BANK OF THE JAMES FINANCIAL GROUP INC - Quarter Report: 2021 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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, 2021

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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Securities registered or to be registered pursuant to Section 12(b) of the Act

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, 2.14 per share par value

BOTJ

The NASDAQ Stock Market LLC

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ 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: 4,324,836 shares of Common Stock, par value $2.14 per share, were outstanding at May 12, 2021.

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	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

PART II – OTHER INFORMATION		61

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		63

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) (2021 unaudited)


Assets	March 31, 2021			December 31, 2020
Cash and due from banks	$	33,725		$	31,683
Federal funds sold		90,325			69,203

Total cash and cash equivalents		124,050			100,886
Securities held-to-maturity (fair value of $3,948 in 2021 and $4,192 in 2020)		3,667			3,671
Securities available-for-sale, at fair value		99,832			90,185
Restricted stock, at cost		1,551			1,551
Loans, net of allowance for loan losses of $7,106 in 2021 and $7,156 in 2020		606,485			601,934
Loans held for sale		4,150			7,102
Premises and equipment, net		17,228			16,982
Interest receivable		2,256			2,350
Cash value—bank owned life insurance		16,453			16,355
Other real estate owned		761			1,105
Other assets		9,927			9,265

Total assets	$	886,360		$	851,386

Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand	$	158,469		$	143,345
NOW, money market and savings		497,191			463,506
Time		145,530			158,116

Total deposits		801,190			764,967
Capital notes		10,029			10,027
Interest payable		64			85
Other liabilities		9,743			9,575

Total liabilities	$	821,026		$	784,654

Commitments and Contingencies
Stockholders’ equity
Preferred stock; authorized 1,000,000 shares; none issued and outstanding	$	—		$	—
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,324,836 and 4,339,436 as of March 31, 2021 and December 31, 2020		9,255			9,286
Additional paid-in-capital		30,808			30,989
Retained earnings		26,196			24,665
Accumulated other comprehensive (loss) income		(925	)		1,792

Total stockholders’ equity	$	65,334		$	66,732

Total liabilities and stockholders’ equity	$	886,360		$	851,386

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,
	2021		2020
Interest Income
Loans	$	6,860	$	7,005
Securities
US Government and agency obligations		191		187
Mortgage backed securities		77		59
Municipals—taxable		143		75
Municipals—tax exempt		10		—
Dividends		6		9
Other (Corporates)		50		23
Interest bearing deposits		14		64
Federal Funds sold		14		66

Total interest income		7,365		7,488

Interest Expense
Deposits
NOW, money market savings		135		326
Time Deposits		373		946
Finance leases		27		30
Capital notes		82		50

Total interest expense		617		1,352

Net interest income		6,748		6,136
Provision for loan losses		—		888

Net interest income after provision for loan losses		6,748		5,248

Noninterest income
Gain on sales of loans held for sale		1,774		1,177
Service charges, fees and commissions		554		488
Life insurance income		98		78
Other		8		12
Gain on sales and calls of securities, net		—		431

Total noninterest income		2,434		2,186

Noninterest expenses
Salaries and employee benefits		3,732		3,354
Occupancy		428		436
Equipment		626		609
Supplies		118		127
Professional, data processing, and other outside expense		914		924
Marketing		273		136
Credit expense		276		196
Other real estate expenses		66		99
FDIC insurance expense		165		57
Other		291		259

Total noninterest expenses		6,889		6,197

Income before income taxes		2,293		1,237
Income tax expense		458		242

Net Income	$	1,835	$	995

Weighted average shares outstanding—basic		4,333,274		4,348,040

Weighted average shares outstanding—diluted		4,333,274		4,348,040

Earnings per common share—basic	$	0.42	$	0.23

Earnings per common share—diluted	$	0.42	$	0.23

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands) (unaudited)


	For the Three Months Ended March 31,
	2021			2020
Net Income	$	1,835		$	995

Other comprehensive (loss) income:
Unrealized gains on securities available-for-sale		(3,439	)		2,287
Tax effect		722			(480	)
Reclassification adjustment for gains included in net income (1)		—			(431	)
Tax effect (2)		—			91

Other comprehensive (loss) income, net of tax		(2,717	)		1,467

Comprehensive (loss) income	$	(882	)	$	2,462

(1)	Gains are included in “gain on sales and calls 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

For the Three Months Ended March 31, 2021 and 2020

(dollar amounts in thousands) (unaudited)


	For the Three Months Ended March 31,
	2021			2020
Cash flows from operating activities
Net Income	$	1,835		$	995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		506			504
Stock based compensation expense		27			27
Net amortization and accretion of premiums and discounts on securities		628			100
Amortization of debt issuance costs		2			—
(Gain) on sales of available-for-sale securities		—			(431	)
(Gain) on sales of loans held for sale		(1,774	)		(1,177	)
Proceeds from sales of loans held for sale		82,424			46,037
Origination of loans held for sale		(77,698	)		(46,773	)
Provision for loan losses		—			888
Loss (gain) on sale of other real estate owned		66			(6	)
Impairment of other real estate owned		—			102
Bank owned life insurance income		(98	)		(78	)
Decrease (increase) in interest receivable		94			(56	)
(Increase) decrease in other assets		(65	)		39
(Decrease) increase in interest payable		(21	)		3
Increase in other liabilities		245			17

Net cash provided by operating activities	$	6,171		$	191

Cash flows from investing activities
Purchases of securities available-for-sale	$	(14,543	)	$	(8,259)
Proceeds from maturities, calls and paydowns of securities available-for-sale		833			495
Proceeds from sale of securities available-for-sale		—			14,619
Purchases of bank owned life insurance		—			(2,750	)
Life insurance proceeds		—			588
Proceeds from sale of other real estate owned		344			500
Origination of loans, net of principal collected		(4,617	)		1,709
Purchases of premises and equipment		(627	)		(159	)

Net cash (used in) provided by investing activities	$	(18,610	)	$	6,743

Cash flows from financing activities
Net increase in deposits	$	36,223		$	18,811
Principal payments on finance lease obligations		(104	)		(80	)
Repurchase of common stock		(212	)		(275	)
Dividends paid to common stockholders		(304	)		(304	)

Net cash provided by financing activities	$	35,603		$	18,152

Increase in cash and cash equivalents		23,164			25,086
Cash and cash equivalents at beginning of period	$	100,886		$	39,111

Cash and cash equivalents at end of period	$	124,050		$	64,197

Non cash transactions
Transfer of loans to other real estate owned	$	66		$	18
Fair value adjustment for securities available-for-sale		(3,439	)		1,856
Cash transactions
Cash paid for interest	$	638		$	1,349
Cash paid for income 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, 2021 and 2020

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


									Accumulated
					Additional				Other
	Shares		Common		Paid-in		Retained		Comprehensive
	Outstanding		Stock		Capital		Earnings		Income (Loss)		Total
Balance at December 31, 2019		4,357,436	$	9,325	$	31,225	$	20,900	$	(5)	$	61,445

Net Income		—		—		—		995		—		995
Dividends paid on common stock ($0.28 per share)		—		—		—		(304)		—		(304)
Repurchase of common stock		(18,000)		(39)		(236)		—		—		(275)
Other comprehensive income		—		—		—		—		1,467		1,467

Balance at March 31, 2020		4,339,436	$	9,286	$	30,989	$	21,591	$	1,462	$	63,328

Balance at December 31, 2020		4,339,436	$	9,286	$	30,989	$	24,665	$	1,792	$	66,732

Net Income		—		—		—		1,835		—		1,835
Dividends paid on common stock ($0.28 per share)		—		—		—		(304)		—		(304)
Repurchase of common stock		(14,600)		(31)		(181)		—		—		(212)
Other comprehensive (loss)		—		—		—		—		(2,717)		(2,717)

Balance at March 31, 2021		4,324,836	$	9,255	$	30,808	$	26,196	$	(925)	$	65,334

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, 2021 and 2020 and for the three months ended March 31, 2021 and 2020 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, 2020. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2020 included in Financial’s Annual Report on Form 10-K. Results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Certain immaterial reclassifications have been made to prior period balances to conform to the current period presentation.

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, Blacksburg, Harrisonburg, Lexington, and Rustburg.

Financial’s critical accounting policies include 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 losses 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 policy with respect to the methodology for determining the allowance for loan losses involves a higher degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about uncertain matters. This critical policy and its assumptions are periodically reviewed with the Board of Directors.

Financial also considers valuation of other real estate owned (OREO) a critical accounting policy. OREO consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of foreclosure. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed.

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)

The following is a summary of the earnings per share calculation for the three months ended March 31, 2021 and 2020.


	Three Months Ended
	March 31,
	2021		2020
Net income	$	1,835,000	$	995,000
Weighted average number of shares		4,333,274		4,348,040
Restricted stock units/stock options affect of incremental shares		—		—

Weighted average diluted shares		4,333,274		4,348,040

Basic EPS (weighted avg shares)	$	0.42	$	0.23

Diluted EPS (including incremental shares)	$	0.42	$	0.23

In 2021 and 2020, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 2021 and 2020 wholly in cash. Going forward, management has adopted a cash settlement policy for all currently outstanding RSUs. Prior to 2020, the presumption was that the shares would be settled in common stock and the RSUs were included in the calculation of diluted EPS. There were no potentially dilutive shares excluded from the 2021 and 2020 earnings per share calculation because they were anti-dilutive.

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.

Note 4 – Stock Based Compensation (continued)

At the annual meeting of shareholders held on May 15, 2018, the shareholders approved the Bank of the James Financial Group, Inc. 2018 Equity Incentive Plan (the “2018 Incentive Plan”). The 2018 Incentive Plan permits the issuance of up to 250,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock awards and performance units.

On January 2, 2019, the Company granted its first block of equity compensation under the 2018 Incentive Plan consisting of 24,500 restricted stock units. The recipients of restricted stock units do not receive shares of the Company’s stock immediately, but instead may receive shares, cash in lieu of shares, or a combination thereof upon satisfying the requisite service period specified by the terms and conditions of the grant. Additionally, the recipients of restricted stock units do not enjoy the rights of holder of the Company’s common stock until the units have vested and as such, they do not have voting rights or rights to nonforfeitable dividends. The related compensation expense is based on the fair value of the Company’s stock. RSUs vest over 3 years in thirds with the first one-third vesting on January 2, 2020. The value of the first one-third vested portion of the grant was settled with cash payments and no shares were issued.

The total expense recognized for the three months ended March 31, 2021 and 2020, in connection with the restricted stock unit awards was approximately $27,000 in each of the periods. There were no forfeitures during the three month period ending March 31, 2021.

At March 31, 2021, the unrecognized stock-based compensation expense related to unvested restricted stock units amounted to approximately $80,000. The unrecognized expense will be recognized ratably over the remaining vesting period of 0.75 years. The Company accounts for forfeitures as they occur.

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 (an exit price) in the principal or most advantageous market and 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.

Note 5 – Fair Value Measurements (continued)

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and 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.

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.

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities available-for sale 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.

Note 5 – Fair Value Measurements (continued)

Derivatives Assets/Liabilities – Interest Rate Lock Commitments (IRLCs)

The Company recognizes IRLCs at fair value based on the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis while taking into consideration the probability that the rate lock commitments will close. All of the Company’s IRLCs are classified as Level 3.


			Carrying Value at March 31, 2021 (in thousands)
Description	Balance as of March 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
US Treasuries	$	2,022	$	—	$	2,022	$	—
US agency obligations		46,751		—		46,751		—
Mortgage-backed securities		16,488		—		16,488		—
Municipals		28,250		—		28,250		—
Corporates		6,321		—		6,321		—

Total available-for-sale securities	$	99,832	$	—	$	99,832	$	—

IRLCs—asset		262		—		—		262

Total assets at fair value	$	100,094	$	—	$	99,832	$	262


			Carrying Value at December 31, 2020 (in thousands)
Description	Balance as of December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
US Treasuries	$	2,027	$	—	$	2,027	$	—
US agency obligations		41,320		—		41,320		—
Mortgage-backed securities		15,696		—		15,696		—
Municipals		24,773		—		24,773		—
Corporates		6,369		—		6,369		—

Total available-for-sale securities	$	90,185	$	—	$	90,185	$	—

IRLCs – asset		425		—		—		425

Total assets at fair value	$	90,610	$	—	$	90,185	$	425

Note 5 – Fair Value Measurements (continued)

The following table provides additional quantitative information about assets measured at fair value on a recurring basis and for which we have utilized Level 3 inputs to determine fair value:


	Quantitative information about Level 3 Fair Value Measurements for March 31, 2021 (dollars in thousands)
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average) (1)
Assets
IRLCs—asset	$	262	Market approach	Range of pull through rate	70%—100% (85%)

(1)	Weighted based on the relative value of the instruments


	Quantitative information about Level 3 Fair Value Measurements for December 31, 2020 (dollars in thousands)
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average) (1)
Assets
IRLCs—asset	$	425	Market approach	Range of pull through rate	70%—100% (85%)

(1)	Weighted based on the relative value of the instruments

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, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the 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, 2021. 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 property 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).

Any fair value adjustments are recorded in the period incurred and expensed against current earnings. However, in situations where the collateral is a house or building in the process of construction, the appraisal is more than 12 months old, management has determined the fair value of the collateral is further impaired below the appraised value, or the appraisal is not based solely on market comparables adjusted for observable inputs, the value is considered Level 3.

Note 5 – Fair Value Measurements (continued)

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


			Carrying Value at March 31, 2021
Description	Balance as of March 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans*	$	1,842	$	—	$	—	$	1,842
Other real estate owned		761		—		—		761

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


			Carrying Value at December 31, 2020
Description	Balance as of December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans*	$	1,829	$	—	$	—	$	1,829
Other real estate owned		1,105		—		—		1,105

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

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, 2021 (dollars in thousands)
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average) (1)
Assets
Impaired loans	$	1,842	Discounted appraised value	Selling cost	0%—10% (8%)
				Discount for lack of marketability and age of appraisal	0%—20% (6%)
OREO		761	Discounted appraised value	Selling cost	10%
				Discount for lack of marketability and age of appraisal	0%—25% (15%)

(1)	Weighted based on the relative value of the instruments.

Note 5 – Fair Value Measurements (continued)


	Quantitative information about Level 3 Fair Value Measurements for December 31, 2020 (dollars in thousands)
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average) (1)
Assets
Impaired loans	$	1, 829	Discounted appraised value	Selling cost	0%—10% (8%)
				Discount for lack of marketability and age of appraisal	0%—20% (6%)
OREO		1,105	Discounted appraised value	Selling cost	10%
				Discount for lack of marketability and age of appraisal	0%—25% (15%)

(1)	Weighted based on the relative value of the instruments.

Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following tables whether or not recognized on the Consolidated Balance Sheets at fair value.

Note 5 – Fair Value Measurements (continued)

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at March 31, 2021 and December 31, 2020 was as follows (in thousands):


			Fair Value Measurements at March 31, 2021 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
Assets	Amounts		(Level 1)		(Level 2)		(Level 3)		Balance
Cash and due from banks	$	33,725	$	33,725	$	—	$	—	$	33,725
Fed funds sold		90,325		90,325		—		—		90,325
Securities
Available-for-sale		99,832		—		99,832		—		99,832
Held-to-maturity		3,667		—		3,948		—		3,948
Restricted stock		1,551				1,551		—		1,551
Loans, net (1)		606,485		—		—		614,956		614,956
Loans held for sale		4,150		—		4,150		—		4,150
Interest receivable		303		—		303		—		303
BOLI		16,453		—		16,453		—		16,453
Derivatives—IRLCs		262		—		—		262		262
Liabilities
Deposits	$	801,190	$	—	$	802,071	$	—	$	802,071
Capital notes		10,029		—		9,058		—		9,058
Interest payable		64		—		64		—		64


			Fair Value Measurements at December 31, 2020 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
Assets	Amounts		(Level 1)		(Level 2)		(Level 3)		Balance
Cash and due from banks	$	31,683	$	31,683	$	—	$	—	$	31,683
Fed funds sold		69,203		69,203		—		—		69,203
Securities
Available-for-sale		90,185		—		90,185		—		90,185
Held-to-maturity		3,671		—		4,192		—		4,192
Restricted stock		1,551		—		1,551		—		1,551
Loans, net		601,934		—		—		598,745		598,745
Loans held for sale		7,102		—		7,102		—		7,102
Interest receivable		2,350		—		2,350		—		2,350
BOLI		16,355		—		16,355		—		16,355
Derivatives—IRLCs		425		—		—		425		425
Liabilities
Deposits	$	764,967	$	—	$	766,212	$	—	$	766,212
Capital notes		10,027		—		9,003		—		9,003
Interest payable		85		—		85		—		85

(1)	Carrying amount is net of unearned income and the Allowance.

Note 6—Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2021 and December 31, 2020 (amounts in thousands):


	March 31, 2021
	Amortized		Gross Unrealized					Fair Value
	Costs		Gains		(Losses)
Held-to-Maturity
US agency obligations	$	3,667	$	281	$	—		$	3,948

Available-for-Sale
US Treasuries		2,000		22		—			2,022
US agency obligations		47,427		649		(1,325	)		46,751
Mortgage-backed securities		16,646		149		(307	)		16,488
Municipals		28,864		336		(950	)		28,250
Corporates		6,066		255		—			6,321

	$101,003		$1,411		$(2,582)			$99,832


	December 31, 2020
	Amortized		Gross Unrealized					Fair Value
	Costs		Gains		(Losses)
Held-to-Maturity
US agency obligations	$	3,671	$	521	$	—		$	4,192

Available-for-Sale
US Treasuries	$	2,000	$	27	$	—		$	2,027
US agency obligations		40,111		1,544		(335	)		41,320
Mortgage-backed securities		15,461		241		(6	)		15,696
Municipals		24,275		594		(96	)		24,773
Corporates		6,070		299		—			6,369

	$	87,917	$	2,705	$	(437	)	$	90,185

Note 6 – 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, 2021 and December 31, 2020 (amounts in thousands):


	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2021	Value		Losses		Value		Losses		Value		Losses
Description of securities
Held-to-maturity
US agency obligations	$	—	$	—	$	—	$	—	$	—	$	—
Available-for-sale
US Treasuries		—		—		—		—		—		—
US agency obligations		25,166		1,325		—		—		25,166		1,325
Mortgage-backed securities		10,750		307		—		—		10,750		307
Municipals		17,178		950		—		—		17,178		950
Corporates		—		—		—		—		—		—

Total	$	53,094	$	2,582	$	—	$	—	$	53,094	$	2,582

	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2020	Value		Losses		Value		Losses		Value		Losses
Description of securities
Held-to-maturity
US agency obligations	$	—	$	—	$	—	$	—	$	—	$	—
Available-for-sale
US Treasuries		—		—		—		—		—		—
US agency obligations		15,808		335		—		—		15,808		335
Mortgage-backed securities		8,201		6		—		—		8,201		6
Municipals		8,202		96		—		—		8,202		96
Corporates		—		—		—		—		—		—

Total	$	32,211	$	437	$	—	$	—	$	32,211	$	437

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).

Note 6 – Securities (continued)

At March 31, 2021, 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, 2021, the Bank owned 36 securities in an unrealized loss position that were being evaluated for other than temporary impairment. Thirteen of these securities was S&P rated AAA and 23 were rated AA. As of March 31, 2021, 20 of these securities were municipal issues and 16 were backed by the US government.

Based on the analysis performed by management as mandated by the Bank’s investment policy, management believes the default risk to be minimal. Because management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to change in interest rates and other market conditions, no declines currently are deemed to be other-than-temporary.

There were no sales of available-for-sale securities during the three months ended March 31, 2021 as compared to $14,619 in sales during the same periods in 2020. In 2020, there were gross gains on sales of available-for-sale securities of $431 during the three month periods ended March 31, 2020. There were no sales of held-to-maturity securities during the three month periods ended March 31, 2021 and 2019.

Note 7 – 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 within 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, 2021 and 2020 was as follows (dollars in thousands):

Note 7 – Business Segments (continued)

Business Segments


	Community
	Banking		Mortgage		Total
For the three months ended March 31, 2021
Net interest income	$	6,748	$	—	$	6,748
Provision for loan losses		—		—		—

Net interest income after provision for loan losses		6,748		—		6,748
Noninterest income		660		1,774		2,434
Noninterest expenses		5,504		1,385		6,889

Income before income taxes		1,904		389		2,293
Income tax expense		376		82		458

Net income	$	1,528	$	307	$	1,835

Total assets	$	881,535	$	4,825	$	886,360

For the three months ended March 31, 2020
Net interest income	$	6,136	$	—	$	6,136
Provision for loan losses		888		—		888

Net interest income after provision for loan losses		5,248		—		5,248
Noninterest income		1,009		1,177		2,186
Noninterest expenses		5,340		857		6,197

Income before income taxes		917		320		1,237
Income tax expense		175		67		242

Net income	$	742	$	253	$	995

Total assets	$	739,651	$	6,404	$	746,055

Note 8 – 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,		December 31,
	2021		2020
Commercial	$	155,235	$	145,145
Commercial real estate		311,826		309,563
Consumer		90,496		92,344
Residential		56,034		62,038

Total loans (1)		613,591		609,090
Less allowance for loan losses		7,106		7,156

Net loans	$	606,485	$	601,934

(1)	Includes net deferred (fees) of ($716) and ($18) as of March 31, 2021 and December 31, 2020, respectively.

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 8 – 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.

•

Note 8 – Loans, allowance for loan losses and OREO (continued)

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.

•

“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, 2021		December 31, 2020
Commercial	$	117	$	121
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		911		940
Commercial Mortgages-Non-Owner Occupied		668		552
Commercial Construction		—		—
Consumer
Consumer Unsecured		—		—
Consumer Secured		60		240
Residential:
Residential Mortgages		207		210
Residential Consumer Construction		—		—

Totals	$	1,963	$	2,063

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO decreased to $761 on March 31, 2021 from $1,105 on December 31, 2020. The following table represents the changes in

Note 8 – Loans, allowance for loan losses and OREO (continued)

OREO balance during the three months ended March 31, 2021 and year ended December 31, 2020.

OREO Changes

(dollars in thousands)


	Three Months Ended			Year Ended
	March 31, 2021			December 31, 2020
Balance at the beginning of the year (net)	$	1,105		$	2,339
Transfers from loans		66			18
Capitalized costs		—			—
Valuation adjustments		—			(437	)
Sales proceeds		(344	)		(844	)
Gain (loss) on disposition		(66	)		29

Balance at the end of the period (net)	$	761		$	1,105

At March 31, 2021 and December 31, 2020, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate property in other real estate owned as of March 31, 2021 and December 31, 2020.

Note 8 – Loans, allowance for loan losses and OREO (continued)


		Impaired Loans
		*(dollars in thousands)*
		As of and For the Three Months Ended March 31, 2021
2021		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
	Commercial	$	277	$	327	$	—	$	309	$	6
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,105		2,461		—		2,124		41
	Commercial Mortgage Non-Owner Occupied		634		685		—		637		4
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		223		223		—		283		4
	Residential
	Residential Mortgages		1,339		1,409		—		1,343		12
	Residential Consumer Construction		—		—		—		—		—
With an Allowance Recorded:
	Commercial	$	—	$	—	$	—	$	2	$	—
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		—		—		—		—		—
	Commercial Mortgage Non-Owner Occupied		—		—		—		—		—
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		—		—		—		—		—
	Residential
	Residential Mortgages		—		—		—		—		—
	Residential Consumer Construction		—		—		—		—		—
Totals:
	Commercial	$	277	$	327	$	—	$	311	$	6
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,105		2,461		—		2,124		41
	Commercial Mortgage Non-Owner Occupied		634		685		—		637		4
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		223		223		—		283		4
	Residential
	Residential Mortgages		1,339		1,409		—		1,343		12
	Residential Consumer Construction		—		—		—		—		—

		$	4,578	$	5,105	$	—	$	4,698	$	67

Note 8 – Loans, allowance for loan losses and OREO (continued)


		Impaired Loans
		*(dollars in thousands)*
		As of and For the Year Ended December 31, 2020
				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
2020		Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded:
	Commercial	$	341	$	341	$	-	$	405	$	30
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,143		2,496		—		2,305		135
	Commercial Mortgage Non-Owner Occupied		639		677		—		601		43
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		343		346		—		225		16
	Residential
	Residential Mortgages		1,347		1,415		—		1,319		62
	Residential Consumer Construction		—		—		—		—		—
With an Allowance Recorded:
	Commercial	$	4	$	4	$	4	$	6	$	-
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		—		—		—		6		—
	Commercial Mortgage Non-Owner Occupied		—		—		—		7		—
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		—		—		—		—		—
	Residential
	Residential Mortgages		—		—		—		70		—
	Residential Consumer Construction		—		—		—		—		—
Totals:
	Commercial	$	345	$	345	$	4	$	411	$	30
	Commercial Real Estate
	Commercial Mortgages-Owner Occupied		2,143		2,496		—		2,311		135
	Commercial Mortgage Non-Owner Occupied		639		677		—		608		43
	Commercial Construction		—		—		—		—		—
	Consumer
	Consumer Unsecured		—		—		—		—		—
	Consumer Secured		343		346		—		225		16
	Residential
	Residential Mortgages		1,347		1,415		—		1,389		62
	Residential Consumer Construction		—		—		—		—		—

		$	4,817	$	5,279	$	4	$	4,944	$	286

Note 8 – 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, 2021
				Commercial
2021	Commercial			Real Estate			Consumer			Residential			Total
Allowance for Credit Losses:
Beginning Balance	$	2,001		$	3,550		$	868		$	737		$	7,156
Charge-Offs		(54	)		—			(10	)		—			(64	)
Recoveries		4			3			6			1			14
Provision		127			(81	)		(34	)		(12	)		—

Ending Balance		2,078			3,472			830			726			7,106
Ending Balance: Individually evaluated for impairment		—			—			—			—			—

Ending Balance: Collectively evaluated for impairment		2,078			3,472			830			726			7,106

Totals:	$	2,078		$	3,472		$	830		$	726		$	7,106

Financing Receivables:
Ending Balance: Individually evaluated for impairment		277			2,739			223			1,339			4,578

Ending Balance: Collectively evaluated for impairment		154,958			309,087			90,273			54,695			609,013

Totals:	$	155,235		$	311,826		$	90,496		$	56,034		$	613,591

Note 8 – 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, 2020
				Commercial
2020	Commercial			Real Estate			Consumer			Residential			Total
Allowance for Credit Losses:
Beginning Balance	$	1,330		$	1,932		$	865		$	702		$	4,829
Charge-Offs		(96	)		(224	)		(75	)		(53	)		(448	)
Recoveries		20			139			53			15			227
Provision		747			1,703			25			73			2,548

Ending Balance		2,001			3,550			868			737			7,156
Ending Balance: Individually evaluated for impairment		4			—			—			—			4

Ending Balance: Collectively evaluated for impairment		1,997			3,550			868			737			7,152

Totals:	$	2,001		$	3,550		$	868		$	737		$	7,156

Financing Receivables:
Ending Balance: Individually evaluated for impairment		345			2,782			343			1,347			4,817

Ending Balance: Collectively evaluated for impairment		144,800			306,781			92,001			60,691			604,273

Totals:	$	145,145		$	309,563		$	92,344		$	62,038		$	609,090

Note 8 – Loans, allowance for loan losses and OREO (continued)


	Age Analysis of Past Due Loans as of
	March 31, 2021
	(dollars in thousands)
					Greater								Recorded Investment
	30-59 Days		60-89 Days		than		Total Past				Total		> 90 Days &
2021	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	—	$	31	$	—	$	31	$	155,204	$	155,235	$	—
Commercial Real Estate:
Commercial Mortgages- Owner Occupied		108		—		633		741		108,933		109,674		—
Commercial Mortgages-Non-Owner Occupied		100		—		627		727		169,722		170,449		—
Commercial Construction		—		—		—		—		31,703		31,703		—
Consumer:
Consumer Unsecured		63		—		—		63		3,722		3,785		—
Consumer Secured		201		6		49		256		86,455		86,711		—
Residential:
Residential Mortgages		264		68		207		539		42,315		42,854		—
Residential Consumer Construction		—		—		—		—		13,180		13,180		—

Total	$	736	$	105	$	1,516	$	2,357	$	611,234	$	613,591	$	—


	Age Analysis of Past Due Loans as of
	December 31, 2020
	(dollars in thousands)
					Greater								Recorded Investment
	30-59 Days		60-89 Days		than		Total Past				Total		> 90 Days &
2020	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial	$	157	$	—	$	—	$	157	$	144,988	$	145,145	$	—
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		38		—		842		880		107,342		108,222		—
Commercial Mortgages-Non-Owner Occupied		252		116		394		762		170,307		171,069		—
Commercial Construction		—		—		—		—		30,272		30,272		—
Consumer:
Consumer Unsecured		7		—		—		7		3,764		3,771		—
Consumer Secured		309		27		229		565		88,008		88,573		—
Residential:
Residential Mortgages		575		243		210		1,028		45,868		46,896		—
Residential Consumer Construction		—		—		—		—		15,142		15,142		—

Total	$	1,338	$	386	$	1,675	$	3,399	$	605,691	$	609,090	$	—

Note 8 – Loans, allowance for loan losses and OREO (continued)


	Credit Quality Information—by Class
	March 31, 2021
	(dollars in thousands)
2021	Pass		Monitor		Special Mention		Substandard		Doubtful		Totals
Commercial	$	143,337	$	4,530	$	7,050	$	318	$	—	$	155,235
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		99,739		3,406		4,424		2,105		—		109,674
Commercial Mortgages-Non-Owner Occupied		161,407		7,213		1,028		801		—		170,449
Commercial Construction		31,703		—		—		—		—		31,703
Consumer
Consumer Unsecured		3,758		—		26		1		—		3,785
Consumer Secured		86,363		—		—		348		—		86,711
Residential:
Residential Mortgages		41,408		—		—		1,446		—		42,854
Residential Consumer Construction		13,180		—		—		—		—		13,180

Totals	$	580,895	$	15,149	$	12,528	$	5,019	$	—	$	613,591


	Credit Quality Information—by Class
	December 31, 2020
	(dollars in thousands)
2020	Pass		Monitor		Special Mention		Substandard		Doubtful		Totals
Commercial	$	133,075	$	4,332	$	7,386	$	352	$	—	$	145,145
Commercial Real Estate:
Commercial Mortgages-Owner Occupied		98,623		3,028		4,428		2,143		—		108,222
Commercial Mortgages-Non -Owner Occupied		161,300		7,277		1,682		810		—		171,069
Commercial Construction		30,272		—		—		—		—		30,272
Consumer
Consumer Unsecured		3,740		—		30		1		—		3,771
Consumer Secured		88,044		—		—		529		—		88,573
Residential:
Residential Mortgages		45,441		—		—		1,455		—		46,896
Residential Consumer Construction		15,142		—		—		—		—		15,142

Totals	$	575,637	$	14,637	$	13,526	$	5,290	$	—	$	609,090

Note 8 – Loans, allowance for loan losses and OREO (continued)

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three months ended March 31, 2021 and 2020.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three months ended March 31, 2021 and 2020.

At March 31, 2021 and December 31, 2020, the Bank had no outstanding commitments to disburse additional funds on loans classified as TDRs.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant.

Since the beginning of the pandemic in the spring of 2020, the Bank has modified a total of 191 loans. The principal balances of these loans on March 31, 2021 (adjusted for payoffs) totaled approximately $90 million. As of March 31, 2020, 5 of the 191 previously modified loans remain in deferment. The principal balance of these 5 loans is approximately $6.12 million, which represents 1.00% of the total loan portfolio. Of the total deferrals, all 5 loans are for deferrals of principal only. There are no loans for which principal and interested are being deferred.

If a customer requests a second modification, an extensive evaluation of the circumstances surrounding the need for the request is conducted. Procedurally, a commercial borrower will be required to present financial forecasts, proof of business sustainability, and verification of sources of repayment to the primary loan officer, the Chief Lending Officer, and the Chief Credit Officer before a second deferral is granted. Retail borrowers are also required to submit in writing the reason for the need for a second deferral request before an additional deferral is granted. Relationships whose situations do not warrant a second deferral will most likely be downgraded and subsequently evaluated for specific impairment within the allowance for loan loss. We are not currently evaluating any relationships, for additional deferrals.

In accordance with provisions of Section 4013 of the CARES Act (March 2020) and the Joint Interagency Regulatory Guidance (March 2020, revised April 2020), the above modifications were not considered to be TDRs. The CARES Act addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Interagency Guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and explained that in consultation with the Financial Accounting Standards Board (FASB) staff, the federal banking agencies concluded that short-term modifications (e.g. six months or less) made on a good faith basis to borrowers who were current as of the implementation date of a relief program and not TDRs. In December 2020, the Consolidated Appropriations Act extended the period established by Section 4013 of the CARES Act for providing temporary relief from TDR classification to the earlier of January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates.

Note 9 – Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and

monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, treasury services income and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Treasury services income primarily represents fees charged to customers for sweep, positive pay and lockbox services. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or at the end of the month.

Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Note 10 – Recent accounting pronouncements and other authoritative guidance

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company has been in discussions with its core processor to coordinate plans for implementation and has contracted with an additional vendor to begin implementation.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

Note 10 – Recent accounting pronouncements and other authoritative guidance (continued)

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022The Company has identified a small number of affected loans and is evaluating other benchmarks to substitute for LIBOR such as SOFR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers,

Note 10 – Recent accounting pronouncements and other authoritative guidance (continued)

extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, is encouraged to continue to work with effected borrowers on additional loan modifications. This interagency guidance is expected to continue have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Note 11—COVID-19 and Current Economic Conditions

On March 11, 2020, the World Health Organization announced that the COVID-19 outbreak was deemed a pandemic, and on March 13, 2020, the President declared the ongoing COVID-19 pandemic of sufficient magnitude to warrant an emergency declaration. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and when state and local economies will return to operational norms, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. In addition, we rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas.

Management will continue to evaluate current economic conditions to determine the impact of the pandemic on the ability of our customers to fulfill their financial obligations to the Company, as well as the values of our financial and nonfinancial assets resulting from the market disruption. Accordingly, significant estimates used in the preparation of our financial statements including those associated with the evaluation of the allowance for loan losses as well as other valuation-based estimates may be subject to significant adjustments in future periods. As the full effects are not yet known, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. However, as the pandemic continues to evolve into a prolonged worldwide health crisis, the pandemic could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

Note 12 – Capital Notes

On April 13, 2020, the Company commenced a private placement of unregistered debt securities (the “2020 Offering”). In the 2020 Offering, the Company sold and closed $10,050,000 in principal of notes (the “2020 Notes”) during the 2^nd and 3^rd quarters of 2020. The 2020 Offering officially ended on July 8, 2020. The 2020 Notes bear interest at the rate of 3.25% per year with interest payable quarterly in arrears. The 2020 Notes will mature on September 30, 2025 and are subject to full or partial repayment on or after September 30, 2021. The balance of the 2020 Notes on the March 31, 2021 consolidated balance sheet is net of unamortized issuance costs.

Note 12 – Capital Notes (continued)

On September 24, 2020 the Bank used $5,000,000 of the proceeds for the payment of principal of the Company’s previously outstanding 4.00% notes that were issued in 2017. The Company intends to use the balance of the proceeds from the 2020 Offering for general corporate purposes in the discretion of Company’s management such as payment of interest on the 2020 Notes and as a contribution of additional capital to the Bank.

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. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:

•

the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;

•

operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Financial specifically;

•

government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations), including changes to address the impact of COVID-19;

•

economic, market, political and competitive forces affecting Financial’s banking and other businesses;

•

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 interest rates, monetary policy and general economic conditions, which may impact Financial’s net interest income;

•

changes in the value of real estate securing loans made by the Bank;

•

diversion of management time on pandemic-related issues;

•

adoption of new accounting standards or changes in existing standards;

•

changes to statutes, regulations, or regulatory policies or practices resulting from the COVID-19 pandemic;

•

compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement; and

•

the risk that Financial’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

IMPACT OF COVID-19

Effects on Market Areas

The COVID-19 pandemic and certain provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and other recent legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations, as further discussed below.

Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

•

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0—0.25%.

•

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program, or PPP Program, which was subsequently increased by $320 billion on April 24, 2020. Under the PPP program, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the PPP program. Effective August 8, 2020, banks ceased taking applications under the PPP program. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to loan modifications and classification as troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19.

•

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, is encouraged to continue to work with effected borrowers on additional loan modifications. Loan modifications made through December 31, 2020 are disclosed within Note 5 – Loans and Allowance for Loan Losses.

•

On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) into law to provide continued assistance to individuals and businesses that have been financially impacted by the ongoing coronavirus pandemic. Section 311 of the Economic Aid Act added a new temporary provision that authorizes the SBA to guarantee Paycheck Protection Program Second Draw Loans (the “PPP Second Draw Program”), under generally the same terms and conditions available under the PPP Under section 311, SBA may guarantee loans under the PPP Second Draw Program through March 31, 2021 (‘‘Second Draw PPP Loans’’) to borrowers that previously received an initial PPP loan and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid Act permits individuals and business that did not receive an initial PPP loan to apply under the PPP Program.

•

In accordance with the relief provisions of the CARES Act and the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from TDR classification. The TDR relief provisions provided for by the CARES Act were extended in December 2020 by the Consolidated Appropriations Act through the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency terminates.

Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above are may have a significant impact on our business. As a result, we anticipate that our financial condition, capital levels and results of operations could be significantly adversely affected, as described in further detail below.

COVID-19 Crisis Management

As an essential service provider, Bank of the James has continued to provide uninterrupted service to its clients throughout the COVID-19 crisis. On March 2, 2020 the Company’s Management Committee initiated plans in response to the emerging risk related to the pandemic.

From the beginning, our management of the crisis has focused on protecting the health and well-being of our employees and clients while continuing to provide our clients with full access to banking services. As the operational risk related to the COVID-19 crisis evolved, the Company took proactive measures to manage operational risk, including the following:

•

The Company has implemented its Business Continuity Plan.

•

All branches remain open, with routine banking services offered through online banking, drive-thru, ATMs, and limited lobby access.

•

Implemented a number of actions to support a healthy workforce, including:

•

Flexible work practices such as work-from-home options, working in shifts and placing greater distances between employees;

•

Discontinuation of non-essential business travel and meetings; and

•

Use of online meeting platforms, including successfully conducting the 2020 Annual Meeting of Shareholders in a virtual format. We intend to conduct the 2021 Annual Meeting of Shareholders virtually as well.

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.

Financial’s critical accounting policies include 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 the Bank. 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 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”).

The Bank’s policy with respect to the methodology for determining the allowance for loan losses involves a higher degree of complexity and requires management to make subjective judgments that often require assumptions or estimates about uncertain matters. This critical policy and its assumptions are periodically reviewed with the Board of Directors.

See “Management Discussion and Analysis Results of Operations – Allowance for Provision for Loan Losses” 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. Recently the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington and Rustburg. 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.bank.

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 gains on sales of loans held for sale 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 5204 Fort Avenue in Lynchburg (the “Fort Avenue Branch”),

•

A branch located at 4698 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”),

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

•

A branch located at 1745 Confederate Blvd, Appomattox, VA (the “Appomattox Branch”),

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A branch located at 225 Merchant Walk Avenue, Charlottesville, VA (the “5^th Street Station Branch”),

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A branch located at 3562 Electric Road, Roanoke, VA (the “Roanoke Branch”),

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A branch located at 45 South Main St., Lexington, VA (the “Lexington Branch”),

•

A branch located at 550 Water St., Charlottesville, VA (the “Water Street Branch”),

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A branch located at 2101 Electric Road, Roanoke, VA (the “Oak Grove Branch”), and

•

A branch located at 13 Village Highway, Rustburg, VA (the “Rustburg Branch”).

Limited Service Branches

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

•

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

Loan Production Offices

•

Residential mortgage loan production office located at the Forest Branch,

•

Residential mortgage loan production office located at 2001 South Main Street, Blacksburg, Virginia, and

•

Commercial, consumer and residential mortgage loan production office located at the Water Street Branch.

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

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 may open 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 Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between $900,000 and $1,500,000.

•

Real property located at 4105 Boonsboro Road, Lynchburg, Virginia. This property is a former bank branch and with minor cosmetic improvements is suitable as is to be used as a bank branch. The Bank does not anticipate utilizing this location as a bank branch until mid 2022 at the earliest.

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, 2021 (in thousands)
Commitments to extend credit	$	159,934
Letters of Credit		4,286

Total	$	164,220

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 ultimately 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, 2021 and December 31, 2020 and the results of operations of Financial for the three-month periods ended March 31, 2021 and 2020. 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, 2021 as Compared to December 31, 2020

Total assets were $886,360,000 on March 31, 2021 compared with $851,386,000 at December 31, 2020, an increase of 4.11%. The increase in total assets was primarily funded from the growth in deposits.

Total deposits increased from $764,967,000 as of December 31, 2020 to $801,190,000 on March 31, 2021, an increase of 4.74%. The increase resulted in large part from increases in the following deposit categories: non-interest-bearing demand deposits, NOW, money market, and savings accounts and was partially offset by a decrease in time deposits. The increase was attributable in part to stimulus funds and PPP loans received by our customers.

Total loans, excluding loans held for sale, increased to $613,591,000 on March 31, 2021 from $609,090,000 on December 31, 2020, resulting from the origination of loans under the ongoing PPP loan program. This growth was partially offset by normal amortization, PPP loan forgiveness, and decreased commercial loan origination in the first quarter. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for loan losses, increased to $606,485,000 on March 31, 2021 from $601,934,000 on December 31, 2020, 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, 2021					December 31, 2020
	Amount		Percentage			Amount		Percentage
Commercial	$	155,235		25.30	%	$	145,145		23.83	%
Commercial Real Estate		311,826		50.82	%		309,563		50.82	%
Consumer		90,496		14.75	%		92,344		15.16	%
Residential		56,034		9.13	%		62,038		10.19	%

Total loans	$	613,591		100.00	%	$	609,090		100.00	%

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to $2,723,000 on March 31, 2021 from $3,168,000 on December 31, 2020. OREO decreased to $761,000 on March 31, 2021 from $1,105,000 on December 31, 2020. The decrease in OREO was due in large part to the sale of one large OREO property during the first quarter. Non-performing loans decreased slightly from $2,063,000 at December 31, 2020 to $1,963,000 at March 31, 2021.

As discussed in more detail below under “Results of Operations—Allowance and Provision for Loan Losses,” management has provided for the anticipated losses on these loans in the allowance for loan losses. 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.

As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers will continue to encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2020, the Bank was carrying three OREO properties on its books at a value of $1,105,000. During the three months ended March 31, 2021, the Bank acquired one additional OREO property and disposed of two OREO properties, and as of March 31, 2021 the Bank is carrying two OREO properties at a value of $761,000. The OREO properties are available for sale and are being actively marketed.

The Bank had loans in the amount of $384,000 at March 31, 2021 classified as performing TDRs as compared to $392,000 at December 31, 2020. 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.

In accordance with the relief provisions of the CARES Act and the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above modifications were not considered to be troubled debt restructurings and were excluded from the TDR discussion above. The TDR relief provisions provided for by the CARES Act were extended in December 2020 by the Consolidated Appropriations Act through the earlier of January 1, 2022 or 60 days after the national COVID-19 emergency terminates.

Management has reviewed loan segments that it believes could be adversely impacted by the COVID-19 pandemic, and identified the following segments: assisted living, education/childcare, entertainment, hospitality, oil & gas (gas stations), religious/charitable, restaurants, retail & services. At March 31, 2021, the loan balances in those segments were as follows:


Industry	Principal Balance (in thousands)		Number of Loans		Percent of Total Loan Portfolio
Assisted Living	$	7,646		12		1.25	%
Education/Childcare		6,435		14		1.05	%
Entertainment		6,611		23		1.08	%
Hospitality		15,209		7		2.48	%
Oil & Gas (Gas Stations)		476		9		0.08	%
Religious/Charitable		18,181		37		2.96	%
Restaurants		17,027		48		2.77	%
Retail & Services		9,960		43		1.62	%

Total	$	81,545		193		13.29	%

Management continues to closely monitor loans in these categories.

Cash and cash equivalents increased to $124,050,000 on March 31, 2021 from $100,886,000 on December 31, 2020. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase was due in large part to an increase in deposits related to PPP loan funds and management’s decision to carry additional liquidity in order to accommodate the use of PPP loan proceeds. Cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Securities held-to-maturity were flat, decreasing slightly to $3,667,000 on March 31, 2021 from $3,671,000 on December 31, 2020. This decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

Securities available-for-sale, which are carried on the balance sheet at fair market value, increased to $99,832,000 on March 31, 2021, from $90,185,000 on December 31, 2020. During the three months ended March 31, 2021, the Bank purchased $14,543,000 in available-for-sale securities, which was responsible for the increase in securities available-for sale. During the three months ended March 31, 2021 the Bank did not sell any securities available-for-sale and received $833,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale, which partially offset the increase.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $653,000 at March 31, 2021, which was unchanged from December 31, 2020. 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, 2021, Financial, on a consolidated basis, had liquid assets of $223,882,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. Of this amount, approximately $28,570,000 (representing current market value) of the available-for-sale securities are pledged as collateral with $20,400,000 pledged as security for public deposits, and $8,170,000 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, 2021. 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.

The COVID-19 pandemic could have a material negative impact on Financial’s short-term or long-term liquidity. For example, if customers unexpectedly draw down on existing lines of credit, our liquidity could be impacted. While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management is closely monitoring our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. Based in part on recent loan activity including loans made pursuant to the PPP as discussed below under “Allowance and Provision for Loan Losses,” the Bank is monitoring liquidity to ensure it is able to fund future loans and withdrawals related to the use of PPP funds.

At March 31, 2021, the Bank had a leverage ratio of approximately 8.33%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 11.47% and a total risk-based capital ratio of approximately 12.59%. As of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020:

Bank Level Only Capital Ratios


Analysis of Capital for Bank of the James (Bank only)
(dollars in thousands)
	March 31,		December 31,
Analysis of Capital (in 000’s)	2021		2020
Tier 1 capital
Common Stock	$	3,742	$	3,742
Surplus		22,325		22,325
Retained earnings		46,571		44,621

Total Tier 1 capital	$	72,638	$	70,688

Common Equity Tier 1 Capital (CET1)	$	72,638	$	70,688

Tier 2 capital
Allowance for loan losses	$	7,106	$	7,156
Total Tier 2 capital:	$	7,106	$	7,156

Total risk-based capital	$	79,744	$	77,844

Risk weighted assets	$	633,451	$	635,445
Average total assets	$	871,732	$	853,558


	Actual						Regulatory Benchmarks
							For Capital			For Well
	March 31,			December 31,			Adequacy			Capitalized
	2021			2020			Purposes (1)			Purposes
Capital Ratios:
Tier 1 capital to average total assets		8.33	%		8.28	%		4.000	%		5.000	%
Common Equity Tier 1 capital		11.47	%		11.12	%		7.000	%		6.500	%
Tier 1 risk-based capital ratio		11.47	%		11.12	%		8.500	%		8.000	%
Total risk-based capital ratio		12.59	%		12.25	%		10.500	%		10.000	%

(1)	Includes the capital conservation buffer of 2.50% for all ratios, excluding the Tier 1 capital to average total assets ratio.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, 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, 2021 would be slightly lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019 and implemented a capital conservation buffer of 2.5%. As a result, the Bank is required to have a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer) and a Tier 1 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). Failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raised 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.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

While the CBLR framework is currently available for banks to use in their March 31, 2021 Call Report, the Bank has elected not to opt into the CBLR framework at this time.

Results of Operations

Comparison of the Three months Ended March 31, 2021 and 2020

Earnings Summary

Financial had net income including all operating segments of $1,835,000 for the three months ended March 31, 2021, compared to $995,000 for the comparable period in 2020. Basic and diluted earnings per common share for the three months ended March 31, 2021 were $0.42, compared to basic and diluted earnings per share of $0.23 for the three months ended March 31, 2020.

The increase in net income for the three months ended March 31, 2021, as compared to the prior year period was due primarily to an decrease in the loan loss provision, as discussed in more detail below, along with minimal loan growth, and was bolstered in part by an increase in non-interest income. In the quarter ended March 31, 2020, the Bank increased the provision for loan losses due to economic uncertainty caused by the onset of the COVID-19 pandemic. Because of improving economic metrics in 2021, the provision for loan losses decreased. We anticipate that our net income for future fiscal periods will continue to be impacted as a result of the winding down of the PPP loan program. We further expect that net interest margins will remain compressed which will have a further negative impact on our earnings.

These operating results represent an annualized return on average stockholders’ equity of 11.49% for the three months ended March 31, 2021, compared with 6.52% for the three months ended March 31, 2020. This increase for the three months ended March 31, 2021 was due to an increase in our net income. The Company had an annualized return on average assets of 0.85% for the three months ended March 31, 2021 compared with 0.54% for the same period in 2020. The increase for the three months ended March 31, 2021 largely resulted from an increase in the Bank’s net income and was partially offset by an increase in assets.

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

Interest Income, Interest Expense, and Net Interest Income

Interest income decreased to $7,365,000 for the three months ended March 31, 2021 from $7,488,000 for the same period in 2020, a decrease of 1.64%. Interest income decreased because of a decrease in interest rates and was partially offset by a minimal increase in loan balances. The average rate received on loans decreased from 4.87% for the three months ended March 31, 2020 to 4.51% for the comparable period in 2021. The rate on total average earning assets decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 primarily because a decrease in the rates paid by borrowers on loans, particularly the lower yielding PPP loans.

Interest expense decreased to $617,000 for the three months ended March 31, 2021 from $1,352,000 for the same period in 2020, a decrease of 54.36%. The decrease for the three months resulted primarily from a decrease in interest rates paid on deposits. The Bank’s average rate paid on interest bearing deposits was 0.33% during the three months ended March 31, 2021 as compared to 0.90% for the same period in 2020.

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, 2021 of $6,748,000 increased from $6,136,000 for the same period in 2020. The net interest margin was 3.35% for the three months ended March 31, 2021 as compared with 3.63% for the same period in 2020. The decrease was primarily caused by the impact of lower-yielding PPP loans. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact net interest margin. Other financial impacts could occur, though such potential impacts are unknown at this time.

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, gains on sales of mortgage loans held for sale, commissions on sales of investments, fees generated from treasury management services, and bank-owned life insurance income. Non-interest income increased to $2,434,000 for the three months ended March 31, 2021 from $2,186,000 for the three months ended March 31, 2020.

These increases for the three months ended March 31, 2021 as compared to the same period last year were due primarily to an increase in gains on sales of loans held for sale from $1,177,000 for the three months ended March 31, 2020 to $1,774,000 for the same period ended March 31, 2021. This was offset by a decrease in gains on sales of available-for-sale securities which decreased from $431,000 to $0 for three months ended March 31, 2020 and 2021.

The Bank, through its 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 $30,838,000 or 39.69% of the total mortgage loans originated in the three months ended March 31, 2021 as compared to $24,993,000 or 53.44% of the total mortgage loans originated in the same period in 2020. Management anticipates that in the short term purchase mortgage originations will continue to represent a majority of mortgage originations as they have in the recent past. However, management also believes that further decreases in long term market interest rates could trigger increased refinancing activity. While uncertainty remains, management expects mortgage rates stay near historic lows for the foreseeable future.

Although mortgage rates fluctuated dramatically in the first quarter of 2020, rates generally decreased to near historic lows in the first three months of 2020 and remained there through March 31, 2021. Because of the uncertainty surrounding current and near-term economic conditions arising from the COVID-19 pandemic, management cannot predict future mortgage rates. Nevertheless, management expects that the Mortgage division’s reputation in Region 2000, steady residential real estate inventory and the recent hiring of additional mortgage loan originators in Roanoke, Harrisonburg and Charlottesville, and Blacksburg, will result in strong mortgage originations through the remainder of 2021. Management also believes that in the event that interest rates rise, 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 two 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 2021.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell 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 2021.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2021 increased to $6,889,000 from $6,197,000, an increase of 11.17% from the comparable period in 2020. This increase resulted from increases in personnel expenses from variable compensation, credit expense, marketing expense, and FDIC insurance expense. These were offset in part by the deferral of loan origination costs of $441,000 related to the PPP program, which will be amortized to interest income along with the related fees over the lives of the related loans, and a slight decrease in OREO expense. Income recognition may be accelerated due to repayment or forgiveness of the loans. Total personnel expense was $3,732,000 for the three month period ended March 31, 2021 as compared to $3,354,000 for the same period in 2020.

Allowance and Provision 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 for 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 as well as all TDRs, 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 $0 to the allowance for loan losses for the three month period ended March 31, 2021. This compares to a provision of $888,000 for the comparable period in 2020.

In the first quarter of 2020, an adjustment in qualitative factors associated with the onset of the pandemic resulted in an increase in the provision. These factors were relatively unchanged during the first quarter of 2021 from December 31, 2020 due to some signs of leveling and stabilization in the economy, and therefore no additional provision was required during the quarter ended March 31, 2021. In addition, a significant portion of loans originated in the first quarter are guaranteed by the United States Small Business Administration. These loans pose no credit risk and therefore required no provision. The components of the allowance are detailed further in table below.

At March 31, 2021, the allowance for loan losses was 1.16% of total loans outstanding, versus 1.17% of total loans outstanding at December 31, 2020. The allowance to total loans, excluding PPP loans, increased to approximately 1.26% at March 31, 2021 as compared to approximately 1.25% at December 31, 2020. Because the PPP loans are guaranteed in full by the U.S. Small Business Administration, management determined that these loans should be excluded from the calculation. At March 31, 2021, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate further due to the COVID-19 pandemic, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying potential credit losses is a subjective process. Therefore, the Company maintains a general reserve to cover credit losses within the portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The March 22, 2020 (revised April 2020) statement issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), passed on March 27, 2020 provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. §§1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to certain borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, short-term interest only payments, or other delays in payment that are insignificant.

If a customer requests a second modification, an extensive evaluation of the circumstances surrounding the need for the request is conducted. Procedurally, a commercial borrower will be required to present financial forecasts, proof of business sustainability, and verification of sources of repayment to the primary loan officer, the Chief Lending Officer, and the Chief Credit Officer before a second deferral is granted. Retail borrowers are also required to submit in writing the reason for the need for a second deferral request before an additional deferral is granted. Relationships whose situations do not warrant a second deferral will most likely be downgraded and subsequently evaluated for specific impairment within the allowance for loan loss. As of March 31, 2021, we are currently evaluating 1 relationship, totaling approximately $3,000,000, for a second deferral.

In accordance with the March 22, 2020 (revised April 2020) Joint Interagency Regulatory Guidance as well as the legislative relief provision, the above modifications were not considered to be troubled debt restructurings and were excluded from the TDR discussion above.

Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), which appropriated $349 billion (which was subsequently increased by an additional $320 billion including $60 billion set aside for small, midsize, and community lenders) in loans designed to provide a direct incentive for sole proprietors, independent contractors, self-employed persons, non-profits and small businesses with less than 500 employees, allowing for narrow exceptions with businesses greater than 500 employees, to keep their workers on the payroll. These loans will be fully forgiven by the Small Business Administration if the funds are used for payroll costs, interest on mortgages, rent, or utilities as long as at least 75% of the forgiven amount was used for payroll. Additionally, loan payments will also be deferred for ten months. The initial Program started on April 3, 2020 and ended on August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees.

The Bank began accepting applications from qualified customers on April 3, 2020 and, as of March 31, 2021, had helped provide over $102,600,000 in funding to over 894 clients through the PPP. The Bank received 251 applications in the first quarter of 2021.

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 $64,000 for the three months ended March 31, 2021 as compared to $260,000 for the comparable period in 2020. 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, 2021, the Bank had recoveries of charged-off loans of $14,000 as compared with $17,000 for the comparable period in 2020.

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, 2021 was relatively unchanged as compared to December 31, 2020.

As shown in the table below, the total balance in the allowance decreased, from $7,156,000 as of December 31, 2020 to $7,106,000 on March 31, 2021. The allowance for loan losses as a percent of loans decreased to 1.16% as of March 31, 2021 from 1.17% as of December 31, 2020. The allowance for loan losses as a percent of unimpaired loans was 1.16% at March 31, 2021 as compared to 1.17% at December 31, 2020. The general reserve as a percentage of unimpaired loan balances remained at 1.16% (or 1.26% excluding PPP loans) as of March 31, 2021 as compared to 1.17% (or 1.25% excluding PPP loans) as of December 31, 2020. Management will continue to evaluate the adequacy of the allowance for loan losses as more economic data becomes available and as changes within the Company’s portfolio are known. The effects of the pandemic may require the Company to fund additional increases in the allowance for loan losses in future periods.

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, 2021
2021	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for Credit Losses:
Beginning Balance	$	2,001		$	3,550		$	868		$	737		$	7,156
Charge-Offs		(54	)		—			(10	)		—			(64	)
Recoveries		4			3			6			1			14
Provision		127			(81	)		(34	)		(12	)		—

Ending Balance		2,078			3,472			830			726			7,106
Ending Balance: Individually evaluated for impairment		—			—			—			—			—

Ending Balance: Collectively evaluated for impairment		2,078			3,472			830			726			7,106

Totals:	$	2,078		$	3,472		$	830		$	726		$	7,106

Financing Receivables:
Ending Balance: Individually evaluated for impairment		277			2,739			223			1,339			4,578

Ending Balance: Collectively evaluated for impairment		154,958			309,087			90,273			54,695			609,013

Totals:	$	155,235		$	311,826		$	90,496		$	56,034		$	613,591


	Allowance for Loan Losses and Recorded Investment in Loans (dollars in thousands) As of and For the Year Ended December 31, 2020
2020	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for Credit Losses:
Beginning Balance	$	1,330		$	1,932		$	865		$	702		$	4,829
Charge-Offs		(96	)		(224	)		(75	)		(53	)		(448	)
Recoveries		20			139			53			15			227
Provision		747			1,703			25			73			2,548

Ending Balance		2,001			3,550			868			737			7,156
Ending Balance: Individually evaluated for impairment		4			—			—			—			4

Ending Balance: Collectively evaluated for impairment		1,997			3,550			868			737			7,152

Totals:	$	2,001		$	3,550		$	868		$	737		$	7,156

Financing Receivables:
Ending Balance: Individually evaluated for impairment		345			2,782			343			1,347			4,817

Ending Balance: Collectively evaluated for impairment		144,800			306,781			92,001			60,691			604,273

Totals:	$	145,145		$	309,563		$	92,344		$	62,038		$	609,090

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


	Three Months Ended March 31, (in thousands)
	2021			2020
Balance, beginning of period	$	7,156		$	4,829
Provision for loan losses		—			888
Loans charged off		(64	)		(260	)
Recoveries of loans charged off		14			17

Net (charge offs)		(50	)		(243	)

Balance, end of period	$	7,106		$	5,474

No nonaccrual loans were excluded from the impaired loan disclosures at March 31, 2021 and December 31, 2020. If interest on these loans had been accrued, such income cumulatively would have approximated $173,000 and $158,000 on March 31, 2021 and December 31, 2020, 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

•

“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.

•

Income Taxes

For the three months ended March 31, 2021, Financial had an income tax expense of $458,000 as compared to $242,000 for the three months ended March 31, 2020. This represents an effective tax rate of 19.97% for the three months ended March 31, 2021 as compared with 19.56% for the three months ended March 31, 2020. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance.

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2021 and 2020

(dollars in thousands)


	2021								2020
	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)	$	611,420		$	6,792		4.51	%	$	574,185		$	6,968		4.87	%
Loans held for sale		6,158			68		4.48	%		3,653			37		4.06	%
Fed funds sold		82,579			14		0.07	%		24,192			66		1.09	%
Interest bearing bank balances		18,657			14		0.30	%		18,007			64		1.43	%
Securities (3)		96,246			474		2.00	%		55,962			344		2.47	%
Federal agency equities		1,435			6		1.70	%		1,390			9		2.60	%
CBB equity		116			—		—			116			—		—

Total earning assets		816,611			7,368		3.66	%		677,505			7,488		4.43	%

Allowance for loan losses		(7,156	)							(4,907	)
Non-earning assets		63,903								63,161

Total assets	$	873,358							$	735,759

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing	$	377,894		$	107		0.11	%	$	284,389		$	276		0.39	%
Savings		102,162			28		0.11	%		86,901			50		0.23	%
Time deposits		149,560			373		1.01	%		193,355			946		1.96	%
Total interest bearing deposits		629,616			508		0.33	%		564,645			1,272		0.90	%
Other borrowed funds
Financing leases		4,092			27		2.68	%		4,415			30		2.73	%
Capital Notes		10,028			82		3.32	%		5,000			50		4.00	%

Total interest-bearing liabilities		643,736			617		0.39	%		574,060			1,352		0.94	%

Non-interest bearing deposits		158,692								95,218
Other liabilities		6,136								5,238

Total liabilities		808,564								674,516
Stockholders’ equity		64,794								61,243

Total liabilities and Stockholders’ equity	$	873,358							$	735,759

Net interest income				$	6,751							$	6,136

Net interest margin							3.35	%							3.63	%

Interest spread							3.27	%							3.49	%

(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. Assumed income tax rates of 21% were used for the periods presented.

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 quarter ended March 31, 2021, 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.

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

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 29, 2021. Except as set forth herein, there have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2020.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) On January 19, 2021, the Company’s board of directors approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to a total of 47,000 shares of the Company’s common stock. Repurchases may be made in the open market, through block trades, or otherwise, and in privately negotiated transactions.

The Company repurchased 14,600 shares during the quarter ended March 31, 2021.

The following table provides information as of March 31, 2021 with respects to shares of common stock repurchased by the Company for the quarter then ended:


Beginning Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2021 through January 31, 2021		—		N/A		—		47,000
February 1, 2021 through February 28, 2021		—	$	14.51		14,600		32,400
March 1, 2021 through March 31, 2021		—		N/A		—		32,400

Total		—	$	14.51		14,600		32,400

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 12, 2021

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 12, 2021

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 12, 2021

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, 2021, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of March 31, 2021 and December 31, 2020; (ii) Consolidated Statements of Income (unaudited) for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income(Loss) (unaudited) for the three months ended March 31, 2021 and 2020 (iv) Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and 2020 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2021 and 2020; (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 12, 2021	By	/S/ Robert R. Chapman III
		Robert R. Chapman III, President
		(Principal Executive Officer)

Date: May 12, 2021	By	/S/ J. Todd Scruggs
		J. Todd Scruggs, Secretary and Treasurer
		(Principal Financial Officer and Principal Accounting
		Officer)