Item 1A.Risk Factors
RISK FACTORS
In addition to the other information included in this Annual Report on Form 10-K, the following risk factors should be carefully considered in connection with evaluating our business and any forward-looking statements contained herein. Our business, financial condition, results of operations and cash flows could be harmed by any of the risk factors described below, or other risks that have not been identified or which we believe are immaterial or unlikely. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our business, financial condition, operating results and cash flows could be materially adversely affected.
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RISKS RELATED TO OUR BUSINESS
Our profitability depends significantly on local economic conditions.
Our success depends primarily on the general economic conditions of the primary markets in Virginia in which we operate and where our loans are concentrated. Unlike nationwide banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Lynchburg metropolitan statistical area (“MSA”), often referred to as Region 2000, which includes the City of Lynchburg and the Counties of Bedford, Campbell, Amherst, and Appomattox. To a lesser extent, our lending market includes the Roanoke, Charlottesville, Harrisonburg, Blacksburg, and Wytheville MSAs. As of December 2025, the Lynchburg MSA had an unemployment rate (not seasonally adjusted) of approximately 3.6%, compared to a statewide average unemployment rate of approximately 3.5%, reflecting a modest increase from approximately 3.3% at the end of 2024.
The local economic conditions in these areas have a significant impact on our commercial and industrial, real estate and construction loans, the ability of our borrowers to repay their loans and the value of the collateral securing these loans. If population or income growth in our market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could result in a reduction in our growth and profitability. If our market areas experience a downturn or recession for a prolonged period, we could experience significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreaks of hostilities or other calamities, unemployment, or monetary and fiscal policies of the federal government could negatively affect our financial condition, results of operations and cash flows.
Future public health emergencies could adversely affect our business, financial condition, and results of operations.
A widespread public health crisis, such as a pandemic or epidemic, could adversely affect economic conditions in our markets, disrupt our operations, increase loan delinquencies and defaults, reduce the value of loan collateral, and negatively impact our financial condition and results of operations. The extent of any impact would depend on the severity and duration of the crisis and related governmental and economic responses.
A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.
A substantial majority of our loans have real estate as a primary or secondary component of collateral. The real estate collateral provides an alternate source of repayment in the event of default but may deteriorate in value during the time the credit is extended. Because most of our loans are concentrated in the Region 2000 area in and surrounding the City of Lynchburg, a decline in local economic conditions may have a greater effect on our earnings and capital than on larger financial institutions whose real estate loan portfolios are more geographically diverse.
A weakening of the real estate market in our primary market areas could increase borrower defaults and reduce the value of collateral securing our loans, which could adversely affect our profitability and asset quality. If we are required to liquidate collateral during a period of reduced real estate values, our earnings and capital could be adversely affected. Additionally, acts of nature, including hurricanes, tornadoes, earthquakes, fires and floods, may cause uninsured damage to real estate that secures our loans and negatively impact our financial condition.
Our loan portfolio contains a number of real estate loans with relatively large balances.
A significant portion of our loan portfolio consists of real estate loans with balances in excess of $1,000,000. The deterioration of one or a few of these loans could significantly increase nonperforming loans, loan charge-offs, and the provision for credit losses, which could have a material adverse effect on our financial condition and results of operations.
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Commercial real estate loans increase our exposure to credit risk.
A majority of our loan portfolio is secured by commercial real estate. Commercial real estate loans generally have higher default risk than residential real estate or consumer loans because repayment often depends on the successful operation of the property, the borrower’s income stream, and the accuracy of property valuations and construction cost estimates. An adverse development with respect to one lending relationship can expose us to significantly greater risk of loss compared with single-family residential mortgage loans because we typically have multiple loans with such borrowers. Additionally, these loans typically involve larger loan balances to single borrowers or groups of related borrowers.
The deterioration of one or a few of these loans could cause a significant decline in asset quality, a sharp increase in loan charge-offs, and could require us to significantly increase our allowance for credit losses, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
A percentage of the loans in our portfolio currently include exceptions to our loan policies and supervisory guidelines.
All loans we make are subject to written loan policies adopted by our board of directors and supervisory guidelines imposed by our regulators. Our loan policies are designed to reduce risks by requiring loan officers to take certain steps prior to closing, including documenting and perfecting liens on collateral and requiring proof of adequate insurance coverage.
Loans that do not fully comply with our loan policies are known as “exceptions,” which we categorize as policy exceptions, financial statement exceptions, and document exceptions. As a result of these exceptions, such loans may have a higher risk of loan loss than loans that fully comply with our loan policies. In addition, we may be subject to regulatory action by federal or state banking authorities if they believe the number of exceptions in our loan portfolio represents an unsafe banking practice.
As a community bank, we have different lending risks than larger banks due to our focus on individuals and small to medium-sized businesses.
Our ability to diversify our economic risks is limited by our local markets and economies. We lend primarily to small to medium-sized businesses, professionals and individuals, which may expose us to greater lending risks than banks lending to larger, better-capitalized businesses with longer operating histories. Small to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, have fewer financial resources and borrowing capacity, often need substantial additional capital to expand or compete, and may experience significant volatility in operating results. Any one or more of these factors may impair a borrower’s ability to repay a loan.
In addition, the success of a small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay. Economic downturns and other events that negatively impact our market areas could cause us to incur substantial credit losses that could negatively affect our results of operations and financial condition.
We depend on the accuracy of information provided by clients and counterparties.
In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify as a matter of course. We also rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit, we may assume that a customer’s audited financial statements conform
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with U.S. Generally Accepted Accounting Principles (“GAAP”) and fairly present the customer’s financial condition, results of operations and cash flows. Our financial condition and results of operations could be negatively impacted if we rely on financial statements that do not comply with GAAP or are materially misleading.
Credit losses could adversely affect our earnings and financial condition.
We could sustain losses if borrowers, guarantors or related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.
These policies and procedures necessarily rely on our making various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets serving as collateral. In determining the amount of the allowance for credit losses, we review our loans, our loss and delinquency experience, and economic conditions. If our assumptions are incorrect, our allowance for credit losses may not be sufficient to cover losses in our loan portfolio, resulting in additions to our allowance. Any future additions to our allowance could materially decrease our net income.
In addition, the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by regulatory authorities could have a material adverse effect on our financial condition and results of operations.
Our allowance for credit losses may not be adequate to cover actual losses.
A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and nonperformance. We maintain an allowance for credit losses in accordance with GAAP to provide for such defaults and other nonperformance. As of December 31, 2025, our allowance as a percentage of total loans was 0.97% and our allowance as a percentage of nonperforming loans was 379%. The determination of the appropriate level of allowance is an inherently difficult process based on numerous assumptions and judgments, and the amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, many of which are beyond our control. In addition, our underwriting policies, credit monitoring processes and risk management systems may not prevent unexpected losses. Our allowance may not be adequate to cover actual credit losses, and any increase in our allowance will adversely affect our earnings.
We adopted the Current Expected Credit Losses (“CECL”) accounting standard on January 1, 2023. The CECL methodology requires a forward-looking approach that reflects expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. CECL requires us to record, at the time of origination, the credit losses expected throughout the life of our loans, as opposed to the previous incurred-loss method, which recorded losses only when it was probable that a loss event had already occurred. CECL necessitates the use of quantitative models, forecasts, and significant assumptions and judgment, and it relies on historical data and estimated relationships that may not accurately predict future losses, particularly during periods of economic stress or rapid changes in interest rates or the composition of our loan portfolio. In addition, we may rely on third-party vendors, models, software, or data in developing or operating our CECL methodology and forecasts, and any limitations, errors, or deficiencies in such tools or inputs, or in our model governance, validation, and monitoring processes, could result in inaccurate loss estimates. CECL can also result in greater volatility in our allowance and provision for credit losses. If our assumptions prove incorrect, if actual credit losses differ materially from our estimates, or if regulators, auditors, or standard setters require changes to our methodology, assumptions, or inputs, we could be required to increase our allowance or otherwise modify our estimates, which could materially adversely affect our financial condition and operating results.
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We face substantial competition in our markets.
The banking and financial services industry is highly competitive. We compete with other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms in the Virginia localities where we operate and surrounding areas. Many of these competing institutions have nationwide or regional operations and greater resources than we have, while we also face competition from local community institutions. Many of our competitors enjoy competitive advantages, including greater name recognition and financial resources, a wider geographic presence, more accessible branch locations, the ability to offer additional services, greater marketing resources, more favorable pricing for loans and deposits, and lower origination and operating costs. We are also subject to lower lending limits than our larger competitors.
Our profitability depends upon our continued ability to successfully compete in our market areas. Increased deposit competition could increase our cost of funds and adversely affect our ability to generate funds necessary for our lending operations. If we must raise interest rates paid on deposits or lower interest rates charged on loans, our net interest margin and profitability could be adversely affected. Competition could result in a decrease in loans we originate and could negatively affect our ability to grow and our results of operations.
Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing.
We have increased and plan to continue to increase our levels of commercial and industrial loans. We may not be successful in continuing to penetrate this market segment, which has helped to drive some of our recent earnings.
A significant percentage of our loans are commercial and industrial loans, and we continue to focus on this market segment. While we intend to originate these loans in a manner consistent with safety and soundness, commercial and industrial loans generally expose us to greater risk of loss than one- to four-family residential mortgage loans because repayment generally depends, in large part, on the borrower’s business performance and ability to cover operating expenses and debt service. In addition, these loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Changes in economic conditions beyond our or the borrower’s control could adversely affect the value of the loan collateral and the future cash flow of the affected business. As we continue to originate these loans, we may experience higher levels of non-performing assets or credit losses, or both.
Our plans for future expansion depend, in some instances, on factors beyond our control, and an unsuccessful attempt to achieve growth could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We may engage in branch expansion or seek to acquire other financial institutions or parts of those institutions in the future, though we have no present acquisition plans. Expansion involves a number of risks, including:
the time and costs of evaluating new markets, hiring experienced local management and opening new offices;
time lags between expansion activities and the generation of sufficient assets and deposits to support the costs;
entrance into new markets where we lack experience;
introduction of new products and services with which we have no prior experience;
failure to culturally integrate an acquisition target or new branches; and
failure to identify and retain experienced key management with local expertise and relationships in new markets.
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Foreclosed properties could lead to increased operating expenses and losses.
From time to time, we foreclose upon and take title to real estate serving as collateral for our loans. If our other real estate owned (OREO) balance increases, our earnings will be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership.
At the time we foreclose upon a loan and take possession of a property, we estimate the property’s value using third-party appraisals and internal judgments. OREO property is valued on our books at the estimated market value of the property, less estimated costs to sell. Upon foreclosure, a charge-off to the allowance for credit losses is recorded for any excess of the loan balance over fair value. Thereafter, we periodically reassess fair value based on updated appraisals or other factors. Any declines in our estimate of fair value will result in valuation adjustments that negatively impact our earnings. As a result, our results of operations are vulnerable to declines in the residential and commercial real estate markets in the areas in which we operate. Any increase in non-accrual loans may lead to increases in our OREO balance.
We may need to raise additional capital in the future, which may not be available on acceptable terms.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We may need to raise additional capital to support future growth or to meet regulatory capital requirements. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. We cannot assure that we will be able to raise additional capital on terms acceptable to us. If we cannot raise additional capital when needed, our ability to expand our operations could be materially impaired, and our financial condition and results of operations could be adversely affected.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the teamwork and increased productivity fostered by our culture, which could harm our business.
We believe that a critical contributor to our success has been our corporate culture, which we believe fosters teamwork and increased productivity. As our organization grows and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our future success.
Loss of key employees could adversely affect our business.
Our success is highly dependent on our executive management team and other key personnel. As a community bank, we depend on our management team’s ties to the community to generate business and on our executives’ expertise to implement our business strategy. Our executive management and other key personnel have not signed non-competition covenants.
Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. The loss of several key personnel could adversely affect our growth strategy and seriously harm our business, results of operations and financial condition.
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses, any of which could have a material adverse effect on our business, financial condition and results of operations.
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As a community bank, our ability to maintain our reputation is critical to the success of our business, and our failure to do so may materially adversely affect our performance.
Our reputation is one of the most valuable components of our business. Negative publicity can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, acquisitions and actions taken or threatened by government regulators and community organizations in response to those activities. If our reputation is negatively affected by the actions of our employees or otherwise, there may be an adverse effect on our ability to keep and attract customers, and we might be exposed to litigation and regulatory action, any of which could materially adversely affect our business and operating results.
Our decisions regarding how we manage our credit exposure may materially and adversely affect our business.
We manage our credit exposure through careful monitoring of lending relationships and loan concentrations in particular industries, and through loan approval and review procedures. The adequacy of our allowance for credit losses is crucial in monitoring credit exposure. While our board and senior management are continuing to improve the Bank’s risk management framework and align the Bank’s risk philosophy with its capital and strategic plans, failure to continue to improve such risk management framework could have a material adverse effect on our financial condition and results of operations. We can make no assurances that our credit loss reserves will be sufficient to absorb future credit losses or prevent a material adverse effect on our business, financial condition or results of operations.
Our profitability is vulnerable to interest rate fluctuations and changes in monetary policies.
Our profitability depends substantially upon our net interest income, which is the difference between the interest earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and other borrowings. Market interest rates are highly sensitive to many factors beyond our control, including market conditions, policies of monetary and fiscal authorities, particularly the Federal Reserve, and competitive pricing pressures. Changes in interest rates may cause significant changes in our net interest income and net interest margin. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could have an adverse effect on our deposit levels, loan demand or business and earnings.
Inflation could adversely impact our customers’ ability to repay loans.
Inflation decreases the purchasing power of money and can reduce the value of assets and income from investments. Our customers may be adversely affected by inflation and the rising costs of goods and services used in their households and businesses, which could negatively impact their ability to repay their loans.
Cybersecurity threats and operational system failures could disrupt our business and result in financial losses.
Cybersecurity threats, including attacks on us or our third-party service providers, and operational system failures could disrupt our business, result in financial losses, increase compliance and remediation costs, and harm our reputation.
We rely on communications, information systems, and third-party service providers to operate our business and to deliver products and services to customers. These systems and relationships expose us to the risk of cyber incidents and operational disruptions, including unauthorized access, loss or destruction of data (including nonpublic personal information), account takeovers, unavailability of service, ransomware or other malware, and other attacks.
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Cyber threats are continually evolving, and threat actors may use increasingly sophisticated methods, including social engineering, credential theft, deepfake-enabled fraud, supply-chain compromise, and exploitation of vulnerabilities in vendor systems. In addition, our customers access our services through devices and networks we do not control, which may increase the risk of compromise of customer credentials.
Cyber incidents or operational disruptions could:
impair our ability to conduct business, process transactions, or provide customer service;
result in the disclosure, misuse, or loss of confidential information;
subject us to regulatory scrutiny, supervisory actions, investigations, or litigation;
require significant expenditures for remediation, forensic investigation, notification, system enhancements, and business continuity measures;
increase our cyber insurance costs or reduce the availability of coverage on acceptable terms; and
damage our reputation and adversely affect customer relationships.
While we maintain policies, procedures, and controls designed to prevent, detect, and respond to cyber incidents and operational disruptions, no system can provide absolute security. We have experienced cybersecurity incidents and other technology-related events in the past that resulted in costs and/or operational impacts, and we may experience additional incidents in the future. Any such incident, whether arising from our systems or those of third parties, could materially adversely affect our business, financial condition, and results of operations.
We have suffered non-material losses in the past from such events and there can be no assurance that such events will not have a material effect on the Bank.
Emerging Technological Threats
The pace of technological change continues to increase the operational, fraud, and cybersecurity risks faced by financial institutions. In particular, malicious actors are increasingly using artificial intelligence and other tools to conduct more sophisticated attacks, including highly targeted phishing and social‐engineering campaigns, business email compromise, deepfake or voice‐spoofing fraud, and account takeover attempts. These evolving tactics may be difficult to detect and prevent and could result in customer losses, theft or diversion of funds, unauthorized transactions, operational disruption, reputational harm, litigation, and increased compliance and remediation costs.
We also rely on third‐party service providers for critical technology systems and services, including core processing, online and mobile banking, payment processing, information security tools, cloud-based services, and other outsourced functions. A failure, disruption, security breach, or other compromise of our systems or those of our service providers—whether due to cyberattack, human error, system failure, or other cause—could impair our ability to deliver products and services, expose sensitive customer or Company information, or otherwise adversely affect our operations and financial condition. In addition, changes in the threat landscape and technology environment may require us to make significant ongoing investments in technology infrastructure, cybersecurity controls, fraud prevention, vendor oversight, and employee training; if we are unable to implement these enhancements effectively or on a timely basis, our risk exposure may increase.
Customer expectations regarding digital banking capabilities, convenience, and availability continue to evolve. If we do not successfully maintain and enhance our digital delivery channels and technology-enabled services, or if customers perceive our capabilities to be less competitive than alternatives offered by other banks, credit unions, or financial technology companies, we could lose customers, deposits, and related relationships, which could adversely affect our liquidity, net interest income, fee income, and overall profitability.
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Alternative financial products, digital banking trends, and technological change could affect our deposit base and competitive position.
Our traditional banking model depends heavily on stable customer deposits as a primary source of funding. The rising popularity of alternative financial products and services—including fintech platforms, cryptocurrencies, money market funds, and digital wallets—may lead to increased volatility in our deposit base as customers seek different ways to save and invest their funds. This shift in customer preferences could challenge our ability to maintain stable deposits and attract and retain customers.
The financial services industry is increasingly affected by advances in technology, including Internet-based banking, mobile banking, and new technology-driven products and services. Financial technology companies that rely on technology to provide financial services such as peer-to-peer platforms have the potential to disrupt the financial services industry. Our ability to compete successfully may depend on the extent to which we are able to adapt to and implement such technological changes and properly train our staff to use such technologies. We may not be able to effectively implement new technology-driven products and services or compete successfully against these products.
Increasing customer demand for digital banking capabilities also requires ongoing investments in technology infrastructure, cybersecurity, and regulatory compliance. Significant fluctuations in deposits could adversely affect our liquidity position, funding costs, and overall financial stability. Although we actively manage our liquidity and funding sources, a substantial shift of customer deposits to alternative products or failure to adapt to technological changes could negatively impact our operations, profitability, and competitive position.
Changes in consumers’ use of banks and changes in consumers’ spending and saving habits could adversely affect our financial results.
Technology and other changes now allow many consumers to complete financial transactions without using banks. For example, consumers can pay bills and transfer funds directly without going through a bank. This disintermediation could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect our operations, and we may be unable to timely develop competitive new products and services in response to these changes that are accepted by new and existing customers.
We are subject to operational risks.
The Company may also be subject to disruptions of its systems arising from events that are wholly or partially beyond our control (including, for example, computer viruses or electrical or telecommunications outages), which may give rise to losses in service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Company) and to the risk that the Company’s (or its vendors’) business continuity and data security systems prove to be inadequate.
Liquidity risk could adversely affect our business and financial condition.
Liquidity risk is the potential that we will be unable to meet our obligations as they become due, capitalize on growth opportunities as they arise, or pay regular cash dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. A failure to adequately manage our liquidity risk could adversely affect our business, financial condition and operating results. In addition, the Federal Reserve could impose additional requirements on us if the agency determines that our liquidity risk management practices do not adequately manage our liquidity risk.
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Our liquidity could be reduced by a decrease in the value of certain assets, including loans and investment securities, caused by increases in interest rates, which could reduce the amount that we are able to borrow or reduce the proceeds from the sale of securities in our portfolio. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views about the prospects for the financial services industry.
We may lose lower-cost funding sources.
Checking, savings and money market deposit account balances can decrease when customers perceive alternatives such as other financial institutions or investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments or to other financial institutions, we could lose a relatively low-cost source of funds, thereby increasing our funding costs and reducing our net interest income and net income.
Failure to maintain effective internal and disclosure controls could adversely affect our financial reporting and stock price.
We face the risk that the design of our internal controls and procedures, including those to mitigate the risk of fraud by employees or outsiders, may prove to be inadequate or circumvented, thereby causing delays in detection of errors or inaccuracies. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Any failure to maintain effective controls or timely effect any necessary improvements could hinder our ability to accurately report our operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with The NASDAQ Capital Market. Ineffective internal and disclosure controls could also harm our reputation, negatively impact our operating results or cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.
Changes in the financial markets could impair the value of our investment portfolio.
Our investment securities portfolio represents a significant component of our total earning assets. Market volatility, fluctuations in interest rates, and broader economic uncertainties could adversely affect the market value of our investment portfolio, potentially negatively impacting our net income and capital levels.
As of December 31, 2024, and December 31, 2025, we had unrealized losses, net of taxes, in our investment securities portfolio of $22,915,000 and $14,937,000, respectively. While we maintain sufficient liquidity to support our intent and ability to hold these securities until maturity or market recovery, if future conditions impair our liquidity or alter our intent or ability to hold these investments to maturity, we could incur losses that negatively impact our net income and potentially our capital position.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on our future earnings.
The FDIC insures deposits at FDIC-insured depository institutions up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system, which considers the institution’s capital levels and the level of supervisory concern the institution poses to its regulators. Banks are assessed deposit insurance premiums based on the bank’s average consolidated total assets, and the FDIC may modify risk-based adjustments, which increase or decrease a bank’s overall assessment rate.
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Bank failures can significantly deplete the FDIC’s Deposit Insurance Fund and reduce the ratio of reserves to insured deposits. If increases in assessment rates are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay higher FDIC premiums. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce our profitability or otherwise negatively impact our operations.
Declines in assets under management could adversely affect our investment advisory business.
PWW, our investment advisory business, derives revenue primarily from investment advisory fees based on the market value of assets under management. Assets under management may decline for various reasons including declines in the market value of the assets due to price declines in the securities markets, redemptions and other withdrawals by clients, or termination of contracts in response to adverse market conditions or pursuit of other investment opportunities. If the assets under management decline, the related decrease in fees will negatively affect our results of operations.
We may not be able to attract and retain investment advisory clients.
Our investment advisory business faces strong competition from numerous well-established investment management and wealth advisory firms including commercial banks and trust companies, investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Many of our competitors have greater resources than we have. Our ability to attract and retain investment advisory clients depends upon our ability to compete with competitors’ investment products, level of investment performance, client services, and marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted.
The investment advisory industry is subject to extensive regulation, and any enforcement action or adverse regulatory changes could decrease our revenues and profitability.
As an investment advisor registered with the Securities and Exchange Commission, PWW is subject to regulation by a number of regulatory agencies. In the event of non-compliance with regulation, governmental regulators, including the SEC and the Financial Industry Regulatory Authority, may institute administrative or judicial proceedings that could result in censure, fines, civil penalties, cease-and-desist orders, deregistration or suspension, or other adverse consequences. The imposition of any such penalties or orders could have a material adverse effect on our operating results and financial condition. New or revised legislation or regulations could also impose additional costs that adversely impact our profitability.
Loss of PWW’s key employees could adversely affect our investment advisory business.
PWW’s success is highly dependent on its executive management team and other key personnel who make investment decisions for PWW clients and manage client relations. Although they are subject to non-compete agreements, there is no assurance that these key personnel will remain employees of PWW.
Competition for investment advisory personnel is intense, and we may not be successful in attracting or retaining qualified personnel. The loss of several key personnel could adversely affect our growth strategy and seriously harm our business, results of operations and financial condition.
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REGULATORY AND LEGAL RISKS
We are subject to extensive regulation that could limit or restrict our activities and adversely affect our profitability.
As a bank holding company, we are primarily regulated by the Federal Reserve. The Bank is primarily regulated by the Virginia Bureau of Financial Institutions and the Federal Reserve. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets and the adequacy of a financial institution’s allowance for credit losses. Any change in such regulation and regulatory oversight, whether in the form of regulatory policy, regulations or legislation, could have a material impact on us and our operations.
Because our business is highly regulated, the applicable laws, rules and regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Such changes may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capital requirements by our regulators. Our compliance with regulatory requirements is costly, and the increased scope, complexity and cost of compliance affect our profitability more than some of our larger competitors.
The laws and regulations applicable to the banking industry could change at any time, and these changes may adversely affect our business and profitability.
Although many provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have been fully integrated into our operations, ongoing regulatory interpretations, enforcement activities, or amendments to existing regulations may continue to impact our business, financial condition and profitability. While initial implementation costs have stabilized, any future changes in regulatory expectations, especially regarding capital requirements, consumer protection, stress-testing, cybersecurity and liquidity, could result in increased compliance costs, operational complexity and reduced flexibility in managing our business operations. We cannot predict the precise nature, extent or timing of any additional regulatory requirements, but such developments could materially affect our operations, increase operational expenses, reduce profitability, or restrict our ability to pursue strategic opportunities or pay dividends.
Consumer financial protection regulations could impact our compliance obligations and business practices.
We are subject to extensive federal and state consumer financial protection laws and regulations governing our lending and deposit activities, including fair lending, UDAAP, privacy and data security, and residential mortgage origination and servicing requirements, which are administered and enforced by multiple regulators, including the Consumer Financial Protection Bureau (“CFPB”) and the federal banking agencies. We originate residential mortgage loans subject to applicable mortgage-related requirements, including the Qualified Mortgage (“QM”) rules. Changes in applicable laws or regulations, supervisory expectations or interpretations, or enforcement priorities, or any failure or alleged failure by us or our third-party service providers to comply with these requirements, could increase compliance and operating costs, restrict or delay our ability to offer certain products or services, require remediation or other payments, and result in litigation, regulatory actions, penalties, or reputational harm, which could materially adversely affect our business, financial condition, and results of operations.
Regulatory capital requirements could adversely affect our operations and profitability.
Under current capital standards, in order to be well-capitalized, the Bank is required to have a common equity Tier 1 capital ratio of 6.5% and a Tier 1 capital ratio of 8.0%. The application of more stringent capital requirements could result in lower returns on invested capital, require the raising of additional capital and result in regulatory actions if we were unable to comply with such requirements. Furthermore, the imposition of liquidity requirements could result in our
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having to lengthen the term of our funding, restructure our business models or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying dividends or buying back shares.
Under the community bank leverage ratio framework, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9 percent, are eligible to opt into the framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the generally applicable risk-based and leverage capital requirements. The Bank has chosen not to opt into the community bank leverage ratio framework at this time.
RISKS RELATED TO OUR STOCK
Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.
The Company is a legal entity separate and distinct from the Bank and PWW. The Company currently does not have any significant sources of revenue other than cash dividends paid to it by the Bank and PWW. Both the Company and the Bank are subject to laws and regulations that limit the payment of cash dividends, including requirements to maintain capital at or above regulatory minimums. As a bank that is a member of the Federal Reserve System, the Bank must obtain prior written approval for any cash dividend if the total of all dividends declared in any calendar year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years. PWW’s ability to pay dividends is likewise subject to certain limits imposed by state law.
Banking regulators have indicated that Virginia banking organizations should generally pay dividends only from net undivided profits and if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In addition, the Federal Deposit Insurance Act prohibits insured depository institutions from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become undercapitalized. Moreover, the Federal Reserve is authorized to determine under certain circumstances relating to the financial condition of a bank that the payment of dividends would be an unsafe and unsound practice and to prohibit payment thereof. The Federal Reserve has indicated that banking organizations generally pay dividends only out of current operating earnings. The Bank may be prohibited under Virginia law from the payment of dividends if the Virginia Bureau of Financial Institutions determines that a limitation of dividends is in the public interest and is necessary to help ensure the Bank’s financial soundness.
In addition, the Bank’s ability to pay dividends will be limited if the Bank does not have the capital conservation buffer required by the capital rules, which may limit the Company’s ability to pay dividends to stockholders.
If the Bank is not permitted to pay cash dividends to the Company, it is unlikely that the Company would be able to pay cash dividends on our common stock. Moreover, holders of our common stock are entitled to receive dividends only when and if declared by our board of directors. Although we currently pay cash dividends on our common stock, we are not required to do so and our board of directors could reduce or eliminate the amount of our common stock dividends in the future.
A limited market exists for our common stock.
Our common stock commenced trading on The NASDAQ Capital Market on January 25, 2012, and trading volumes have been relatively low compared to larger financial services companies. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Accordingly, holders of our common stock
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may have difficulty selling our common stock at prices they find acceptable or which accurately reflect the value of the Company.
Future offerings of debt or other securities may adversely affect the market price of our stock.
In the future, we may attempt to increase our capital resources or, if our or the Bank’s capital ratios fall below the required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of any debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.
Our stockholders may experience dilution due to issuances of additional securities.
We may in the future issue additional shares of our common stock to raise cash for operations or to fund acquisitions, to provide equity-based incentives to our management and employees, to permit our stockholders to invest cash dividends and optional cash payments in shares of our common stock, or as consideration in acquisition transactions. Additional equity offerings and issuances of additional shares of our common stock may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.
Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts.
Our articles of incorporation and bylaws contain provisions that may discourage or delay uninvited attempts by third parties to gain control of us. These provisions include the division of our board of directors into classes with staggered terms, the ability of our board of directors to set the price, terms and rights of, and to issue, one or more series of our preferred stock, and the ability of our board of directors, in evaluating a proposed business combination or other fundamental change transaction, to consider the effect of the business combination on us and our stockholders, employees, customers and the communities we serve. Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could effect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of stockholders to change the composition of the board of directors, to affect its policies.
Item 1B.Unresolved Staff Comments
None.
Item 1C.Cybersecurity
As a publicly-traded financial institution, we are subject to various cybersecurity risks that could adversely affect our business, financial condition, results of operations and reputation, including, but not limited to, cyber-attacks against us or our service providers focused on gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. As described below, we have risk management and governance practices and processes designed to address these risks.
The Company has established an enterprise risk management framework that outlines the processes and procedures the Company uses to identify, assess, mitigate, and monitor the risks faced by the Company, including cybersecurity risk. Within the overarching enterprise risk management framework, we maintain an information security program (“ISP”) designed to preserve the confidentiality, integrity, and availability of information or data on our systems and those of our service providers, as documented in our information security policy. The ISP encompasses the Company’s cybersecurity policies and practices and procedures that we use to identify, assess, mitigate, and monitor
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cybersecurity risks. The ISP follows relevant industry frameworks and standards set by the relevant legal and regulatory authorities and has been updated to align with the NIST Cybersecurity Framework 2.0.
As part of the ISP, the Company has a Cybersecurity Incident Response Plan (“CIRP”) and Incident Response Team (“IRT”). The IRT includes members of executive and senior management and other employees, including representatives from audit, compliance, human resources, finance, credit, information technology, information security, and legal. The IRT manages how incidents are defined, identified, and classified and ensures that procedures are in place to properly escalate, report and respond to incidents, as they are defined in the policy. The CIRP covers incident preparation, detection, analysis, and declaration, as well as plan execution and process guides for specific scenarios. Post incident activity, which covers incident termination, metrics, lessons learned, evidence retention, and plan maintenance is also included.
The Company maintains ongoing cybersecurity awareness training programs for employees to help prevent social engineering, phishing attacks, and other cyber threats. Additionally, the Company maintains cybersecurity insurance coverage as part of its overall risk mitigation strategy.
The Board is responsible for the oversight of cybersecurity risk management. In 2022, we elevated the Enterprise Risk Committee to a “committee of the whole” of the Bank’s board of directors. At the second board meeting of each calendar quarter, a significant portion of the meeting is dedicated to enterprise risk management. At that board meeting, management presents the enterprise risk management matrix, including the portions related to cybersecurity, to the board. In addition, the board receives regular reports from management on our cybersecurity threat risk management and strategic processes on topics including information on any cybersecurity incidents (including any remedial actions), including, for example, results of our EDR and XDR programs.
At the management level, the Company has designated an information security officer (“ISO”). Our ISO is responsible for the overall administration and execution of the ISP and reports to our EVP-CFO. Our ISO has over twenty years of experience working in information security. The ISO monitors the security of, among other things, systems, applications, tools, databases, computers, websites, cloud infrastructure, vendor tools, and user access systems. The ISO also works with and oversees third-party vendors that provide us with information security services and products. The ISO performs an annual information security risk assessment, which, among other things, documents inherent risk levels and controls in place to manage those risks. The information security risk assessment is presented to the Board annually. The ISO has various professional certifications in relevant fields. The ISO is responsible for administering and executing the ISP and formulating a risk-based approach for evaluating and managing technology and cybersecurity threats.
Management determines and prioritizes appropriate risk responses for each identified enterprise risk. In doing so, executive and senior management work directly with our information technology team and our ISO. Management is accountable for our day-to-day risk management activities.
We strive to minimize the occurrence of cybersecurity incidents and the risks resulting from such incidents. However, when a cybersecurity incident does occur, the Company has in place an incident response program to guide our assessment of and response to the incident. The ISO coordinates the Company’s response to a cybersecurity incident, including investigating, recording and evaluating any potential, suspected or confirmed incidents involving non-public customer information or Company confidential information.
On a quarterly basis, the ISO reports to executive management and the Board information security risk issues, risk mitigation progress and developments, and information security enhancement initiatives. The ISO also reports the status of information security-related key risk indicators to executive management.
The Company employs third parties in certain aspects of its information security and cybersecurity risk management. For example, we engage third parties to assess the information security risks related to our ISP as well as information security products, services, and security infrastructure. We have adopted a Third-Party Relationship Risk Management Program to help us effectively assess, measure, monitor and control the risks associated with third party
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relationships, including those related to information security. The board and senior management are responsible for all vendor relationships. The ISO assesses and monitors information risks posed by third parties and any non-compliance with the controls created to address such risks. With respect to cybersecurity incidents affecting our third-party service providers, the ISO works with our service providers to understand and document any incidents, along with managing the impact to us and reporting such incidents to executive management, and, if applicable, the Board. We utilize endpoint detection and response (EDR) and extended detection and response (XDR) platforms which both align to the MITRE ATT&CK® knowledge base for threat modeling and methodologies. These assist us in detecting, investigating, and responding to actual and potential security incidents.
Additionally, the Company utilizes a third-party online brand protection service to identify, analyze, and facilitate the takedown of malicious mobile applications, social media accounts, and websites attempting to impersonate the Bank. While we cannot guarantee that all impersonation attempts will be successfully removed, this continuous monitoring service helps protect our customers and reputation from fraudulent actors.
Based on information known to us, we have not incurred material costs or losses related to cybersecurity incidents. However, like other financial institutions, we have experienced cybersecurity incidents and other technology-related events in the past that resulted in costs and/or operational impacts, and we may experience additional incidents in the future. However, the risk management and governance processes described above may not be sufficient to prevent cybersecurity incidents, and we could incur substantial costs and suffer other negative consequences from cybersecurity incidents. We can give no assurance that we have detected or protected against all cybersecurity threats or incidents. Please refer to “Emerging Technological Threats” included “Item 1A, Risk Factors” of this Annual Report on Form 10-K for additional information about material risks related to cybersecurity threats.
Item 2.Properties
Current Locations and Property
Depending on such factors as cost, availability, and location, we may either lease or purchase our operating facilities. The existing facilities that we have purchased typically have been former branches of other financial institutions. As of March 25, 2026 the Bank conducts its operations from 23 locations, of which we own 15 and lease 8. In addition, PWW operates from 1925 Atherholt Road, Lynchburg, Virginia, which it leases from the Bank.
The following table describes the location and general character of the Bank’s primary operating facilities:
Address Type of Facility Year Opened Owned/Leased
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501 VES RoadLynchburg, Virginia Limited-service branch 2010 Leased (3)
3562 Electric RoadRoanoke, Virginia Full-service branch with ATM 2017 Leased (6)
45 South Main StreetLexington, Virginia Full-service branch with ATM 2019 Owned
(1)The current term of the amended and restated lease expires in three years and the Bank has three five-year renewal options (subject to the terms and conditions outlined in the lease). The Bank leases this property from Jamesview Investment, LLC, which is wholly-owned by William C. Bryant III, a member of the Board of Directors of both Financial and the Bank.
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(2)Base lease expires March 31, 2028. We have one or more renewal options that we may exercise at our discretion subject to the terms and conditions outlined in the lease.
(3)Base lease expired May 31, 2025. The Bank currently leases the property on a month-to-month basis.
(4)Base lease expires April 30, 2030. We have one or more renewal options that we may exercise at our discretion subject to the terms and conditions outlined in the lease.
(5)Base lease expires October 31, 2026. We have one or more renewal options that we may exercise at our discretion subject to the terms and conditions outlined in the lease.
(6)Base lease expires January 31, 2027.
(7)Base lease expired February 28, 2021. The Bank currently leases on a month-to-month basis.
(8)Base lease expires February 28, 2029. We have one or more renewal options that we may exercise at our discretion subject to the terms and conditions outlined in the lease.
We believe that each of these operating facilities is maintained in good operating condition and is suitable for our operational needs.
Interest in Additional Properties
1925 Atherholt Road, Lynchburg, Virginia currently serves as the office for the Company’s wholly-owned subsidiary, PWW, which leases the space from the Bank on a month-to-month basis. The property is held for possible future branch expansion, although the Bank does not currently have a timeline for opening a branch at this location.
The Bank also owns two additional properties in its market area, one held for possible future expansion or sale and one under contract for sale, subject to due diligence and other customary closing conditions.
The opening of any additional branches is contingent upon receipt of applicable regulatory approvals.
Item 3.Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or to which the property of the Company is subject.
Item 4.Mine Safety Disclosures
Not applicable.
PART II
Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Prices and Dividends
Since January 25, 2012, the Common Stock of Financial is listed and has been trading on the NASDAQ Capital Market LLC (NASDAQ) under the symbol “BOTJ.” Prior to this time, the Common Stock of Financial was quoted on the Over the Counter Bulletin Board (OTCBB) under the symbol “BOJF” (“BOJF.OB” on some systems) and transactions generally involved a small number of shares.
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As of March 25, 2026, there were approximately 4,543,338 shares of Common Stock outstanding, which shares are held by approximately 1,700 active shareholders of record.
Dividend Policy
The Company’s future dividend policy is subject to the discretion of its Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity and capital requirements of both the Company and the Bank, applicable governmental regulations and policies and other factors deemed relevant by its Board of Directors.
The Company is organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the normal course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.
The Company is a legal entity separate and distinct from its subsidiaries. Its ability to distribute cash dividends will depend primarily on the ability of the Bank and PWW to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. For a discussion of these restrictions, see “Supervision and Regulation of Financial – Limits on the Payment of Dividends” in Item 1 of this Report on Form 10-K. PWW’s ability to pay dividends is subject to certain limits imposed by state law.
On January 27, 2026, Financial declared a cash dividend for the fourth quarter of 2025 of $0.11 per common share. The dividend was paid on March 6, 2026, to shareholders of record at the close of business on February 17, 2026. Financial will evaluate the factors set forth above in determining whether to continue paying cash dividends in 2026.
Financial does not have an active stock repurchase plan. During the quarter ended December 31, 2025, Financial repurchased no shares of common stock.
Item 6.[Reserved]
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist readers in understanding and evaluating our financial condition and results of operations. You should read this discussion in conjunction with our financial statements and accompanying notes included elsewhere in this report. Bank of the James Financial Group, Inc. (“Financial”) has no material operations and conducts no business other than the ownership of its operating subsidiaries, Bank of the James (and its divisions and subsidiary), and Pettyjohn, Wood & White, Inc., which was acquired on December 31, 2021. However, for ease of reading and because our financial statements are presented on a consolidated basis, references to “we,” “us,” or “our” refer to Financial, Bank of the James, and their divisions and subsidiaries as appropriate.
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
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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 widespread health emergencies or public health crises on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;
problems with technology utilized by us;
potential exposure to fraud, negligence, computer theft and cyber-crime, and the Company’s ability to maintain the security of its data processing and information technology systems;
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 Consumer Protection Act and its related regulations;
economic, market, political and competitive forces affecting Financial’s banking and other businesses;
competition for our customers from other providers of financial services;
reliance on our management team, including our ability to attract and retain key personnel;
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;
adoption of new accounting standards or changes in existing standards;
compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Financial may pursue or implement;
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;
the stability of the overall banking industry in the United States;
liquidity and perceived liquidity in the banking industry in the United States;
geopolitical conflicts, international tensions, and related economic sanctions, which may have a destabilizing effect on financial markets and economic activity; and
other risks and uncertainties set forth in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchanges Commission (“SEC”).
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.
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 four other business activities: mortgage banking through the Bank’s Mortgage Division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment Division”), certain insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”), and investment advisory services through the Company’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc. (which we refer to as “PWW”).
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Although we intend to increase other sources of revenue, 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 credit losses, as well as the level of its noninterest income, including deposit fees and service charges, gains on sales of mortgage loans, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, miscellaneous other expenses, franchise taxes, and income taxes. We expect PWW to continue enhancing our operating results through investment advisory fee income.
As discussed in more detail below,
For the year ended December 31, 2025, Financial had net income of $9,022,000, an increase of $1,078,000 from net income of $7,944,000 for the year ended December 31, 2024.
For the year ended December 31, 2025, earnings per basic and diluted common share were $1.99, as compared to earnings of $1.75 per basic and diluted common share for the year ended December 31, 2024.
Net interest income increased to $32,807,000 for the current year from $29,236,000 for the year ended December 31, 2024.
Noninterest income increased to $15,852,000 for the year ended December 31, 2025, from $15,137,000 for the year ended December 31, 2024.
Total assets as of December 31, 2025, were $1,039,024,000 compared to $979,244,000 at the end of 2024, an increase of $59,780,000 or 6.10%.
Net loans (excluding loans held for sale), net of unearned income and the allowance for credit losses, increased to $661,357,000 as of December 31, 2025 from $636,552,000 as of December 31, 2024.
The net interest margin increased by 28 basis points to 3.39% for 2025, compared to 3.11% for 2024. The following table sets forth select financial ratios:
For the Year Ended
December 31,
Return on average assets 0.88% 0.80%
Average equity to total average assets 6.97% 6.28%
Effect of Economic Trends
A variety and wide scope of economic factors affect Financial’s success and earnings. Although interest rate trends are one of the most important of these factors, Financial believes that interest rates cannot be predicted with a reasonable level of confidence and therefore does not attempt to do so with complicated economic models. Rather than focusing on any single interest rate scenario, Financial prepares for multiple outcomes, including unexpected ones, in order to safeguard its margins against wide swings in interest rates.
Following the COVID-19 pandemic, the Federal Reserve maintained the target range for federal funds (“fed funds”) at 0% to 0.25% through early 2022. However, in response to elevated inflation and supply chain disruptions exacerbated by geopolitical tensions, the FOMC began an aggressive rate-hiking cycle in March 2022. Through a series of increases throughout 2022 and into 2023, including multiple 75 basis point increases, the FOMC raised the target rate from near zero to a peak range of 5.25% to 5.50% by July 2023 - the highest level in over two decades.
The FOMC maintained this restrictive monetary policy stance throughout the second half of 2023 and the first half of 2024, as inflation gradually moderated toward the Federal Reserve’s 2.0% target. In September 2024, with
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inflation showing sustained progress and labor market conditions normalizing, the FOMC initiated a rate-cutting cycle with a 50 basis point reduction, followed by additional 25 basis point cuts in November and December 2024, bringing the target range to 4.25% to 4.50% by year-end 2024.
During 2025, the FOMC continued its gradual easing cycle with three 25 basis point rate cuts at its September, October, and December meetings, bringing the target rate to a range of 3.50% to 3.75% as of December 31, 2025. These cuts totaled 75 basis points and brought the cumulative rate reduction since the peak in July 2023 to 175 basis points. At its January 2026 meeting, the FOMC voted to hold rates steady at 3.50% to 3.75%, pausing after three consecutive cuts to assess incoming economic data. As of mid-March 2026, the target rate remains at 3.50% to 3.75%.
The FOMC has indicated that further rate adjustments will depend on incoming economic data, particularly inflation metrics, labor market conditions, and overall economic growth. The Federal Reserve has emphasized its commitment to achieving maximum employment and returning inflation sustainably to its 2.0% target. The December 2025 Summary of Economic Projections indicated significant division among FOMC participants, with the median projection showing only one additional 25 basis point cut in 2026 and another in 2027, reflecting the Committee’s view that the fed funds rate is now approaching neutral levels.
Critical Accounting Policies
The Company’s 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 obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. The following critical accounting policies involve significant management judgment and have a material impact on our financial statements.
The allowance for credit losses (“ACL”) on loans represents management’s best estimate of lifetime expected losses in the loan portfolio as of the reporting date. The ACL is initially recognized upon origination or acquisition of loans and reflects management’s ongoing evaluation based on current conditions, past events, and reasonable and supportable forecasts of future economic conditions, including anticipated prepayments. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.
The Company utilizes a discounted cash flow model to estimate its current expected credit losses. For purposes of calculating quantitative reserves, the Company has segmented its loan portfolio based on loans that share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or more loss drivers, which may include unemployment rates and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model. Additional analysis and detailed information on the ACL and loan portfolio quality can be found in “Management’s Discussion and Analysis – Analysis of Financial Condition – Asset Quality.”
Goodwill resulting from business combinations represents the excess of consideration transferred over the fair value of net identifiable assets acquired and is assigned to the applicable reporting unit. Goodwill is tested for impairment annually as of September 1, or more frequently if events or changes in circumstances indicate that it may be impaired. The impairment evaluation begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If necessary, a quantitative test is performed by comparing the
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reporting unit’s carrying amount to its estimated fair value. Fair value is determined using discounted cash flow analyses, market-based approaches, or a combination of valuation methodologies, as appropriate. An impairment charge is recognized for the amount by which the carrying value exceeds fair value. Determining fair value requires significant management judgment, including assumptions related to projected future cash flows, discount rates, growth rates, and prevailing market conditions.
RESULTS OF OPERATIONS
Year Ended December 31, 2025 compared to year ended December 31, 2024
Net Income
The net income for Financial for the year ended December 31, 2025, was $9,022,000 or $1.99 per basic and diluted share compared with net income of $7,944,000 or $1.75 per basic and diluted share for the year ended December 31, 2024. Note 13 of the consolidated financial statements provides additional information with respect to the calculation of Financial’s earnings per share.
The increase of $1,078,000 in 2025 net income compared to 2024 was due primarily to a significant increase in our net interest income. Net interest income grew $3,571,000, or 12.2%, driven by improved net interest margin, higher loan yields, and reduced interest expense following the retirement of approximately $10.05 million in capital notes discussed below. The increase in net income was also in part due to growth in noninterest income, including a 10.4% increase in wealth management fees to $5,347,000 in 2025 from $4,843,000 in 2024. Core operating performance strengthened in 2025. The year-over-year comparison was partially offset by lower credit loss recoveries of $35,000 in 2025 compared to $655,000 in 2024.
Additionally, the Company’s efficiency ratio, calculated as noninterest expense divided by the sum of net interest income and noninterest income, improved to 77.17% in 2025 from 79.11% in 2024, as revenue growth of 9.7% outpaced expense growth of 7.0%. The improvement reflects the substantial increase in net interest income driven by margin expansion and lower interest expense following the retirement of capital notes, together with disciplined expense management initiatives, including vendor renegotiations. The efficiency ratio is a non-GAAP financial measure used by the Company to assess operational efficiency, and no non-recurring adjustments were applied in its calculation.
These operating results represent a return on average stockholders’ equity of 12.68% for the year ended December 31, 2025, compared to 12.70% for the year ended December 31, 2024. Our return on average stockholders’ equity decreased modestly despite the 13.6% increase in net income due to a significant increase in stockholders’ equity, which grew 23.4% from $64,865,000 at December 31, 2024, to $80,048,000 at December 31, 2025. The return on average assets for the year ended December 31, 2025, was 0.88% compared to 0.80% in 2024, reflecting improved profitability relative to our asset base.
Provision for Credit Losses
The provision for credit losses was a net recovery of $35,000 for the year ended December 31, 2025, compared to a net recovery of $655,000 for 2024, a decrease of $620,000. Both amounts include the provision for credit losses on unfunded commitments. The 2025 figure consisted of a recovery of credit losses on loans of $166,000 and a provision for credit losses on unfunded commitments of $131,000, as compared with a recovery of credit losses on loans of $533,000 and a recovery of credit losses on unfunded commitments of $122,000 for 2024. The decrease from 2024 reflected loan growth of approximately $24,212,000, which required additional reserves, partially offset by the impact of model updates implemented in the second quarter of 2025, as described in Note 5. In the second quarter, the Company, in collaboration with its third-party model vendor and as part of ongoing model governance, implemented updates to the quantitative CECL loss models for collectively evaluated loan segments that use discounted cash flow techniques. The updates (i) revised certain maximum loss-rate parameters and (ii) incorporated additional post-COVID historical loss data. Provision
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activity in the third and fourth quarters of 2025 reflected the continued application of the updated models together with normal portfolio dynamics, updated economic forecasts, and loan growth trends. The allowance for credit losses as a percentage of total loans was 0.97% at December 31, 2025, compared to 1.09% at December 31, 2024.
Net Interest Income
The fundamental source of Financial’s earnings, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. The significant categories of earning assets are loans, federal funds sold, interest-bearing balances at other banks, and investment securities, while deposits, federal funds purchased, and other borrowings represent interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operation.
Interest income increased to $46,655,000 for the year ended December 31, 2025, from $44,643,000 for the year ended December 31, 2024. This increase was due to growth in average earning assets, which increased 3.14% as loan balances increased, and a modest increase in the yields on average earning assets, which primarily consist of loans and investment securities, as discussed below. The increase was driven by an increase in the rates received on loans and investment securities and was partially offset by a decrease in rate received on fed funds sold.
Net interest income for 2025 increased substantially, to $32,807,000 from $29,236,000 in 2024, representing growth of $3,571,000 or 12.2%. This improvement was driven by a significant decline in interest expense, which decreased 10.1% from $15,407,000 in 2024 to $13,848,000 in 2025, combined with steady growth in interest income. The decrease in interest expense primarily reflected the moderately easing interest rate environment during 2025, the Bank’s active management of deposit pricing as competitive pressures moderated, and the retirement of approximately $10.05 million in capital notes at the end of the second quarter of 2025, which eliminated interest expense on those borrowings. The average balance of interest-bearing liabilities increased 2.39%, from $783,003,000 for the year ended December 31, 2024, to $801,692,000 for the year ended December 31, 2025. However, the average interest rate paid on interest-bearing liabilities decreased by 24 basis points to 1.73% in 2025 from 1.97% in 2024, as the Federal Reserve’s rate cuts beginning in September 2024 and continuing through 2025 allowed the Bank to reduce deposit pricing.
The net interest margin increased to 3.39% in 2025 from 3.11% in 2024, an improvement of 28 basis points. The average rate on earning assets increased modestly by 7 basis points from 4.75% in 2024 to 4.82% in 2025, as new loan originations and repricing of variable-rate loans continued at elevated market rates. Meanwhile, the average rate on interest-bearing deposits decreased from 1.92% in 2024 to 1.68% in 2025, a decline of 24 basis points, reflecting the Bank’s pricing discipline as the competitive environment for deposits moderated and market rates declined. As of December 31, 2025, time deposits were $235,328,000, as the Bank successfully managed the overall cost of these deposits downward as maturing certificates of deposit were renewed at lower rates consistent with the declining interest rate environment. Because of Financial’s asset interest rate sensitivity, we anticipate that a decrease in interest rates likely would have a negative impact on our results of operations while an increase likely would have a positive impact on our results of operations.
The following table shows the average balances of total interest earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and related revenue,
expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.
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Net Interest Margin Analysis
Average Balance Sheets
(dollars in thousands)
Average Average
Average Interest Rates Average Interest Rates
Balance Income/ Earned/ Balance Income/ Earned
ASSETS Sheet Expense Paid Sheet Expense /Paid
Allowance for credit losses (6,623) (7,089)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Other borrowed funds
Total liabilities and
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Net interest margin 3.39% 3.11%
(1)Net 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 using the Company’s applicable federal tax rate of 21% for each year. This tax-exempt income is exempt from federal income tax only; no state tax adjustment was included as state net operating loss carryforwards eliminated state income tax liability in both periods presented. Accordingly, 21% represents the full combined marginal rate applied in the tax equivalent calculation.’
Interest income and expenses are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the year-to-year changes in components of net interest income on a taxable equivalent basis:
Volume and Rate
(dollars in thousands)
Years Ending December 31,
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
Securities nontaxable 46 33 79 - - -
Federal agency equities 1 (4) (3) 8 5 13
Correspondent bank equity - 6 6 - - -
Liabilities:
FHLB borrowings - - - (16) (16) (31)
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Net interest income on a taxable equivalent basis was $32,843,000 for the year ended December 31, 2025, compared to $29,255,000 for the year ended December 31, 2024. The tax equivalent adjustment, which reflects the grossing up of tax-exempt municipal securities income at the 21% federal statutory rate, was $36,000 for 2025 and $19,000 for 2024. No state tax adjustment was included as state net operating loss carryforwards eliminated state income tax liability in both periods presented. Net interest income as reported on a GAAP basis was $32,807,000 and $29,236,000 for the years ended December 31, 2025 and 2024, respectively.
Noninterest Income of Financial
Noninterest income has been and will continue to be an important factor for increasing our profitability. Management continues to review and consider areas where noninterest income can be increased. Noninterest income (excluding securities gains and losses) consists of income from mortgage originations and sales, service fees, income from life insurance, income from credit and debit card transactions, fees generated by the investment services of Investment, and wealth management fees earned by PWW. Service fees consist primarily of monthly service and minimum account balance fees and charges on transactional deposit accounts, treasury management fees, overdraft charges, and ATM service fees.
The Bank, through the Mortgage Division originates both conforming and non-conforming consumer residential mortgages and reverse mortgage loans primarily in the Region 2000 area as well as in Charlottesville, Harrisonburg, Roanoke, Lexington, Blacksburg, and Wytheville. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are presold to mortgage banking or other financial institutions. The Mortgage Division and assumes negligible credit or interest rate risk on these mortgages. We operate the Mortgage Division primarily with non-delegated correspondent relationships that allow the Bank to close loans in its name before an investor purchases the loan. By using the Bank’s funds to close the loan (as compared to a broker relationship in which loans are funded by the purchaser of the mortgage), the Bank is able to obtain better pricing due to the slight increase in risk. In 2025 and 2024, approximately 15.04% and 13.21% percent of our loans by total origination amount.
The Mortgage Division originated 659 mortgage loans, totaling approximately $199,563,000 during the year ended December 31, 2025, as compared with 633 mortgage loans, totaling $190,669,000 in 2024. The increase in originations was due to continued purchase activity in our market areas, including markets served by the Mortgage Division. Loans for new home purchases comprised 80.66% of the total volume in 2025, as compared to 81% in 2024. The Mortgage Division’s revenue is derived from gains on sales of loans held-for-sale to the secondary market. For the year ended December 31, 2025 and 2024, the Mortgage Division accounted for approximately 6.27% and 8.33% of Financial’s pre-tax net income, contributing $699,000 and $827,000, respectively. Because of the uncertainty surrounding current and near-term economic conditions, management cannot predict future mortgage rates. Management also anticipates that in the near to medium term, if rates are above the mid- 6% range and prices remain relatively steady or increase, refinancing opportunities will be limited, and the majority of the loan mix will continue to lean towards new home purchases and away from refinancing. The Mortgage Division’s presence in the Wytheville market area continues to develop. Management expects that the Mortgage Division’s reputation in its markets and our offices and producers present an opportunity for us to continue to grow the Mortgage Division’s market share and, in the longer term, revenue.
Service charges, fees, and commissions increased to $4,273,000 for the year ended December 31, 2025, from $4,003,000 for the year ended December 31, 2024. Contributing factors included growth in merchant services income, higher debit card interchange income, a Visa network incentive fee earned for the first time in 2025, and modestly higher wire transfer fees and business online banking fees. These increases were partially offset by a decline in commercial credit card interchange fees. Overall, the improvement reflects continued growth in customer accounts and payment transaction activity across the Bank’s service offerings.
Investment provides brokerage services to its clients through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank and the broker-dealer. Investment receives commissions on
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transactions generated and, in some cases, ongoing management fees such as mutual fund 12b-1 fees. Investment’s financial impact on our consolidated revenue has been minimal. Although management cannot predict the financial impact of Investment with certainty, management anticipates it will continue to be a relatively small component of revenue in 2026.
We provide insurance and annuity products to Bank customers and others through the Bank’s Insurance subsidiary. 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 2026.
We conduct our investment advisory business through PWW, a wholly-owned subsidiary of Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. As of December 31, 2025, PWW’s assets under management were approximately $1,028,928,000. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income. For the year ended December 31, 2024, PWW had fee income of $4,843,000. PWW’s fee income increased to $5,328,000 for the year ended December 31, 2025, representing growth of 10.4%. For the year ended December 31, 2025 and 2024, PWW accounted for approximately 22.5% and 21.5% of Financial’s pre-tax net income, respectively.
The Bank has invested in two Small Business Investment Company (SBIC) funds as part of its community development and investment strategy. At December 31, 2025, the carrying value of these investments totaled $3,217,000, compared to $2,529,000 at December 31, 2024. The Bank has outstanding capital commitments of $1,220,000 related to these funds, which may be drawn over time at the discretion of the fund managers. Income from SBIC investments totaled $506,000 for the year ended December 31, 2025, compared to $934,000 for the year ended December 31, 2024. The decrease of $427,841, or 45.8%, reflects variability and timing in fund distributions, which are driven by the underlying investment activity and performance of portfolio companies within each fund and are not necessarily indicative of future results.
Noninterest income increased to $15,852,000 in 2025 from $15,137,000 in 2024. The principal components of this change are reflected in the table below. The following table details our noninterest income for the periods indicated:
Noninterest Income
(dollars in thousands)
December 31,
Gains on sale of loans held for sale $ 4,853 $ 4,494
Service charges, fees and commissions 4,273 4,003
Gain on sales and calls of securities, net 27 62
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The following table details the Company’s noninterest expense for the periods indicated:
Noninterest Expense
(dollars in thousands)
December 31,
Professional and other outside expenses 3,967 3,471
Amortization of intangibles 561 560
The increase in noninterest expense from $35,105,000 in 2024 to $37,549,000 in 2025 was driven by normal operating cost increases, including salaries and employee benefits reflecting annual compensation adjustments and the impact of staffing for a branch location opened in April 2025. Variable compensation related to mortgage origination increased consistent with changes in mortgage volume. The year-over-year increase was also driven by higher professional and other outside expenses, primarily due to a non-recurring fee paid to a consultant engaged to assist the Company with the negotiation of an amendment to and extension of the contract with its core service provider. However, the year-over-year increase was significantly moderated by successful cost reduction initiatives implemented during 2025. Specifically, the Company achieved meaningful reductions in data processing expenses through vendor contract renegotiations completed during the year. Management anticipates that the amended contract with the Company’s core provider, which was effective April 1, 2025, will generate significant savings over the term of the contract as compared to the previous contract. Marketing and advertising expenses increased as the Company continued to support customer acquisition and growth initiatives across its markets. Other expenses increased by $61,000, primarily due to higher software and software licensing costs, office supplies and mail handling expenses These increases were partially offset by lower printing costs and modest decreases in other expense categories.
Income Tax Expense
For the year ended December 31, 2025, Financial recorded federal income tax expense of $1,997,000, compared to federal income tax expense of $1,851,000 for the year ended December 31, 2024, resulting in effective tax rates of 17.92% and 18.66%, respectively. The Company’s effective tax rate was lower than the federal statutory corporate tax rate of 21% in both periods primarily due to permanent tax benefits associated with earnings on bank-owned life insurance and certain tax-exempt municipal securities and loans. These benefits were partially offset by the impact of state income taxes. For the year ended December 31, 2025, Financial recorded total income tax expense (federal and state) of $2,123,000, compared to total income tax expense (federal and state) of $1,979,000 for the year ended December 31, 2024, resulting in effective tax rates of 19.05% and 19.94%, respectively. Note 12 of the consolidated financial statements provides additional information regarding income tax expense and deferred tax accounts for 2025 and 2024.
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ANALYSIS OF FINANCIAL CONDITION
As of December 31, 2025 and December 31, 2024
General
Our total assets were $1,039,024,000 at December 31, 2025, an increase of $59,780,000 or 6.1% from $979,244,000 at December 31, 2024. This reflects balanced growth across our core business lines and marked the first time the Company has exceeded $1 billion in total assets at year-end. The increase was primarily driven by growth in loans, net of allowance for credit losses, which increased $24,805,000 or 3.9%, reflecting organic loan demand in our Virginia markets. As explained in more detail below, deposits increased from $882,404,000 on December 31, 2024, to $937,129,000 on December 31, 2025, representing growth of $54,725,000 or 6.2%. The deposit growth in excess of loan growth was deployed into a combination of federal funds sold, interest-bearing balances at other financial institutions, and investment securities, providing the Company with enhanced liquidity and interest income while maintaining flexibility to fund future loan growth.
Loans
Our loan portfolio is the largest and most profitable component of our earning assets. The Bank has comprehensive policies and procedures which cover both commercial and consumer loan origination and management of credit risk. Loans are underwritten in a manner that focuses on the borrower’s ability to repay through cash flow. Management’s goal is not to avoid risk, but to manage it and to include credit risk as part of the pricing decision for each product.
The Bank’s loan portfolio consists of commercial short-term lines of credit, term loans, mortgage financing and construction loans that are used by the borrower to build or develop real estate properties, and consumer loans. The consumer portfolio includes residential real estate mortgages, home equity lines and installment loans.
Loans, net of unearned income and the allowance, increased to $661,357,000 on December 31, 2025, from $636,552,000 on December 31, 2024, representing growth of $24,805,000 or 3.9%. Total loans increased due to continued demand and originations across our lending portfolios, with particular strength in commercial real estate and consumer lending. The moderate growth rate reflects the Bank’s disciplined underwriting approach in a competitive market environment, as management maintained credit quality standards while selectively pursuing attractive lending opportunities. Competition for qualified borrowers continues to remain strong, with pricing pressure in certain segments as competitors seek to deploy excess liquidity.
As of December 31, 2025, the Bank had $1,704,000, or 0.26% of total loans, in nonaccrual status, compared with $1,640,000, or 0.25% of total loans, at December 31, 2024. The increase in nonaccrual loans was primarily attributable to higher balances in real estate and commercial loans, partially offset by declines in consumer loans during 2025. Despite the modest increase, nonaccrual loans remained at a low level relative to total loans. Management continues to focus on maintaining nonperforming assets at low levels through proactive collection efforts and, when appropriate, the liquidation of underlying collateral. The Bank works with borrowers on a case-by-case basis to protect its interests. However, the level of nonaccrual loans may be affected by changes in unemployment levels, housing market conditions, and broader economic conditions at the local, regional, and national levels. See “Asset Quality” below.
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The following table summarizes net charge-offs, average loan balance and the percentage of net (charge-offs) recoveries to average loan balance for each of the Company’s loan segments at the end of the period:
Loan Portfolio
(dollars in thousands)
December 31,
The provision amounts in the table above reflect only the provision for (recovery of) credit losses on loans. Total provision for (recovery of) credit losses as reported in the Consolidated Statements of Income was a recovery of $35,000 and $655,000 for the years ended December 31, 2025 and 2024, respectively. The Consolidated Statements of Income also includes provision for (recovery of) credit losses on unfunded commitments.
The following table sets forth the maturities of the loan portfolio at December 31, 2025:
Remaining Maturities of Selected Loans
(dollars in thousands)
Due in After One, After Five,
One Year but Within but Within After
or Less Five Years Fifteen Years Fifteen Years Total
Loans with fixed interest rates:
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Loans with variable interest rates:
Deposits
Total deposits increased by 6.2%, from $882,404,000 at December 31, 2024, to $937,129,000 at December 31, 2025, representing growth of $54,725,000. This deposit growth was driven by core deposit expansion, including noninterest bearing demand deposits and interest-bearing transaction accounts reflecting successful customer relationship growth and the maturation of branch locations opened in 2024 and 2025. Noninterest-bearing demand deposits increased by $1,764,000, or 1.4%, from $129,692,000 at December 31, 2024, to $131,456,000 at December 31, 2025. This increase reflects our stable customer base as the competitive environment for deposits moderated following Federal Reserve rate cuts, reducing the incentive for customers to migrate funds to higher-yielding accounts. Interest-bearing deposits increased by $52,961,000, or 7.0%, from $752,712,000 at December 31, 2024, to $805,673,000 at December 31, 2025, driven by new customer relationships, growth in existing customer balances, and the ongoing maturation of our branch network. We continue to pursue deposit growth in all our markets and remain focused on acquiring primary checking accounts from commercial loan customers to strengthen our core deposit base. The Company’s strong deposit franchise and relationship-focused approach enabled successful deposit gathering even as the declining interest rate environment allowed the Bank to reduce rates paid on deposits during 2025.
The following table sets forth the average deposit balances and the rates paid on deposits for the years indicated:
Average Deposits and Rates Paid
(dollars in thousands)
Year Ended December 31,
Amount Rate Amount Rate
Interest-bearing deposits
Time deposits
The following table sets forth the maturity schedule for certificates of deposits greater than $250,000:
Maturities of CD’s Greater than $ 250,000
(dollars in thousands)
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In addition to our time deposit maturity profile, we consider the level of deposits that may be more sensitive to changes in market conditions. As of December 31, 2025, deposits in accounts with balances exceeding the FDIC insurance limit of $250,000 totaled approximately $289,069,000 (approximately 30.85% of total deposits), compared to approximately $275,654,000 (approximately 31.24% of total deposits) as of December 31, 2024. These amounts are based on account balances calculated without applying FDIC deposit insurance aggregation rules across accounts or ownership capacities and, as a result, the amounts presented may differ from the actual portion of deposits that is uninsured. Excluding public deposits that are collateralized in accordance with applicable requirements, deposits in accounts exceeding the FDIC insurance limit totaled approximately $252,818,000 (approximately 26.98% of total deposits) and $236,358,000 (approximately 26.79% of total deposits) as of December 31, 2025 and 2024, respectively.
Larger-balance deposits may be more rate-sensitive or otherwise more likely to migrate in response to market conditions, which could increase our funding costs and/or affect our liquidity.
Cash and Cash Equivalents
Cash and cash equivalents increased from $73,309,000 on December 31, 2024, to $84,475,000 on December 31, 2025. Federal funds sold increased to $55,937,000 on December 31, 2025, from $50,022,000 on December 31, 2024. The Company’s liquidity position strengthened during 2025, as deposit growth of $54,725,000 exceeded loan growth of $24,805,000. This increased liquidity was deployed across a combination of loans, federal funds sold, interest-bearing deposits at other financial institutions, and securities available-or-sale, balancing the objectives of earning competitive returns, maintaining operational flexibility, and managing interest rate risk. The Company continually evaluates its liquidity deployment strategy and may adjust the allocation among these liquid assets based on market conditions, anticipated loan demand, and the overall interest rate environment. Fluctuations in cash, federal funds sold, and short-term investment balances reflect our ongoing liquidity management practices and our conservative approach to balance sheet management.
Investment Securities
The investment securities portfolio of the Bank is used as a source of income and liquidity.
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The following table summarizes the fair value of the Bank’s securities portfolio for the periods indicated:
Securities Portfolio
(dollars in thousands)
December 31,
Held-to-maturity
Available-for-sale
Deposited funds are generally invested in overnight vehicles, including federal funds sold, until approved loans are funded. The decision to purchase investment securities is based on several factors, individually or in combination, including:
a)Whether yields on investment securities rated “A” or better by Standard & Poor’s are materially higher than the overnight federal funds rate, while credit quality and duration characteristics remain within the Company’s risk tolerance;
b)Whether demand for loan funding exceeds the rate of deposit growth, which affects the level of surplus liquidity;
c)Management’s objective of maintaining a minimum of 6% of the Bank’s total assets in a combination of federal funds sold and investment securities (including both available-for-sale and held-to-maturity portfolios); and
d)Whether the maturity and call structure of potential investments aligns with management’s asset/liability management strategy.
Available-for-sale securities (as opposed to held-to-maturity securities) may be liquidated at any time as funds are needed to fund loans. Liquidation of securities may result in a net loss or net gain depending on current bond yields available in the primary and secondary markets and the shape of the U.S. Treasury yield curve. Management is cognizant of its credit standards policy and does not feel pressure to maintain loan growth at the same levels as deposit growth and thus sacrifice credit quality in order to avoid security purchases.
Management maintains a portion of available funds in liquid assets to ensure the Bank can fund anticipated loan growth and other higher-yielding earning assets as opportunities arise. Because loans generally provide higher yields than overnight instruments and many investment securities, this approach allows the Bank to deploy liquidity into higher-return assets while maintaining appropriate liquidity levels and managing interest rate risk.
Securities held-to-maturity at amortized cost decreased from $3,606,000 at December 31, 2024, to $3,590,000 at December 31, 2025, due to normal amortization of premiums and scheduled paydowns/maturities. The decision to classify securities as held-to-maturity reflects management’s intent and ability to hold such securities until maturity, based on the assessment that the related funds will not be required for liquidity needs during the securities’ contractual term. Held-to-maturity securities may, however, be pledged to secure public deposits or short-term borrowings.
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The portfolio of securities available-for-sale increased from $187,916,000 at December 31, 2024, to $214,128,000 at December 31, 2025. This increase resulted from purchases of $44,263,000 using excess liquidity from strong deposit growth, partially offset by principal repayments, maturities, and calls totaling $23,754,000 and proceeds from sales of $4,227,000, on which net gains of $27,000 were realized. The fair value of the portfolio improved by approximately $7,978,000 (net of tax) during 2025, as declining interest rates increased the market value of the Bank’s fixed-rate securities holdings. Unrealized losses on the available-for-sale portfolio decreased from $22,915,000 (net of tax) at December 31, 2024, to $14,937,000 (net of tax) at December 31, 2025.
The following table shows the maturities of held-to-maturity and available-for-sale securities at fair value and amortized cost at December 31, 2025 and 2024 and the approximate weighted average yields of such securities. Weighted average yields on all securities including state and political subdivision securities are shown on a pre-tax basis. Financial attempts to maintain diversity in its portfolio and maintain credit quality and repricing terms that are consistent with its asset/liability management and investment practices and policies. For further information on Financial’s securities, see Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.
Securities Portfolio Maturity Distribution / Yield Analysis
(dollars in thousands)
Held to Maturity
U.S. agency
Available for sale securities
U.S. agency
Mortgage Backed Securities
Municipals
Corporate
Total portfolio
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Cash surrender value of bank-owned life insurance
The Company maintains bank-owned life insurance (“BOLI”) on the lives of certain officers. The Company is the owner and sole beneficiary of the BOLI policies. As of December 31, 2025, the BOLI had a cash surrender value of $23,676,000, an increase of $769,000 from the cash surrender value of $22,907,000, as of December 31, 2024. The Company purchased no additional BOLI in 2025 and $600,000 in 2024. With the exception of purchases, the value of BOLI increases from the cash surrender values of the pool of insurance. The increase in cash surrender value is recorded as a component of noninterest income; however, the Company does not pay tax on the increase in cash value. This profitability is used to offset a portion of current and future employee benefit costs. BOLI can be liquidated if necessary with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected September 1 of each year as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
On December 31, 2021, Financial completed its acquisition of Pettyjohn, Wood & White, Inc. (“PWW”), a Lynchburg, Virginia-based investment advisory firm with approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. The acquisition date fair value of consideration transferred totaled $10.5 million, which was paid in cash.
In connection with the transaction, the Company recorded intangibles relating to customer relationships and the resultant goodwill, representing the excess of the fair value of the consideration transferred over the fair value of the assets acquired and liabilities assumed in accordance with the acquisition method of accounting. Other assets acquired and liabilities assumed in the combination were not significant.
Liquidity
Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities.
The liquidity of Financial depends primarily on Financial’s current assets, available credit, and the dividends paid to it by the Bank and PWW. Payment of cash dividends by the Bank is limited by regulations of the Federal Reserve Board and is tied to the regulatory capital requirements. Management believes that Financial has sufficient liquidity to meet its current obligations. See “Capital Resources,” below.
The objective of liquidity management for the Bank is to ensure the continuous availability of funds to meet the demands of depositors, borrowers, creditors, and others. Liquidity management involves monitoring the Bank’s sources and uses of funds in order to meet the day-to-day cash flow requirements while maximizing profits. Stable core deposits and a strong capital position are the components of a solid foundation for the Bank’s liquidity position. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of securities held-to-maturity is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net non-maturity deposit inflows and outflows are far less predictable and are not subject to the same degree of control.
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Funding sources for the Bank primarily include paid-in capital and customer-based deposits, and also include borrowed funds and cash flow from operations. The Bank maintains multiple alternative sources of liquidity, including, among others, unsecured and secured borrowing arrangements, the ability to sell investment securities, federal funds purchased, advances through the Federal Home Loan Bank of Atlanta (“FHLBA”) and other correspondent relationships, and brokered certificate of deposit arrangements.
Federal Home Loan Bank of Atlanta. The Bank is a member of the FHLBA and may obtain advances subject to the FHLBA’s lending requirements and the amount and type of eligible collateral pledged. As of December 31, 2025, the Bank’s remaining available credit through the FHLBA was $303,408,000, based on the most recent calculation. The Bank had pledged loans and securities with an estimated book value of approximately $66,510,000, which supported total potential borrowings of up to $47,574,000, of which $0was drawn and outstanding as of December 31, 2025. Additional collateral would be required for additional borrowing capacity to become available up to the Bank’s maximum potential eligibility.
Unsecured federal funds lines. The Bank maintains unsecured federal funds lines with multiple correspondent banking institutions with aggregate borrowing availability of approximately $58.0 million as of December 31, 2025. Borrowings under these lines are subject to customary terms and conditions and counterparty approval.
At December 31, 2025, liquid assets, which include cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, and securities available-for-sale, totaled $298,603,000, as compared to $261,225,000 at December 31, 2024. Investment securities traditionally provide a secondary source of liquidity because they can be converted into cash in a timely manner. However, approximately$115,815,000of these securities are pledged to secure public deposits and unfunded lines of credit. In the event any secured line of credit is drawn upon, the related debt would need to be repaid before the securities could be sold and converted to cash.
The Bank’s liquidity position remained strong throughout 2025, supported by robust deposit growth and diversified funding sources. Management continues to actively monitor our sources and uses of funds in order to meet our cash needs and cash flow requirements while maximizing profits. Our ongoing liquidity management framework includes internal stress testing scenarios and contingency plans to address potential deposit volatility or market disruptions.
At December 31, 2025, non-deposit sources of available funds totaled $366,525,000 which included $303,408,000 available from the FHLBA.
Management believes that the Bank has the ability to meet its liquidity needs.
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The following table sets forth non-deposit sources of funding:
Funding Sources
(dollars in thousands)
Source Capacity Outstanding Available
Federal funds purchased lines (unsecured) $ 58,000 $ - $ 58,000
Federal funds purchased lines (secured) 5,117 - 5,117
Source Capacity Outstanding Available
Federal funds purchased lines (unsecured) $ 53,000 $ - $ 53,000
Federal funds purchased lines (secured) 4,950 - 4,950
(1)Currently the Bank has in place collateral in the form of 1-4 family residential mortgages and securities with a book value of approximately $27,220,000 against which $0 was drawn and outstanding on December 31, 2025. Additional collateral would be required to be pledged in order for the full $303,408,000 to be available.
Capital Resources
Capital adequacy is an important measure of financial stability and performance. Management’s objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.
Regulatory agencies measure capital adequacy utilizing a formula that takes into account the individual risk profiles of financial institutions. The guidelines define capital as Tier 1 (primarily common stockholders’ equity, defined to include certain debt obligations) and Tier 2 (remaining capital generally consisting of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for credit losses).
Regulatory Capital Framework
The Federal Reserve and other federal banking agencies have implemented the Basel III regulatory capital reforms, which established strengthened risk-based and leverage capital requirements for banking organizations. These rules became effective January 1, 2015, and were fully phased in by January 1, 2019.
The current regulatory framework requires the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets.
In addition to these minimum requirements, banks must maintain a capital conservation buffer of 2.5% of risk-weighted assets. This buffer is designed to absorb losses during periods of economic stress. The capital conservation buffer effectively raises the minimum capital ratios to: (i) 7.0% for common equity Tier 1 capital, (ii) 8.5% for Tier 1 capital, and (iii) 10.5% for total capital. Banking institutions that fall below the conservation buffer face constraints on dividends, equity repurchases, and discretionary compensation payments.
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Well-Capitalized Standards
Under the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act, a bank is considered “well-capitalized” if it maintains: (i) a common equity Tier 1 capital ratio of at least 6.5%, (ii) a Tier 1 capital ratio of at least 8.0%, (iii) a total capital ratio of at least 10.0%, and (iv) a leverage ratio of at least 5.0%.
Community Bank Leverage Ratio
Effective January 1, 2020, depository institutions and depository institution holding companies with less than $10 billion in total consolidated assets may elect to use a simplified community bank leverage ratio framework. Qualifying community banking organizations that maintain a leverage ratio (Tier 1 capital divided by average total consolidated assets) of greater than 9.0% are deemed to satisfy all risk-based and leverage capital requirements and are considered well-capitalized for regulatory purposes. As of the date of this filing, the Company has not elected to use the community bank leverage ratio framework.
Risk Weighting of Assets
The capital requirements include specific risk weights for various asset categories to better reflect credit risk and other exposures. Notable risk weights include: 150% for certain high volatility commercial real estate acquisition, development and construction loans and nonresidential mortgage loans that are 90 days past due or on non-accrual status; 250% for mortgage servicing rights and deferred tax assets that are not deducted from capital; and varying risk weights (0% to 600%) for equity exposures.
The Bank’s Capital Position
The Bank’s regulatory capital levels exceed those established for well-capitalized institutions. Management remains committed to maintaining strong capital ratios that provide a cushion above regulatory minimums and support the Bank’s growth objectives.
The following table (along with Note 18 of the consolidated financial statements) shows the minimum capital requirements and the Bank’s capital position as of December 31, 2025 and 2024:
Analysis of Capital for Bank of the James (Bank only)
(dollars in thousands)
Tier 1 capital
Tier 2 capital
Allowance for credit losses $ 6,450 $ 7,044
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Actual Regulatory Benchmarks
For Capital For Well
December 31, December 31, Adequacy Capitalized
Capital Ratios:
(1)Includes capital conservation buffer of 2.5%, where applicable.
On April 13, 2020, the Company commenced a private placement of unregistered debt securities (the “2020 Offering”). In the 2020 Offering, the Company sold $10,050,000 in principal of fixed-rate subordinated notes (the “2020 Notes”) during the second and third quarters of 2020. The 2020 Notes bore interest at the rate of 3.25% per year with interest payable quarterly in arrears. The 2020 Notes matured and were repaid in full on June 30, 2025. The retirement of these notes eliminated approximately $327,000 in annual interest expense and contributed to the Company’s improved net interest margin and profitability in the second half of 2025. For the full year 2025, the notes contributed approximately $163,000 in interest expense during the first half of the year while they remained outstanding.
In June 2025, the Bank paid a dividend to Financial of $5,000,000. The dividend was used to support the repayment of the holding company’s capital notes and had the effect of lowering the capital ratios set forth above. As a result, the Bank’s Tier 1 capital ratio temporarily fell below 9%; however, the Bank subsequently restored the Tier 1 capital ratio above 9% earlier than budgeted.
The capital ratios set forth in the above tables state the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3 billion, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis would be slightly lower than the capital ratios of the Bank due to holding company debt used to finance the acquisition of Pettyjohn, Wood & White in December 2021, as well as other minor differences between the Bank and the consolidated entity.
Stockholders’ Equity
Stockholders’ equity increased from $64,865,000 at December 31, 2024, to $80,048,000 at December 31, 2025, representing an increase of $15,183,000 or 23.4%. This increase was primarily due to record net income of $9,022,000 earned during the year and an improvement of $7,978,000 in the mark-to-market adjustment (net of taxes) of available-for-sale securities during 2025, partially offset by dividends paid to stockholders. As of December 31, 2025, we had an unrealized loss in our securities available-for-sale portfolio of $14,937,000 as compared to $22,915,000 on December 31, 2024. The decrease in unrealized losses during 2025 resulted from declining interest rates as the Federal Reserve reduced the federal funds rate by 75 basis points during the second half of the year, which increased the fair value of the Bank’s fixed-rate securities holdings. The remaining unrealized loss is due to changes in market rates of interest rather than the creditworthiness of the issuers. Financial does not expect to realize the losses, as it has the intent and ability to hold the securities until their recovery, which may be at maturity.
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Asset Quality
We perform monthly reviews of all delinquent loans and loan officers are charged with working with customers to resolve potential payment issues. We generally classify a loan as non-accrual when interest is deemed uncollectible or when the borrower is 90 days or more past due. We generally restore a loan if i) a borrower is no longer 90 days past due on the loan and the borrower has demonstrated the capacity to repay the loan for six consecutive months or ii) the loan committee of the Board of Directors determines that a borrower has the capacity to repay the loan.
Non-accrual loans increased to $1,704,000 on December 31, 2025, from $1,640,000 on December 31, 2024. Non-accrual loans remained relatively stable, reflecting consistent asset quality and the Bank’s disciplined underwriting standards. This change reflects ongoing credit monitoring and collection efforts and the resolution of certain credits through workout arrangements, payments, or charge-offs. Total charge-offs during 2025 were $447,000 compared to $84,000 in 2024.
There was no other real estate owned (OREO) activity during the years ended December 31, 2025 and 2024.
We classified loan modifications as both performing and nonperforming assets. Loans individually evaluated are based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. We maintain a valuation allowance to the extent that the measure of the loan individually evaluated is less than the recorded investment. Loan modifications occurred when we agreed to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions typically were made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Performing loan modifications were $313,000 and $354,000 on December 31, 2025 and 2024.
The amount allocated during the year to the provision for credit losses represents management’s estimate of expected credit losses in the existing loan portfolio. Management’s policy is to maintain the allowance for credit losses at a level sufficient to absorb all expected losses over the life of the loans.Both the amount of the provision and the level of the allowance for credit losses are influenced by numerous factors, including current and forecasted economic conditions, historical credit loss experience, loan performance metrics, borrower-specific conditions, and other relevant qualitative considerations. In performing its credit loss analysis, the Bank assigns a risk rating to each loan in the Bank’s portfolio.
The Bank’s allowance for credit losses decreased 8.4%, from $7,044,000 on December 31, 2024, to $6,450,000 on December 31, 2025, primarily due to changes in the factors used in the CECL model. In the second quarter of 2025, the Company worked with its model provider to implement routine updates to the quantitative CECL loss models, as described in Note 5. The updated model specifications, which revised certain maximum loss-rate parameters and incorporated additional post-COVID historical loss data, resulted in lower probabilities of default and reduced projected losses across the loan portfolio, driving a reduction in the provision for credit losses relative to what would have been recorded under the prior model specification. The updated models remained in use throughout the remainder of 2025 with no further specification changes. The CECL model incorporates input related to economic forecasts, peer asset quality data, historical loss experience, and other quantitative and qualitative factors. At December 31, 2025, the allowance for credit losses was 0.97% of total loans outstanding, versus 1.09% of total loans outstanding at December 31, 2024. The decrease in the allowance as a percentage of total loans was due primarily to the updates implemented to the Company’s quantitative CECL loss models in the second quarter of 2025, which revised certain maximum loss-rate parameters and incorporated additional post-COVID historical loss data, partially offset by loan growth of approximately $24,212,000 during the year.
Management intends to continue to be proactive in quantifying and mitigating the ongoing risk associated with all asset classes. If interest rates rise and/or the U.S. economy experiences a recession, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the
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allowance for credit 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.
All non-accrual loans in excess of $100,000 (and any other loans related to that borrower) at December 31, 2025 and 2024 were individually evaluated. If interest on non-accrual loans had been accrued, such income would have totaled approximately $81,000 and $36,000 at December 31, 2025 and 2024, respectively. Loan payments received on non-accrual loans are applied to principal.
When a loan is placed on non-accrual status, several negative implications occur. First, all interest previously accrued but unpaid is reversed and deducted from the Bank’s interest income. Second, interest accruals are discontinued until it becomes probable that both principal and interest can be fully repaid. Third, the loan may require additional provisions for credit losses that are charged against earnings. These loans are included in the nonperforming loan totals presented below.
The following table shows the balance and percentage of the Bank’s allowance for credit losses allocated to each major category of loans:
Allocation of Allowance for Credit Losses
(dollars in thousands)
At December 31,
Amount Percent of Loans to Total Loans Amount Percent of Loans to Total Loans
The following table provides information on the Bank’s nonperforming assets as of the dates indicated:
Nonperforming Assets
(dollars in thousands)
At December 31,
Nonaccrual loans
Foreclosed Properties
Commercial - -
Commercial Real Estate - -
Consumer - -
Residential - -
Total foreclosed properties $ - $ -
Repossessed Assets - -
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Total Nonperforming assets $ 1,704 $ 1,640
Total nonperforming loans as a percentage of total loans 0.26% 0.25%
Total nonperforming loans as a percentage of total assets 0.17% 0.17%
Total nonaccrual loans as a percentage of total loans 0.26% 0.25%
As set forth in the preceding table, the allowance for credit losses as a percentage of non-accrual loans declined from 429.4% in 2024 to 378.5% in 2025. This decrease reflects a modest increase in non-accrual loans from $1,640,000 to $1,704,000. As a community bank, the Bank remains committed to growing assets through quality loan growth by providing credit to small and mid-size businesses and individuals within the markets we serve.
We have expertise and a long history in originating and managing commercial real estate loans. We have a strong credit underwriting process, which includes management and board oversight. We perform rigorous monitoring, stress testing, and reporting of these portfolios at the management and board levels, and we continue to monitor the level of the concentration in commercial real estate loans within our loan portfolio monthly.
Based on our loan portfolio as of December 31, 2025, the non-owner occupied commercial real estate loans and the construction and land development loans were approximately 241.81% and 26.95% (based on interagency CRE guidelines) of total risk-based capital, respectively.
The Bank closely monitors concentrations within its commercial real estate loan portfolio. As of December 31, 2025, non-owner occupied commercial real estate loans totaled $215,301,000, or 32.24% of total loans. The Bank has minimal exposure to loans secured by large office buildings or shopping centers, which comprise less than 6% of the non-owner occupied commercial real estate portfolio. The majority of the Bank’s non-owner occupied commercial loans are secured by smaller, multi-tenant properties diversified across various industries and geographies within our market areas.The Bank does not have any non-owner-occupied commercial loans secured by properties in major city centers. We have not seen an increase in delinquencies in loans secured by non-owner occupied commercial real estate.
In addition, to help manage risk we actively manage and monitor our commercial real estate risk through, when appropriate, the following:
Origination and Analysis
We have a thorough loan origination process.For all CRE loans secured by real estate collateral, we require an appraisal or valuation at the time that we originate the loan.We generally do not approve loans that have a loan-to-value ratio in excess of 80%. We perform an individual property cashflow analysis and, if appropriate, a global cash flow analysis at origination and generally require a debt service coverage ratio of at least 1.2x.
Ongoing Risk Management
Following origination, we continue to manage risk. Our ongoing risk management includes:
Utilizing enhanced risk rating systems specific to CRE exposures;
Obtaining regular third-party loan reviews of the CRE portfolio;
Obtaining subsequent appraisals when either required by regulations or dictated by our internal policies;
Stress testing of property cash flows using various vacancy and rate scenarios during underwriting;
Regular monitoring of local market conditions and property sector trends;
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Meeting at least annually with clients to which the Bank has significant exposure along with market-level monitoring of vacancy rates and rental trends;
Performing annual reviews, including the review of current financial information, rate shocking, and collecting and analyzing rent rolls and operating statements at least annually; and
Utilizing a risk rating system that incorporates both property and borrower performance metrics.
Credit Enhancements
Where appropriate, we mitigate risk by obtaining credit enhancements. Typical enhancements to CRE loans include personal guarantees, secondary collateral, and liquid collateral.
The following table sets forth information for non-owner occupied CRE Loans for each loan category (classified by purpose code and collateral description) that comprises more than one percent (1%) of our total loans:
(1)Loan-to-value is based on collateral valuation at origination date against current bank-owned principal.
The following table sets forth information for owner occupied CRE Loans for the four largest categories of loans (classified by purpose code and collateral description) that comprises more than one percent (1%) of our total loans:
(1)Loan-to-value is based on collateral valuation at origination date against current bank-owned principal.
Interest Rate Sensitivity
The most important element of asset/liability management is the monitoring of Financial’s sensitivity to interest rate movements. The income stream of Financial is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of Financial’s interest earning assets and the amount of interest-bearing liabilities that prepay, mature or reprice in specified periods. Management’s goal is to maximize net interest income with
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