incremental shares associated with option shares that were not included in calculating the diluted earnings because their effect was anti-dilutive:


	Three Months Ended March 31,
	2016		2015
Incremental shares excluded from calculating diluted EPS because their effect was anti-dilutive		636		66,752

The foregoing shares were anti-dilutive because the exercise price of the options was greater than the market price on March 31, 2016 and 2015.

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.

Note 4 – Stock Based Compensation (continued)

Stock option plan activity for the three months ended March 31, 2016 is summarized below:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Intrinsic Value
Options outstanding, January 1, 2016		636	$	12.79
Granted		—		—
Exercised		—		—
Forfeited		—		—

Options outstanding, March 31, 2016		636		12.79		2.17	$	—

Options exercisable, March 31, 2016		636	$	12.79		2.17	$	—

Intrinsic value is calculated by subtracting the exercise price of option shares from the market price of underlying shares as of March 31, 2016 and multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is greater than the market price on a given date.

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 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Note 5 – Fair Value Measurements (continued)

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

•

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, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities, excluding restricted investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Bankers’ Bank stock are based on quoted prices available in an active market. If quoted prices are available, these 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.

Restricted securities noted above are classified as such because their ownership is restricted to certain types of entities and there is no established market for their resale. When the stock is repurchased, the shares are repurchased at the stock’s book value; therefore, the carrying amount of restricted securities approximate fair value. Restricted securities are considered to be Level 2.

Note 5 – Fair Value Measurements (continued)


			Carrying Value at March 31, 2016 (in thousands)
Description	Balance as of March 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
US agency obligations	$	16,982	$	—	$	16,982	$	—
Mortgage-backed securities		15,108		—		15,108		—
Municipals		5,153		—		5,153		—
Corporates		520				520

Total available-for-sale securities	$	37,763	$	—	$	37,763	$	—


			Carrying Value at December 31, 2015 (in thousands)
Description	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
US agency obligations	$	18,810	$	—	$	18,810	$	—
Mortgage-backed securities		10,647		—		10,647		—
Municipals		5,034		—		5,034		—
Corporates		1,505		—		1,505		—

Total available-for-sale securities	$	35,996	$	—	$	35,996	$	—

Fair Value on a Non-recurring Basis

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Note 5 – Fair Value Measurements (continued)

Loans held for sale

Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended March 31, 2016. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale, net on the Consolidated Statements of Income.

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.

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data.

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. The carrying values of all OREO properties are considered to be Level 3.

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


			Carrying Value at March 31, 2016
Description	Balance as of March 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans*	$	3,434	$	—	$	—	$	3,434
Loans held for sale		3,706		—		3,706		—
Other real estate owned		2,355		—		—		2,355

*	Includes loans charged down during the quarter to the net realizable value of the collateral.


			Carrying Value at December 31, 2015
Description	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans*	$	2,896	$	—	$	—	$	2,896
Loans held for sale		1,964		—		1,964		—
Other real estate owned		1,965		—		—		1,965

*	Includes loans charged down during the quarter to the net realizable value of the collateral.

Note 5 – Fair Value Measurements (continued)

The following table sets forth information regarding the quantitative inputs used to value assets classified as Level 3:

Quantitative information about Level 3 Fair Value Measurements for March 31, 2016
(dollars in thousands)

Fair
Value

Valuation Technique(s)

Unobservable Input

Range (Weighted
Average)

Assets

Impaired loans

$3,434

Discounted appraised value

Selling cost

5% - 10% (6%)

Discount for lack of marketability and age of appraisal

0% - 25% (15%)

OREO

2,355

Discounted appraised value

Selling cost

5% - 10% (6%)

Discount for lack of marketability and age of appraisal

0% -25% (15%)

Quantitative information about Level 3 Fair Value Measurements for December 31, 2015
(dollars in thousands)

Fair
Value

Valuation Technique(s)

Unobservable Input

Range (Weighted
Average)

Assets

Impaired loans

$2,896

Discounted appraised value

Selling cost

5% - 10% (6%)

Discount for lack of marketability and age of appraisal

0% - 45% (15%)

OREO

1,965

Discounted appraised value

Selling cost

5% - 10% (6%)

Discount for lack of marketability and age of appraisal

0% -25% (15%)

Financial Instruments

Cash, cash equivalents and Federal Funds sold

The carrying amounts of cash and short-term instruments approximate fair values.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed rate loans are based on quoted market prices of similar loans adjusted for differences in loan characteristics. Fair values for other loans such as commercial real estate and commercial and industrial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated as described above. The carrying values of all loans are considered to be Level 3.

Bank Owned Life Insurance (BOLI)

The carrying amount approximates fair value. The carrying values of all BOLI is considered to be Level 2.

Note 5 – Fair Value Measurements (continued)

Deposits

Fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using discounted cash flow analyses that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying values of all deposits are considered to be Level 2.

FHLB borrowings

The fair value of FHLB borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. The carrying values of all FHLB borrowings are considered to be Level 2.

Short-term borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days’ approximate fair value. The carrying values of all short term borrowings are considered to be Level 2.

Capital notes

Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics. The carrying values of all capital notes are considered to be Level 2.

Accrued interest

The carrying amounts of accrued interest approximate fair value. The carrying values of all accrued interest is considered to be Level 2.

Off-balance sheet credit-related instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at March 31, 2016 and December 31, 2015 and therefore are not included in the table below.

Note 5 – Fair Value Measurements (continued)

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


			Fair Value Measurements at March 31, 2016 using
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Assets
Cash and due from banks	$	16,104	$	16,104	$	—	$	—	$	16,104
Fed funds sold		3,580		3,580						3,580
Securities
Available-for-sale		37,763		—		37,763		—		37,763
Held-to-maturity		2,517		—		2,643		—		2,643
Restricted stock		1,373				1,373				1,373
Loans, net		433,701		—		—		438,862		438,862
Loans held for sale		3,706		—		3,706		—		3,706
Interest receivable		1,235		—		1,235		—		1,235
BOLI		9,846		—		9,846		—		9,846
Liabilities
Deposits	$	473,451	$	—	$	474,575	$	—	$	474,575
Interest payable		81		—		81		—		81

			Fair Value Measurements at December 31, 2015 using
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance
Assets
Cash and due from banks	$	15,952	$	15,952	$	—	$	—	$	15,952
Fed funds sold		12,703		12,703						12,703
Securities
Available-for-sale		35,996		—		35,996		—		35,996
Held-to-maturity		2,519		—		2,649		—		2,649
Restricted stock		1,313		—		1,313				1,313
Loans, net		430,445		—		—		438,322		438,322
Loans held for sale		1,964		—		1,964		—		1,964
Interest receivable		1,248		—		1,248		—		1,248
BOLI		9,781		—		9,781		—		9,781
Liabilities
Deposits	$	467,610	$	—	$	468,773	$	—	$	468,773
Capital notes		10,000		—		10,024		—		10,024
Interest payable		61		—		61		—		61

Note 5 – Fair Value Measurements (continued)

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 Financial’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of Financial’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 Financial. 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 Financial’s overall interest rate risk.

Note 6 – Capital Notes

As of December 31, 2015 Financial had $10,000,000 categorized as “Capital Notes” which represents the proceeds of the private placement of $10,000,000 in unregistered debt securities as previously disclosed (the “2012 Notes”). The 2012 Notes bore interest at the rate of 6% per year with interest payable quarterly in arrears. On December 3, 2015, Financial closed a private placement of common stock pursuant to which it received gross proceeds of $11,520,000 by selling an aggregate of 1,000,000 shares of Financials’ Common Stock at a price of $11.52 per share, as part of a private placement (the “Common Stock Private Placement”). Financial used $10,000,000 of the proceeds from the Common Stock Private Placement to prepay in full the 2012 Notes on January 5, 2016.

Note 7 - Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2016 and December 31, 2015 (amounts in thousands):


	Amortized		March 31, 2016 Gross Unrealized
	Costs		Gains		(Losses)			Fair Value
Held-to-Maturity
US agency obligations	$	2,517	$	126	$	—		$	2,643

Available-for-Sale
US agency obligations		17,128		84		(230	)		16,982
Mortgage-backed securities		15,074		58		(24	)		15,108
Municipals		4,979		174		—			5,153
Corporates		511		9		—			520

	$	37,692	$	325	$	(254	)	$	37,763


	Amortized		December 31, 2015 Gross Unrealized
	Costs		Gains		(Losses)			Fair Value
Held-to-Maturity
US agency obligations	$	2,519	$	130	$	—		$	2,649

Available-for-Sale
US agency obligations		19,606		3		(799	)		18,810
Mortgage-backed securities		10,778		4		(135	)		10,647
Municipals		4,984		84		(34	)		5,034
Corporates		1,521		—		(16	)		1,505

	$	36,889	$	91	$	(984	)	$	35,996

Note 7 – Securities (continued)

The following tables show the gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015 (amounts in thousands):


	Less than 12 months				More than 12 months				Total
March 31, 2016	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
U.S. agency obligations	$	6,252	$	230	$	—	$	—		6,252	$	230
Mortgage-backed securities		5,666		24		—		—		5,666		24

Total	$	11,918	$	254	$	—	$	—	$	11,918	$	254


	Less than 12 months				More than 12 months				Total
December 31, 2015	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities
U.S. agency obligations	$	7,160	$	353	$	10,650	$	446	$	17,810	$	799
Mortgage-backed securities		6,726		77		1,979		58		8,705		135
Municipals		2,341		25		503		9		2,844		34
Corporates		1,505		16		—		—		1,505		16

Total	$	17,732	$	471	$	13,132	$	513	$	30,864	$	984

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 March 31, 2016, the Company did not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. As of March 31, 2016, the Bank owned 9 securities that were being evaluated for other than temporary impairment. One of these securities was S&P rated AAA and 8 were S&P rated AA. As of March 31, 2016, all of these securities were direct obligations of the U.S. government or government sponsored entities.

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 8 – Business Segments

The Company has two reportable business segments: (i) a traditional full service community banking segment and, (ii) a mortgage loan origination business. The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000 and other areas contiguous to Central Virginia. The mortgage segment provides a variety of mortgage loan products principally within Region 2000. Mortgage loans are originated and sold in the secondary market through purchase commitments from investors with servicing released. Because of the pre-arranged purchase commitments, there is minimal risk to the Company.

Both of the Company’s reportable segments are service based. The mortgage business is a gain on sale business while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business. The mortgage business may also be in a position to refer its customers to the Bank for banking services when appropriate.

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31, 2016 and 2015 was as follows (dollars in thousands):

Business Segments


	Community Banking		Mortgage		Total
Three months ended March 31, 2016
Net interest income	$	4,687	$	—	$	4,687
Provision for loan losses		200		—		200

Net interest income after provision for loan losses		4,487		—		4,487
Noninterest income		508		500		1,008
Noninterest expenses		3,733		457		4,190

Income before income taxes		1,262		43		1,305
Income tax expense		403		15		418

Net income	$	859	$	28	$	887

Total assets	$	520,801	$	3,810	$	524,611

Three months ended March 31, 2015
Net interest income	$	4,196	$	—	$	4,196
Provision for loan losses		100		—		100

Net interest income after provision for loan losses		4,096		—		4,096
Noninterest income		413		534		947
Noninterest expenses		3,293		387		3,680

Income before income taxes		1,216		147		1,363
Income tax expense		386		50		436

Net income	$	830	$	97	$	927

Total assets	$	486,184	$	1,823	$	488,007

Note 9 – Loans, allowance for loan losses and OREO

Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and managing risk in the loan portfolio.


Loan Segments:		Loan Classes:

Commercial		Commercial and industrial loans

Commercial real estate		Commercial mortgages – owner occupied

		Commercial mortgages – non-owner occupied

		Commercial construction

Consumer		Consumer unsecured

		Consumer secured

Residential		Residential mortgages

		Residential consumer construction

A summary of loans, net is as follows (dollars in thousands):


	As of:
	March 31, 2016		December 31, 2015
Commercial	$	79,851	$	76,773
Commercial real estate		215,675		217,125
Consumer		81,223		81,531
Residential		61,702		59,699

Total loans		438,451		435,128
Less allowance for loan losses		4,750		4,683

Net loans	$	433,701	$	430,445

The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.

Note 9 – Loans, allowance for loan losses and OREO (continued)

Below is a summary and definition of the Bank’s risk rating categories:


		RATING 1		Excellent
		RATING 2		Above Average
		RATING 3		Satisfactory
		RATING 4		Acceptable / Low Satisfactory
		RATING 5		Monitor
		RATING 6		Special Mention
		RATING 7		Substandard
		RATING 8		Doubtful
		RATING 9		Loss

We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

•

“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

•

“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

•

“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.

•

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

•

“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

Note 9 – Loans, allowance for loan losses and OREO (continued)

•

“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.


Loans on Non-Accrual Status
(dollars in thousands)
	As of
	March 31, 2016		December 31, 2015
Commercial	$	369	$	483
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		665		799
Commercial Mortgages-Non-Owner Occupied		403		514
Commercial Construction		204		367
Consumer
Consumer Unsecured		—		31
Consumer Secured		203		269
Residential:
Residential Mortgages		669		695
Residential Consumer Construction		75		248

Totals	$	2,588	$	3,406

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO increased to $2,355,000 on March 31, 2016 from $1,965,000 on December 31, 2015. The following table represents the changes in OREO balance during the three months ended March 31, 2016 and year ended December 31, 2015.


OREO Changes
(dollars in thousands)
	Three Months ended March 31, 2016		Year ended December 31, 2015
Balance at the beginning of the year (net)	$	1,965	$	956
Transfers from loans		390		1,425
Capitalized costs		—		25
Writedowns		—		(75	)
Sales proceeds		—		(360	)
(Loss) on disposition		—		(6	)

Balance at the end of the period (net)	$	2,355	$	1,965

At March 31, 2016 and December 31, 2015, the Company had no consumer mortgage loan secured by residential real estate for which foreclosure was in process. The Company held no residential real estate in other real estate owned as of March 31, 2016 and December 31, 2015, respectively.

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Impaired Loans (dollars in thousands) As of and For the Three Months Ended March 31, 2016
2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate
Commercial Mortgages-Owner Occupied		1,984		2,002		—		2,533		25
Commercial Mortgage Non-Owner Occupied		333		384		—		255		6
Commercial Construction		—		—		—		14		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		19		19		—		20		—
Residential
Residential Mortgages		1,894		1,929		—		1,946		18
Residential Consumer Construction		—		—		—		86		—
With An Allowance Recorded:
Commercial	$	1,005	$	1,081	$	519	$	1,093	$	8
Commercial Real Estate
Commercial Mortgages-Owner Occupied		1,722		1,731		334		1,300		26
Commercial Mortgage Non-Owner Occupied		326		328		24		499		3
Commercial Construction		204		628		107		272		—
Consumer
Consumer Unsecured		—		—		—		16		—
Consumer Secured		188		192		152		189		2
Residential
Residential Mortgages		828		975		104		739		14
Residential Consumer Construction		—		—		—		—		—
Totals:
Commercial		1,005	$	1,081	$	519	$	1,093	$	8
Commercial Real Estate
Commercial Mortgages-Owner Occupied		3,706		3,733		334		3,833		51
Commercial Mortgage Non-Owner Occupied		659		712		24		754		9
Commercial Construction		204		628		107		286		—
Consumer
Consumer Unsecured		—		—		—		16		—
Consumer Secured		207		211		152		209		2
Residential
Residential Mortgages		2,722		2,904		104		2,685		32
Residential Consumer Construction		—		—		—		86		—

	$	8,503	$	9,269	$	1,240	$	8,962	$	102

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Impaired Loans
	(dollars in thousands)
	As of and For the Year Ended December 31, 2015
2015	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	—	$	—	$	—	$	1,009	$	—
Commercial Real Estate
Commercial Mortgages-Owner Occupied		3,082		3,100		—		2,959		174
Commercial Mortgage Non-Owner Occupied		177		177		—		628		12
Commercial Construction		27		514		—		244		—
Consumer
Consumer Unsecured		—		—		—		—		—
Consumer Secured		20		20		—		21		1
Residential
Residential Mortgages		1,997		2,027		—		1,466		86
Residential Consumer Construction		171		176		—		86		4
With An Allowance Recorded:
Commercial	$	1,180	$	1,256	$	610	$	1,293	$	38
Commercial Real Estate
Commercial Mortgages-Owner Occupied		877		883		163		865		35
Commercial Mortgage Non-Owner Occupied		672		738		175		399		38
Commercial Construction		340		700		75		170		—
Consumer
Consumer Unsecured		31		32		31		16		1
Consumer Secured		190		193		153		155		10
Residential
Residential Mortgages		650		800		87		740		42
Residential Consumer Construction		—		—		—		—		—
Totals:
Commercial	$	1,180	$	1,256	$	610	$	2,302	$	38
Commercial Real Estate
Commercial Mortgages-Owner Occupied		3,959		3,983		163		3,824		209
Commercial Mortgage Non-Owner Occupied		849		915		175		1,027		50
Commercial Construction		367		1,214		75		414		—
Consumer
Consumer Unsecured		31		32		31		16		1
Consumer Secured		210		213		153		176		11
Residential
Residential Mortgages		2,647		2,827		87		2,206		128
Residential Consumer Construction		171		176		—		86		4

	$	9,414	$	10,616	$	1,294	$	10,051	$	441

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Allowance for Loan Losses and Recorded Investment in Loans (dollars in thousands) As of and For the Three Months Ended March 31, 2016
2016	Commercial			Commercial Real Estate			Consumer			Residential		Total
Allowance for Loan Losses:
Beginning Balance	$	1,195		$	1,751		$	1,073		$	664	$	4,683
Charge-offs		(89	)		(111	)		(51	)		—		(251	)
Recoveries		1			100			17			—		118
Provision		(27	)		128			(66	)		165		200

Ending Balance	$	1,080		$	1,868		$	973		$	829	$	4,750

Ending Balance: Individually evaluated for impairment	$	519		$	465		$	152		$	104	$	1,240

Ending Balance: Collectively evaluated for impairment		561			1,403			821			725		3,510

Totals:	$	1,080		$	1,868		$	973		$	829	$	4,750

Loans:
Ending Balance: Individually evaluated for impairment	$	1,005		$	4,569		$	207		$	2,722	$	8,503

Ending Balance: Collectively evaluated for impairment		78,846			211,106			81,016			58,980		429,948

Totals:	$	79,851		$	215,675		$	81,223		$	61,702	$	438,451

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Allowance for Loan Losses and Recorded Investment in Loans (dollars in thousands) As of and For the Year Ended December 31, 2015
2015	Commercial			Commercial Real Estate			Consumer			Residential		Total
Allowance for Loan Losses:
Beginning Balance	$	1,235		$	2,194		$	812		$	549	$	4,790
Charge-offs		(294	)		(64	)		(257	)		—		(615	)
Recoveries		14			122			54			36		226
Provision		240			(501	)		464			79		282

Ending Balance	$	1,195		$	1,751		$	1,073		$	664	$	4,683

Ending Balance: Individually evaluated for impairment	$	610		$	413		$	184		$	87	$	1,294

Ending Balance: Collectively evaluated for impairment		585			1,338			889			577		3,389

Totals:	$	1,195		$	1,751		$	1,073		$	664	$	4,683

Loans:
Ending Balance: Individually evaluated for impairment	$	1,180		$	5,175		$	241		$	2,818	$	9,414

Ending Balance: Collectively evaluated for impairment		75,593			211,950			81,290			56,881		425,714

Totals:	$	76,773		$	217,125		$	81,531		$	59,699	$	435,128

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Age Analysis of Past Due Loans as of March 31, 2016 (dollars in thousands)
2016	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days & Accruing
Commercial	$	100	$	—	$	369	$	469	$	79,382	$	79,851	$	—
Commercial Real Estate:
Commercial Mortgages- Owner Occupied		7		365		300		672		75,566		76,238		—
Commercial Mortgages-Non-Owner Occupied		104		—		151		255		126,419		126,674		—
Commercial Construction		—		87		204		291		12,472		12,763		—
Consumer:
Consumer Unsecured		8		—		—		8		6,683		6,691		—
Consumer Secured		184		12		175		371		74,161		74,532		—
Residential:
Residential Mortgages		634		441		359		1,434		48,334		49,768		—
Residential Consumer Construction		78		—		75		153		11,781		11,934		—

Total	$	1,115	$	905	$	1,633	$	3,653	$	434,798	$	438,451	$	—


	Age Analysis of Past Due Loans as of December 31, 2015 (dollars in thousands)
2015	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days & Accruing
Commercial	$	—	$	244	$	483	$	727	$	76,046	$	76,773	$	—
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		425		571		426		1,422		75,549		76,971		—
Commercial Mortgages-Non-Owner Occupied		189		90		438		717		126,138		126,855		—
Commercial Construction		—		—		367		367		12,932		13,299		—
Consumer:
Consumer Unsecured		2		—		31		33		6,828		6,861		—
Consumer Secured		198		68		128		394		74,276		74,670		—
Residential:
Residential Mortgages		512		468		543		1,523		48,490		50,013		—
Residential Consumer Construction		—		—		248		248		9,438		9,686		—

Total	$	1,326	$	1,441	$	2,664	$	5,431	$	429,697	$	435,128	$	—

Note 9 – Loans, allowance for loan losses and OREO (continued)


	Credit Quality Information - by Class March 31, 2016 (dollars in thousands)
2016	Pass		Monitor		Special Mention		Substandard		Doubtful		Totals
Commercial	$	75,657	$	1,733	$	1,400	$	1,061	$	—	$	79,851
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		68,151		1,563		2,773		3,751		—		76,238
Commercial Mortgages-Non Owner Occupied		121,783		2,621		1,413		857		—		126,674
Commercial Construction		12,559		—		—		204		—		12,763
Consumer
Consumer Unsecured		6,691		—		—		—		—		6,691
Consumer Secured		73,694		238		—		600		—		74,532
Residential:
Residential Mortgages		46,765		—		—		3,003		—		49,768
Residential Consumer Construction		11,859		—		—		75		—		11,934

Totals	$	417,159	$	6,155	$	5,586	$	9,551	$	—	$	438,451


	Credit Quality Information - by Class December 31, 2015 (dollars in thousands)
2015	Pass		Monitor		Special Mention		Substandard		Doubtful		Totals
Commercial	$	73,831	$	290	$	1,457	$	1,195	$	—	$	76,773
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		68,813		1,353		2,801		4,004		—		76,971
Commercial Mortgages-Non Owner Occupied		120,462		1,558		3,895		940		—		126,855
Commercial Construction		12,932		—		—		367		—		13,299
Consumer
Consumer Unsecured		6,830		—		—		31		—		6,861
Consumer Secured		73,825		276		50		519		—		74,670
Residential:
Residential Mortgages		47,180		—		—		2,833		—		50,013
Residential Consumer Construction		9,438		—		—		248		—		9,686

Totals	$	413,311	$	3,477	$	8,203	$	10,137	$	—	$	435,128

Note 9 – Loans, allowance for loan losses and OREO (continued)

There were no loan modifications that would have been classified as TDRs during the three months ended March 31, 2016.

The following table describe the loan modifications classified as TDRs during the three months ended March 31, 2015:


For the Three Months Ended March 31, 2015 (*dollars in thousands)*
Troubled Debt Restructurings During the Period	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		1	$	21	$	21

The loan noted in the table above was modified during the period to extend maturity only. This loan is factored into the determination of the allowance for loan losses as of the period indicated and is included in the Bank’s impaired loan analysis and individually evaluated for impairment.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2016 and 2015.

At March 31, 2016 and December 31, 2015, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

Note 10 – Recent accounting pronouncements

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

Note 10 – Recent accounting pronouncements (continued)

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore,

upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

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. We undertake 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 an amount that is adequate to absorb probable losses inherent in the 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 headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct three other business activities: mortgage banking through the Bank’s Mortgage division (which we refer to as “Mortgage division”), investment services through the Bank’s Investment division (which we refer to as “Investment division”), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”). Of these three other business activities, only the Mortgage division is material to the Bank’s results and operations.

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. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Within the past three years, the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, and Harrisonburg. 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 areas.

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.

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 our service areas, providing additional services to its customers, and controlling costs.

The Bank services its banking customers through the following locations in Virginia:

Full Service Branches

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (the “Bedford Branch”),

•

A branch located at 1110 Main Street, Altavista, Virginia (the “Altavista Branch”), and

•

A branch located at 1391 South High Street, Harrisonburg, VA (the “Harrisonburg Branch”).

Limited Service Branches

•

Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginia,

•

Westminster-Canterbury facilities located at 250 Pantops Mountain Road, Charlottesville, Virginia, and

•

Luxor Office Park LLC, 1430 Rolkin Court Suite 203, Charlottesville, Virginia (the “Charlottesville Branch”).

Loan Production Offices

•

Residential mortgage loan production office located at the Forest Branch,

•

Commercial loan and residential mortgage loan production office located at 3959 Electric Road SW, Suite 100, Roanoke, Virginia, and

•

Commercial and consumer loan production office located at the Charlottesville Branch.

The Investment division and the Insurance business operate primarily out of offices located at the Church Street Branch.

The Bank continuously evaluates areas located within our service areas 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 following discussion provides a general overview of the additional branch locations that the Bank currently is considering, including the following properties that we own and are holding for expansion:

•

Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The improvements to this property are not suitable for use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace them with appropriate new construction.

•

Unimproved Real property located at 5 Village Highway (near the intersection of Routes 501 and 24) in Rustburg, Virginia. The structure on the property has been demolished and removed. The Bank does not anticipate opening a branch at this location prior to 2017.

•

Unimproved Real property located near the intersection of Confederate Boulevard and Moses Avenue in Appomattox, Virginia. There is no structure on the property. The bank does not anticipate opening a branch at this location prior to the fourth quarter of 2016.

•

Real property located at 45 South Main Street, Lexington, Virginia. This property consists of a former bank branch. The bank does not anticipate opening a branch at this location prior to the second quarter of 2017.

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit each property will be between $900,000 and $1,500,000 per location.

In addition, the Bank determined that a portion of real property located on Route 460 (Bedford County) is suitable for branch expansion and has reclassified the property accordingly.

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.

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:


	March 31, 2016 (in thousands)
Commitments to extend credit	$	94,089
Letters of Credit		3,227

Total	$	97,316

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. 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.

The Bank has rate lock commitments to originate mortgage loans through its Mortgage Division. The Bank has entered into corresponding commitments with third party investors to sell each of these loans that close. No other obligation exists. As a result of these contractual relationships with these investors, the Bank is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.

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 March 31, 2016 and December 31, 2015 and the results of operations of Financial for the three month periods ended March 31, 2016 and 2015. This discussion should be read in conjunction with the financial statements included elsewhere herein.

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

Financial Condition Summary

March 31, 2016 as Compared to December 31, 2015

Total assets were $524,611,000 on March 31, 2016 compared with $527,143,000 at December 31, 2015, a decrease of 0.48%. On January 5, 2016, the Company retired $10,000,000 in capital notes issued by the Company in 2012, which was the primary reason for the decrease in total assets and liabilities as of March 31, 2016 from December 31, 2015.

Total deposits increased from $467,610,000 as of December 31, 2015 to $473,451,000 on March 31, 2016, an increase of 1.25%. The increase resulted from an increase in each of our deposit categories. In particular, time deposits increased from $143,421,000 on December 31, 2015 to $145,865,000 on March 31, 2016.

Total loans, excluding loans held for sale, increased to $438,451,000 on March 31, 2016 from $435,128,000 on December 31, 2015. Loans, excluding loans held for sale and net of unearned income and allowance, increased to $433,701,000 on March 31, 2016 from $430,445,000 on December 31, 2015, an increase of 0.76%. 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):


	March 31, 2016					December 31, 2015
	Amount		Percentage			Amount		Percentage
Commercial	$	79,851		18.21	%	$	76,773		17.64	%
Commercial Real Estate		215,675		49.20	%		217,125		49.90	%
Consumer		81,223		18.52	%		81,531		18.74	%
Residential		61,702		14.07	%		59,699		13.72	%

Total loans	$	438,451		100.00	%	$	435,128		100.00	%

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and other real estate owned (“OREO”) decreased to $4,942,000 on March 31, 2016 from $5,371,000 on December 31, 2015. OREO increased to $2,355,000 on March 31, 2016 from $1,965,000 on December 31, 2015. This increase was due to the Bank’s foreclosure on two properties in the first quarter on real estate that secured two separate loans that had been categorized as non-performing loans. Following the foreclosure and subsequent re-categorization, non-performing loans decreased from $3,406,000 at December 31, 2015 to $2,588,000 at March 31, 2016. As discussed in more detail below under “Results of Operations—Allowance for Loan Losses,” management had provided for the anticipated losses on these loans in the loan loss reserve. If interest on non-accrual loans had been accrued, such interest cumulatively would have approximated $326,000 and $472,000 as of March 31, 2016 and December 31, 2015, 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 loan losses charged against earnings. These loans were included in the non-performing loan totals listed above.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure, deeds in lieu of foreclosure or repossession. On December 31, 2015, the Bank was carrying 3 OREO properties on its books at a value of $1,965,000. During the three months ended March 31, 2016, the Bank acquired 2 additional OREO properties and disposed of no OREO properties, and as of March 31, 2016 the Bank is carrying 5 OREO properties at a value of $2,355,000. The OREO properties are available for sale and are being actively marketed on the Bank’s website and through other means.

The Bank had loans in the amount of $642,000 at March 31, 2016 classified as performing Troubled Debt Restructurings (“TDRs”) as compared to $646,000 at December 31, 2015. None of these TDRs were included in non-accrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

Cash and cash equivalents decreased to $19,684,000 on March 31, 2016 from $28,655,000 on December 31, 2015. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). The decrease in cash and cash equivalents was due primarily to the use of $10,000,000 from the common stock private placement to retire the Company’s capital notes as previously discussed. In addition, cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts. The increase in time deposits discussed above has been used to fund loans and investments.

Due to premium amortization, securities held-to-maturity decreased slightly to $2,517,000 on March 31, 2016 from $2,519,000 on December 31, 2015. Securities available-for-sale increased to $37,763,000 on March 31, 2016, from $35,996,000 on December 31, 2015. The increase is a result of management’s desire to continue to increase on-balance sheet liquidity. During the three months ended March 31, 2016 the Bank received $381,000 in proceeds from calls of securities available-for-sale and $4,563,000 in proceeds from the sale of securities available-for-sale. The Bank purchased no securities held-to-maturity and $5,715,000 in securities available-for sale during the same period.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $565,000 at March 31, 2016 and $505,000 at December 31, 2015, an increase of $60,000. This increase is attributable to the FHLBA’s increase in minimum ownership requirements. 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.

Liquidity and Capital

At March 31, 2016, Financial, on a consolidated basis, had liquid assets of $57,447,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $11,789,000 of the available-for-sale securities are pledged as collateral with $7,127,000 pledged as security for public deposits and $4,662,000 pledged as security on a line of credit the Bank may draw on from time to time to meet liquidity needs. This line of credit currently has a zero balance. Management believes that liquid assets were adequate at March 31, 2016. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, if additional liquidity is needed, the Bank has the ability to purchase federal funds on the open market, borrow from the FHLBA using loans or investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window.

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. Based in part on recent loan growth, the Bank is monitoring liquidity to ensure it is able to fund future loans.

At March 31, 2016, the Bank had a leverage ratio of approximately 9.37%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 10.93% and a total risk-based capital ratio of approximately 11.99%. As of March 31, 2016 and December 31, 2015 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 March 31, 2016 and December 31, 2015:

Bank Level Only Capital Ratios


Analysis of Capital (in 000’s)	March 31, 2016		December 31, 2015
Tier 1 capital
Common Stock	$	3,742	$	3,742
Surplus		19,325		19,325
Retained earnings		25,653		24,711

Total Tier 1 capital	$	48,720	$	47,778

Tier 2 capital
Allowance for loan losses	$	4,750	$	4,683
Total Tier 2 capital:	$	4,750	$	4,683

Total risk-based capital	$	53,470	$	52,461

Risk weighted assets	$	445,820	$	446,201
Average total assets	$	519,815	$	518,096


	Actual						Regulatory Benchmarks
	March 31, 2016			December 31, 2015			For Capital Adequacy Purposes			For Well Capitalized Purposes
Capital Ratios:
Tier 1 capital to average total assets		9.37	%		9.22	%		4.00	%		5.00	%
Common Equity Tier 1 capital		10.93	%		10.71	%		4.50	%		6.50	%
Tier 1 risk-based capital ratio		10.93	%		10.71	%		6.00	%		8.00	%
Total risk-based capital ratio		11.99	%		11.76	%		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 $1,000,000,000, 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 at March 31, 2016 would be comparable to those of the Bank.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The phase-in period for this rule began in January 2015. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The capital conservation buffer will be phased in between January 1, 2016 when it will begin at 0.625% and increase by an additional 0.625% annually until it reaches 2.5% on January 1, 2019. This will result in an effective Tier 1 capital ratio of 8.5% upon full implementation. The capital conservation buffer will limit capital distributions, stock redemptions, and certain. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

Earnings Summary

Financial had net income including all operating segments of $887,000 for the three months ended March 31, 2016, compared to $927,000 for the comparable period in 2015. The basic and diluted earnings per common share for the three months ended March 31, 2016 were $0.20, compared to basic and diluted earnings per share of $0.27 for the three months ended March 31, 2015.

The decrease in net income for the three months ended March 31, 2016 as compared to the prior year was due primarily to increase in non-interest expense arising from the Bank’s recent expansion into the Charlottesville, Harrisonburg, and Roanoke. This expansion resulted in increases in personnel expense, occupancy expense, professional and data processing expense, and marketing expense. Non-interest income increased for the three months ended March 31, 2016.

These operating results represent an annualized return on average stockholders’ equity of 7.30% for the three months ended March 31, 2016, compared with 10.71% for the same period in 2015. This decrease was the result of an increase in outstanding shares resulting from the company’s issuance of common stock in December 2015 and to a lesser extent, the decrease in net income. The Company had an annualized return on average assets of 0.68% for the three months ended March 31, 2016 compared with 0.79 % for the same period in 2015, largely resulting from an increase in assets since March 31, 2015.

See “Non-Interest Income” below for mortgage business segment discussion.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $5,235,000 for the three months ended March 31, 2016 from $4,826,000 for the same period in 2015, an increase of 8.47%. Interest income increased primarily because of increased balances in the loan portfolio. The average rate received on earning assets decreased to 4.34% for the three months ended March 31, 2016 as compared with 4.38% for the comparable period in 2015. The rate on total average earning assets decreased primarily because of a decrease in the rate received on loans resulting from a competitive banking environment. Management expects that competition will continue to pressure the rates we receive on loans and therefore may negatively impact our interest income.

Interest expense decreased to $548,000 for the three months ended March 31, 2016 from $630,000 for the same period in 2015, a decrease of 13.02%. This decrease in interest expense resulted primarily from the elimination of interest paid on capital notes which notes the Company retired in January. This decrease was offset by increase in interest paid on time deposits as well as interest bearing demand deposits. The Bank’s average rate paid on interest bearing deposits was 0.58% during the three month period ended March 31, 2106 as compared to 0.55% for the same period in 2015.

The fundamental source of the Bank’s net 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 months ended March 31, 2016 was $4,687,000 compared to $4,196,000 for the same period in 2015. The change in net interest income for the three months ended March 31, 2016 as compared with the comparable period in 2015 primarily is attributable to the increase in loan balances previously discussed. The net interest margin was 3.89% for the three months ended March 31, 2016, as compared to 3.81% for the same period a year ago.

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

Non-Interest Income

Non-interest income 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. Non-interest income increased to $1,008,000 for the three months ended March 31, 2016 from $947,000 for the three months ended March 31, 2015. This increase for the three months ended March 31, 2016 as compared to the same period last year was due primarily due to an increase in service charges, fees, and commissions from $318,000 for three months ended March 31, 2015 to $372,000 for the three months ended March 31, 2016 as well as gains on sales of securities from $29,000 to $65,000 for the same periods. These increases were partially offset by decreases in gains on sales of residential mortgage loans from $523,000 for the three months ended March 31, 2015 to $491,000 for the three months ended March 31, 2016.

The Bank, through the Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the markets we serve. 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, except in limited circumstances such as first payment default, no credit or interest rate risk on these mortgages.

Purchase mortgage originations totaled approximately $11,040,000, or 68% of the total mortgage loans originated in the three months ended March 31, 2016 as compared to approximately $10,941,000, or 63%, of the total mortgage loans originated in the same period in 2015. The increase in amount of purchase mortgage originations resulted from an increased market presence in Roanoke as well as an increase in home purchase activity. Refinancing activity decreased due to an overall decrease in the number of consumers that would benefit from refinancing. Because many people able to refinance mortgages have already done so, management expects refinancing activity to continue to decrease. Management anticipates that purchase mortgage originations will continue to represent a majority of mortgage originations. In addition, 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.

Despite the recent fluctuations in rates, management anticipates that residential mortgage rates will remain near the current historic lows for the remainder of 2016. Management expects that attractive rates coupled with the Mortgage division’s reputation in Region 2000 will allow us to maintain or increase revenue at the Mortgage division. As a result of the rising interest rates, management expects that loans for home purchases (as opposed to refinances) will constitute the majority of mortgage originations. In the event that interest rates rise, management expects revenue from the mortgage segment could be under pressure.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial in 2016.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has two full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2016.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2016 increased to $4,190,000 from $3,680,000, an increase of 13.86% for the comparable period in 2015. This resulted from increases for personnel expense primarily related to the expansion into Charlottesville, Harrisonburg, and Roanoke, as well as increases in professional, data processing and outside expenses, occupancy expenses, equipment expenses and, supplies expense. Credit expense also increased primarily related to the increase in mortgage volume. Total personnel expense was $2,237,000 for the three month period ended March 31, 2016 as compared to $2,083,000 for the same period in 2015.

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. 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 two components – specific impairment and general reserves. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the loan loss calculation, the Bank provided $200,000 to the allowance for loan losses for the three month period ended March 31, 2016. This compares to a provision of $100,000 for the comparable period in 2015, for an increase of 100%.

General reserves have trended downward for several quarters. This downward trend is directly attributable to the Bank’s charge-off history through the most recent negative credit cycle. A significant part of the general reserve calculation incorporates how a particular loan class performs over a period of time (that is, its charge-off history). Following the financial crisis in 2008 and beyond that disrupted the banking and financial systems, the Bank’s asset quality deteriorated. This deterioration resulted in a significant increase in charge-offs against the Bank’s loan portfolio. The elevated charge-offs continued through 2011. During this period, the Bank’s loan loss methodology, which is based in part on the Bank’s charge-off history, dictated an increase in the amount allocated to the general reserve component of the loan loss reserve. Beginning in 2011, asset quality began to rapidly improve. Since that time general reserves have declined based on overall improvement in the Bank’s asset quality and historical charge-off experience.

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for loan losses and constitute a realized loss. Charged-off loans were $251,000 for the three months ended March 31, 2016 as compared to $201,000 for the comparable period in 2015. Management does not believe that this increase represents a material ongoing negative trend. While a charged off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. In the three months ended March 31, 2016, the Bank had recoveries of charged off loans of $118,000 as compared with $57,000 for the comparable period in 2015.

In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Bank’s loan portfolio. As set forth in the tables below, the Bank’s allowance arising from the specific impairment evaluation as of March 31, 2016 decreased as compared to December 31, 2015.

The percentage of the allowance for loan losses to total loans was 1.08% as of March 31, 2016 and December 31, 2015. The overall balance in the allowance for loan losses increased from $4,683,000 as of December 31, 2015 to $4,750,000 as of March 31, 2016. Despite the decrease in specific and general reserves, primarily due to the overall improvement in asset quality, the inherent risks associated with the increasing industry concentrations and commercial real estate concentrations within the portfolio have increased the unallocated portion of the reserve. Management believes that the current allowance for loan losses is adequate.

The following tables summarize the allowance activity for the periods indicated:


	Allowance for Loan Losses and Recorded Investment in Loans (dollars in thousands) As of and For the Three months Ended March 31, 2016
2016	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for Loan Losses:
Beginning Balance	$	1,195		$	1,751		$	1,073		$	664		$	4,683
Charge-offs		(89	)		(111	)		(51	)		—			(251	)
Recoveries		1			100			17			—			118
Provision		(27	) (1)		128			(66	) (1)		165	(2)		200

Ending Balance	$	1,080		$	1,868		$	973		$	829		$	4,750

Ending Balance: Individually evaluated for impairment	$	519		$	465		$	152		$	104		$	1,240

Ending Balance: Collectively evaluated for impairment		561			1,403			821			725			3,510

Totals:	$	1,080		$	1,868		$	973		$	829		$	4,750

Loans:
Ending Balance: Individually evaluated for impairment	$	1,005		$	4,569		$	207		$	2,722		$	8,503

Ending Balance: Collectively evaluated for impairment		78,846			211,106			81,016			58,980			429,948

Totals:	$	79,851		$	215,675		$	81,223		$	61,702		$	438,451

(1)	The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to these segments.

(2)	The increased concentration of loan balances in the residential segment resulted in an increase in the provision for this category. Management has a process for the ongoing evaluation of our loans and the specific risks associated with concentrations in each segment.


	Allowance for Loan Losses and Recorded Investment in Loans (dollars in thousands) As of and For the Year Ended December 31, 2015
2015	Commercial			Commercial Real Estate			Consumer			Residential		Total
Allowance for Loan Losses:
Beginning Balance	$	1,235		$	2,194		$	812		$	549	$	4,790
Charge-offs		(294	)		(64	)		(257	)		—		(615	)
Recoveries		14			122			54			36		226
Provision		240			(501	) (1)		464			79		282

Ending Balance	$	1,195		$	1,751		$	1,073		$	664	$	4,683

Ending Balance: Individually evaluated for impairment	$	610		$	413		$	184		$	87	$	1,294

Ending Balance: Collectively evaluated for impairment		585			1,338			889			577		3,389

Totals:	$	1,195		$	1,751		$	1,073		$	664	$	4,683

Loans:
Ending Balance: Individually evaluated for impairment	$	1,180		$	5,175		$	241		$	2,818	$	9,414

Ending Balance: Collectively evaluated for impairment		75,593			211,950			81,290			56,881		425,714

Totals:	$	76,773		$	217,125		$	81,531		$	59,699	$	435,128

(1)	The experience within the historical charge-off period used to calculate the allowance has improved which reduced the need for a provision relating to this segment.

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


	Three months ended March 31, (in thousands)
	2016			2015
Balance, beginning of period	$	4,683		$	4,790
Provision for loan losses		200			100
Loans charged off		(251	)		(201	)
Recoveries of loans charged off		118			57

Net (charge offs) recoveries		(133	)		(144	)

Balance, end of period	$	4,750		$	4,746

No nonaccrual loans were excluded from impaired loan disclosure under current accounting rules at March 31, 2016 and December 31, 2015. If interest on these loans had been accrued, such income cumulatively would have approximated $326,000 and $472,000 on March 31, 2016 and December 31,

2015, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is 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.

Below is a summary and definition of the Bank’s risk rating categories:


RATING 1		Excellent
RATING 2		Above Average
RATING 3		Satisfactory
RATING 4		Acceptable / Low Satisfactory
RATING 5		Monitor
RATING 6		Special Mention
RATING 7		Substandard
RATING 8		Doubtful
RATING 9		Loss

•

definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

•

Income Taxes

For the three months ended March 31, 2016, Financial had an income tax expense of $418,000 as compared to $436,000 for the same period in in 2015. This represents an effective tax rate of 32.03% for the three months ended March 31, 2016 as compared with 31.99% for the three months ended March 31, 2015. Our effective rate was lower than the statutory corporate tax rate in both quarters because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance and certain tax free municipal securities.

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2016 and 2015

(dollars in thousands)


	2016								2015
	Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/ Paid
ASSETS
Loans, including fees (1) (2)	$	436,927		$	4,961		4.60	%	$	401,983		$	4,613		4.65	%
Loans held for sale		2,302			17		2.99	%		1,565			15		3.89	%
Fed funds sold		3,071			4		0.53	%		10,059			5		0.20	%
Interest bearing bank balances		6,000			6		0.41	%		5,000			2		0.16	%
Securities (3)		38,982			246		2.56	%		27,046			196		2.94	%
Federal agency equities		1,200			6		2.03	%		1,486			5		1.36	%
CBB equity		116			—		—			116			—		—

Total earning assets		488,598			5,240		4.35	%		447,255			4,836		4.39	%

Allowance for loan losses		(4,739	)							(4,762	)
Non-earning assets		35,537								32,973

Total assets	$	519,396							$	475,466

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing	$	118,718		$	76		0.26	%	$	103,875		$	56		0.22	%
Savings		113,135			60		0.22	%		118,413			66		0.23	%
Time deposits		144,869			400		1.12	%		110,710			332		1.22	%

Total interest bearing deposits		376,722			536		0.58	%		332,998			454		0.55	%
Other borrowed funds
Fed funds purchased		1,487			4		1.09	%		435			1		0.93	%
Other borrowings		—			—		—			18,445			25		0.55	%
Capital Notes		330			8		6.00	%		10,000			150		6.00	%

Total interest-bearing liabilities		378,539			548		0.59	%		361,878			630		0.71	%

Non-interest bearing deposits		90,181								77,870
Other liabilities		1,945								619


	2016							2015
	Average Balance Sheet		Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance Sheet		Interest Income/ Expense		Average Rates Earned/ Paid
Total liabilities		470,665							440,367
Stockholders’ equity		48,731							35,099

Total liabilities and Stockholders’ equity	$	519,396						$	475,466

Net interest income			$	4,692						$	4,206

Net interest margin						3.89	%						3.81	%

Interest spread						3.76	%						3.68	%

(1)	Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)	Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)	The interest income and yields calculated on securities have been tax affected to reflect any tax exempt interest on municipal securities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. 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 three months ended March 31, 2016, 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 Company is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

Item 1A. Risk Factors

We described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 17, 2016. We believe there have been no material changes from the risk factors disclosed on Form 10-K.

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. 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 May 9, 2016

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2016

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 May 9, 2016

101		The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income (unaudited) for the Three months Ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three months Ended March 31, 2016 and 2015 (iv) Consolidated Statements of Cash Flows (unaudited) for the Three months Ended March 31, 2016 and 2015 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three months Ended March 31, 2016 and 2015; (vi) Notes to Unaudited Consolidated Financial Statements.

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: May 9, 2016	By	/S/ Robert R. Chapman III
		Robert R. Chapman III, President (Principal Executive Officer)

Date: May 9, 2016	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 May 9, 2016

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2016

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 May 9, 2016

101		The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income (unaudited) for the Three months Ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the Three months Ended March 31, 2016 and 2015 (iv) Consolidated Statements of Cash Flows (unaudited) for the Three months Ended March 31, 2016 and 2015 (v) Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three months Ended March 31, 2016 and 2015; (vi) Notes to Unaudited Consolidated Financial Statements.