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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. Because Pettyjohn, Wood & White, Inc. was acquired on December 31, 2021, Pettyjohn, Wood & White, Inc. did not impact our operating results in 2021, the discussion primarily concerns the business of the Bank. 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.

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Cautionary Statement Regarding Forward-Looking Statements

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Financial and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Financial’s control, include, but are not necessarily limited to the following:

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

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

government legislation and policies (including the impact of the Dodd-Frank Wall Street Reform and the Consumer Protection Act and its related regulations);

changes to statutes, regulations, or regulatory policies or practices, including changes to address the impact of COVID-19;

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

competition for our customers from other providers of financial services; government legislation and regulation relating to the banking industry (which changes from time to time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act;

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

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

diversion of management time on pandemic-related issues;

adoption of new accounting standards or changes in existing standards;

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;

a potential resurgence of economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, and the sanctions imposed on Russia by numerous countries and private companies, all of 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 filing 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.

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

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the year ended December 31, 2020 and to a lesser extent for the year ended December 31, 2021. Management anticipates that impact of the pandemic will continue to have potentially adverse effect on the economy, the banking industry and our Company in future periods.

Effects on Market Areas

The broad suspension of business activities in the Commonwealth initially led to an increase in the Commonwealth’s and our market areas’ unemployment rate. While these developments commenced late in the first quarter of 2020, the nation, the Commonwealth, and our market areas have experienced a number of COVID-19 surges, we believe the economic consequences of the pandemic are difficult to predict.

Policy and Regulatory Developments

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

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a range of 0.0 - 0.25%, where the range stayed until the Federal Reserve raised the rate on March 16, 2022.

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

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who were unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally did not need to categorize COVID-19-related modifications as TDRs, and that the agencies would not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. In addition, upon expiration of the initial loan modification period, the Bank, pursuant to the “Joint Statement on Additional Loan Accommodations Related to COVID-19” published August 3, 2020, was encouraged to continue to work with effected borrowers on additional loan modifications.

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

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

Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above have had an impact on our business. Initially, we anticipated that the COVID-19 pandemic could have a negative impact on our financial condition, capital levels and results of operations could be significantly adversely affected. Mitigation efforts, as described in further detail below, helped offset the effects of the pandemic.

COVID-19 Crisis Management

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

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

The Company has implemented its Business Continuity Plan.

All branches remained open, with routine banking services offered through online banking, drive-thru, ATMs, and limited lobby access. All branches now provide full lobby access.

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

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

oDiscontinuation of non-essential business travel and meetings; and

oUse of online meeting platforms, including successfully conducting the 2021 and 2021 Annual Meeting of Shareholders in a virtual format.

We anticipate that the Company will continue to maintain these policies as long as necessary.

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

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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”), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”), and as of December 31, 2021, investment advisory services through the Company’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc., which we refer to as “PWW.”

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 loan 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 anticipate that going forward, PWW will enhance our operating results by providing additional noninterest income (generally investment advisory fees less operating expenses).

As discussed in more detail below,

For the year ended December 31, 2021, Financial had net income of $7,589,000, an increase of $2,609,000 from net income of $4,980,000, for the year ended December 31, 2020;

For the year ended December 31, 2021, earnings per basic and diluted common share were $1.60, as compared to earnings of $1.04 per basic and diluted common share for the year ended December 31, 2020;

Net interest income increased to $27,079,000 for the current year from $25,146,000 for the year ended December 31, 2021;

Noninterest income (exclusive of net gains on sales and calls of securities) increased to $11,209,000 for the year ended December 31, 2021 from $10,331,000 for the year ended December 31, 2020;

Total assets as of December 31, 2021 were $987,634,000 compared to $851,386,000 at the end of 2020, an increase of $136,248,000 or 16.00%;

Net loans (excluding loans held for sale), net of unearned income and the allowance for loan losses, decreased to $576,469,000 as of December 31, 2021 from $601,934,000 as of the end of December 31, 2020, a decrease of 4.23%; and

The net interest margin decreased 18 basis points to 3.14% for 2021, compared to 3.32% for 2020.

The following table sets forth selected financial ratios:

For the Year Ended

December 31,

Return on average equity 11.34% 8.01%

Return on average assets 0.82% 0.62%

Average equity to total average assets 7.27% 7.72%

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

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economic models. Management believes that the best defense against wide swings in interest rate levels is to minimize vulnerability at all potential interest rate levels. Rather than concentrate on any one interest rate scenario, Financial prepares for the opposite as well, in order to safeguard margins against the unexpected.

Between January 2018 and December 2018, the FOMC raised rates by 25 basis points four times, at which point the target rate for federal funds (“fed funds”) peaked at 2.25% to 2.50%. Beginning in July 2019, the FOMC began to decrease rates. Between July 2019 and October 2019, the FOMC decreased the target rate three times by 25 basis points.

In its December 11, 2019 statement, the FOMC stated it continues to seek to foster maximum employment and price stability. The FOMC judged that the current stance of monetary policy was appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the FOMC's two percent objective. However, on March 3, 2020, the FOMC lowered the target range of the fed funds rate by 50 basis points in response to concerns related to risks the coronavirus poses to economic activity. Further, in response to concerns that the coronavirus could push the U.S. economy towards a recession, on March 15, 2020, the FOMC, at an emergency meeting lowered the target range of the federal funds rate by an additional 100 basis points. At that meeting, the Federal Reserve also announced that it would buy $700 billion in Treasury and mortgage-backed securities.

As of March 20, 2020, the FOMC had set a current target rate range of 0% to 0.25%. The target rate remained unchanged for the remainder of 2020. Long term interest rates decreased in 2019 and remained relatively flat in 2021. However, as a result of COVID-19 stimulus, long term rates began to trend slightly upward in the first quarter of 2021.

In response to higher inflation and supply chain issues exacerbated by the war in Ukraine, on March 16, 2022, the FOMC increased the target rate to a range of 0.25% to 0.50%. The FOMC further indicated that it is likely to increase the target rate multiple times in 2022.

Critical Accounting Policies

Financial’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 that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Bank uses historical loss factors as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors that the Bank uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of Financial’s transactions would be the same, the timing of events that would impact the transactions could change.

The allowance for loan losses is management’s estimate of the probable losses inherent in our loan portfolio. Management considers impaired loans, historical loss experience, and various qualitative factors (both internal and external) in the Company’s determination of the allowances. Historical and industry trends, as well as peer comparisons are also considered in the Company’s ongoing evaluation of the allowance for loan losses. The allowance is based on two basic principles of accounting: (i) ASC 450, Contingencies, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) ASC 310, Receivables, which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Guidelines for determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102 – “Selected Loan Loss Allowance Methodology and Documentation Issues” and the Federal Financial Institutions Examination Council’s interagency guidance, “Interagency Policy Statement

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on the Allowance for Loan and Lease Losses” (the “FFIEC Policy Statement”). See “Management Discussion and Analysis Results of Operations – Asset Quality” below and Note 2 of the Notes to Consolidated Financial Statements for further discussion of the allowance for loan losses.

Other real estate owned (“OREO”) consists of properties acquired through foreclosure or deed in lieu of foreclosure. These properties are carried at fair value less estimated costs to sell at the date of foreclosure establishing a new cost basis. These properties are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of loans are charged against the allowance for loan losses. Subsequent write-downs, if any, are charged against expense. Gains and losses on the sales of foreclosed properties are included in determining net income in the year of the sale. Operating costs after acquisition are expensed. The Bank had OREO totaling $761,000 and $1,105,000 as of December 31, 2021 and 2020, respectively.

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 initial goodwill impairment test will occur in 2022 as goodwill was the result of a transaction on December 31, 2021. 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 consolidated balance sheet.

RESULTS OF OPERATIONS

Year Ended December 31, 2021 compared to year ended December 31, 2020

Net Income

The net income for Financial for the year ended December 31, 2021 was $7,589,000 or $1.60 per basic and diluted share compared with net income of $4,980,000 or $1.04 per basic and diluted share for the year ended December 31, 2020. All earnings per share figures have been adjusted to reflect the 10% stock dividend paid in 2021. Note 13 of the consolidated financial statements provides additional information with respect to the calculation of Financial’s earnings per share.

The increase of $2,609,000 in 2021 net income compared to 2020 was due in large part to an increase in net interest income of $1,933,000 or 7.69% and a decrease in the provision for loan losses of $3,048,000, or a decrease of 119.62%. These changes were partially offset by an increase in noninterest expense of $1,943,000, or 7.09%.

These operating results represent a return on average stockholders’ equity of 11.34% for the year ended December 31, 2021 compared to 8.01% for the year ended December 31, 2020. Our return on average stockholder’s equity increased because of an increase in net income and a decrease in the market value of the available-for-sale securities portfolio. The return on average assets for the year ended December 31, 2021 was 0.82% compared to 0.62% in 2020 primarily due to the increase in net income, which was offset in part by an increase in our total assets.

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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, fed 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 decreased to $29,181,000 for the year ended December 31, 2021 from $29,686,000 for the year ended December 31, 2020. This decrease was due to a decrease in the yields on average earning assets which primarily consist of loans and investment securities, as discussed below.

Net interest income for 2021 increased $1,933,000, or 7.69%, to $27,079,000 from $25,146,000 in 2020. The growth in net interest income was due primarily to a decrease in interest expense. Our interest expense decreased by $2,438,000 to $2,102,000 in 2021 from $4,540,000 in 2020. Our interest expense decreased primarily because of a decrease in the rates paid on interest bearing liabilities but was partially offset by an increase in the balance of interest-bearing liabilities. The average balance of interest bearing liabilities increased 10.73% from $615,989,000 for the year ended December 31, 2020 to $682,089,000 for the year ended December 31, 2021. The average interest rate paid on interest bearing liabilities decreased by 43 basis points from 0.74% in 2021 to 0.31% in 2020.

The net interest margin decreased to 3.14% in 2021 from 3.32% in 2020. The average rate on earning assets decreased 53 basis points from 3.91% in 2020 to 3.38% in 2021 and the average rate on interest-bearing deposits decreased from 0.69% in 2020 to 0.25% in 2021. The decreases were primarily caused by the impact of lower-yielding PPP loans. One of the results of the spread of COVID-19 has been a sustained low interest rate environment, which negatively impacted our net interest margin. Because of Financial’s asset interest rate sensitivity, we anticipate that an increase in interest rates 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 Interst Margin Analysis

Average Balance Sheets

(dollars in thousands)

Average Average

Average Interest Rates Average Interest Rates

Balance Income/ Earned/ Balance Income/ Earned

Sheet Expense Paid Sheet Expense /Paid

ASSETS

Allowance for loan losses (7,223) (5,913)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits

Other borrowed funds

Total liabilities and

Net interest margin 3.14% 3.32%

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(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.

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

Liabilities:

Financing leases (9) — (9) 52 (8) 44

Repurchase agreements and other borrowings — — — — — —

Noninterest Income of Financial

Noninterest income has been and will continue to be an important factor for increasing our profitability. Our 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 going forward, income from 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, non-conforming consumer residential mortgage, and reverse mortgage loans primarily in the Region 2000 area as well as in Charlottesville, Harrisonburg, Roanoke, Lexington, and Blacksburg. 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 assumes no credit or interest rate risk on these mortgages.

The Mortgage Division originated 1,335 mortgage loans, totaling approximately $331,235,000 during the year ended December 31, 2021 as compared with 1,304 mortgage loans, totaling $298,154,000 in 2020. Income improved with the increased origination volume, which is attributable in part to an improving residential real estate market throughout our footprint as well as consistently low long-term interest rates. Beginning in 2013 we began operating the Mortgage Division with hybrid correspondent relationships that

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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 2021 and 2020, the Mortgage Division continued to operate in an environment in which real estate values continued to improve some of which may be attributed to a decrease in overall home inventory for sale. Loans for new home purchases comprised 54% of the total volume in 2021 as compared to 59% in 2020. 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, 2021, the Mortgage Division accounted for 20.46% of Financial’s total revenue as compared with 19.44% of Financial’s total revenue for the year ended December 31, 2020. Mortgage contributed $2,360,000 and $2,693,000 to Financial’s pre-tax net income in 2021 and 2020, respectively. Because of the uncertainty surrounding current and near-term economic conditions and potential continuing effects from the COVID-19 pandemic, management cannot predict future mortgage rates. Management also anticipates that if rates continue to trend higher, the majority of the loan mix will continue to lean towards new home purchases and away from refinancing.

The Mortgage Division continues to increase its market share in its service areas. We opened a new mortgage origination office in Roanoke in October, 2013 and began originating mortgages in Charlottesville in March, 2014. In addition, in 2016, we hired a new mortgage loan origination officer for the Harrisonburg Market and in 2018 we opened a mortgage origination office in Blacksburg, Virginia with one producer. In 2018, we added one additional mortgage producer in Roanoke and in 2019, a second producer was also added in Blacksburg. In early 2020, a mortgage producer was added at the Bank’s branch location in Lexington. Management expects that continued historically low rates coupled with the Mortgage Division’s reputation in its markets and our recently-added offices and producers present an opportunity for us to continue to grow the Mortgage Division’s revenue.

Service charges and fees and commissions increased to $2,496,000 for the year ended December 31, 2021 from $2,033,000 for the year ended December 31, 2020 primarily due to increases related to commissions on the sales of securities, debit card fees, and treasury management fees.

Investment provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. 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 2022.

Although dependent on overall market performance and other economic factors, we anticipate that PWW will begin to contribute noninterest income to the Company in 2022.

In the third quarter of 2008, we began providing insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has one full-time and one part-time employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2022.

Noninterest income, exclusive of gains and losses on the sale and call of securities, increased to $11,209,000 in 2021 from $10,331,000 in 2020. Inclusive of gains and losses on the sale and call of securities, noninterest income increased to $11,209,000 in 2021 from $10,975,000 in 2020. The following table summarizes our noninterest income for the periods indicated.

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Noninterest Income

(dollars in thousands)

December 31,

Gains on sale of loans held for sale $ 8,265 $ 7,812

Service charges, fees and commissions 2,496 2,033

Gain on sales and calls of securities, net — 644

The increase in noninterest income for 2021 as compared to 2020 was due to an increase in income from gains on sale of loans held for sale and service charges and was partially offset by a decrease in gains on sales of securities.

Noninterest Expense of Financial

Noninterest expenses increased from $27,934,000 for the year ended December 31, 2020 to $29,337,000 for the year ended December 31, 2021. The following table summarizes our noninterest expense for the periods indicated.

Noninterest Expense

(dollars in thousands)

December 31,

Professional, data processing and other outside expenses 4,094 3,691

Other real estate expenses 102 443

The increase in noninterest expense was due in large part to an increase in compensation and benefits, which has a variable component related to mortgage origination. In 2020, compensation expense was impacted by the Bank’s early retirement plan, pursuant to which the Bank incurred approximately $700,000 in salary and benefit expense. To a lesser degree professional, data processing, and other outside expenses, marketing, equipment, and FDIC Insurance, driven by the year-over-year increase in deposits, contributed to the overall increase. Professional, data processing, and other outside expense increased primarily due increased charges by our core service provider relating to the additional deposit business generated in 2021. The increase in equipment expense was related to the replacement of certain computer equipment and software in order to continue to make progress toward cloud-based computing and a fully electronic signature system. The increase in marketing expenses was due primarily to expenses incurred in resuming normal operations in light of easing COVID-19 restrictions and increased charitable contributions.

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The efficiency ratio, that is the cost of producing each dollar of revenue, is determined by dividing noninterest expense by the sum of net interest income plus noninterest income. Financial’s efficiency ratio increased from 75.84% in 2020 to 76.62% in 2021. Our efficiency ratio increased because of the increase in noninterest expense was greater than the increases in net interest income and noninterest income. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. No non-recurring adjustments were made to the calculation of the efficiency ratio.

Income Tax Expense

For the year ended December 31, 2020, Financial had federal income tax expense of $1,199,000, as compared to a federal income tax expense of $1,862,000 in 2021, which equates to effective tax rates of 19.40% and 19.70%, respectively. Our effective tax rate was lower than the statutory corporate tax rate in 2020 and 2021 because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and certain tax-free municipal securities. Note 12 of the consolidated financial statements provides additional information with respect to our 2020 and 2021 federal income tax expense and deferred tax accounts.

ANALYSIS OF FINANCIAL CONDITION

As of December 31, 2021 and December 31, 2020

General

Our total assets were $987,634,000 at December 31, 2021, an increase of $136,248,000 or 16.00% from $851,386,000 at December 31, 2020, primarily due to securities available-for-sale and cash equivalents, both of which were primarily funded by an increase in deposits. As explained in more detail below, deposits increased from $764,967,000 on December 31, 2020 to $887,056,000 on December 31, 2021. Loans, net of unearned income and the allowance, decreased to $576,469,000 on December 31, 2021 from $601,934,000 on December 31, 2020.

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. 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, decreased to $576,469,000 on December 31, 2021 from $601,934,000 on December 31, 2020. Total loans, including loans held for sale decreased to $585,012,000 on December 31, 2021 from $616,192,000 on December 31, 2020. The decrease in total loans was in large part due to PPP loan payoffs and normal amortization of non-PPP loans. This decrease was offset in part by growth in the non-PPP loan portfolio, which is attributed to increased calling and sales efforts by our lenders. Competition for qualified borrowers remains strong.

As of December 31, 2021, the Bank had $954,000, or 0.16% of its total loans, in non-accrual status compared with $2,063,000, or 0.34% of its total loans, at December 31, 2020. Management is continuing its

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efforts to reduce non-performing assets through enhanced collection efforts and the liquidation of underlying collateral. The Bank attempts to work with borrowers on a case-by-case basis to attempt to protect the Bank’s interests. However, despite our commitment, a reduction of non-accrual loans can be dependent on a number of factors, including improvements in employment, housing, and overall economic conditions at the local, regional and national levels. See “Asset Quality” below.

The following table summarizes net charge-offs, average loan balance and the percentage of charge-offs 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,

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The following table sets forth the maturities of the loan portfolio at December 31, 2021:

Remaining Maturities of Selected Loans

(dollars in thousands)

Loans with fixed interest rates:

Loans with variable interest rates:

Deposits

We experienced an increase in deposits from $764,967,000 at December 31, 2020 to $887,056,000 at December 31, 2021, for an increase of 15.96%. Noninterest-bearing deposits increased $18,941,000 or 13.21% from $143,345,000 at December 31, 2020 to $162,286,000 at December 31, 2021. The increase in noninterest-bearing deposits was due to increased market share, customers maintaining higher balances due to COVID-19 uncertainty, along with government stimulus. To a lesser extent, the recent expansion into Charlottesville, Harrisonburg, Roanoke, and most recently, Appomattox and Rustburg, as well as increased and continued efforts to procure the primary checking accounts of our commercial loan customers through offering treasury services contributed to the increase in deposits. Interest-bearing deposits including certificates of deposit increased $103,148,000, or 16.59%, from $621,622,000 at December 31, 2020 to $724,770,000 at December 31, 2021.

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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 includes a summary of maturities of CDs greater than $250,000:

Maturities of CD’s Greater than $ 250,000

(dollars in thousands)

The total amount of all deposit categories in excess of the FDIC $250,000 insurance limit was $118,315,000 and $171,875,000 as of December 31, 2021 and 2020, respectively.

Cash and Cash Equivalents

Cash and cash equivalents increased from $100,886,000 on December 31, 2020 to $183,153,000 on December 31, 2021. Federal funds sold amounted to $153,816,000 on December 31, 2021 compared to $69,203,000 on December 31, 2020. The increase in the balance of federal funds sold is due in part to the Bank’s decision not to invest a large amount of cash in low-yielding, long term securities. In addition, fluctuations in federal funds sold generally are related to fluctuations in transactional accounts and professional settlement accounts, and the use of cash and cash equivalents to fund loan growth. The large increase in cash and cash equivalents in 2021 can be directly attributed to the growth in deposits as a result of organic growth and PPP loan payoffs received throughout 2021.

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 or a combination thereof, including:

a) The fact that yields on acceptably rated investment securities (S&P “A” rated or better) are significantly better than the overnight federal funds rate;

b) Whether demand for loan funding exceeds the rate at which deposits are growing, which leads to higher or lower levels of surplus cash;

c) Management’s target of maintaining a minimum of 6% of the Bank’s total assets in a combination of federal funds sold and investment securities (aggregate of available-for-sale and held-to-maturity portfolios); and

d) Whether the maturity or call schedule meets management’s asset/liability plan.

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 has made the decision to maintain a significant portion of its available funds in liquid assets so that funds are available to fund future growth of the loan portfolio and in anticipation of rising rates. Management believes that this strategy will allow us to maximize interest margins while maintaining appropriate levels of liquidity.

Securities held-to-maturity at carrying cost decreased from $3,671,000 as of December 31, 2020 to $3,655,000 as of December 31, 2021. This decrease resulted from the amortization of premiums within the held-to-maturity portfolio. The decision to invest in securities held-to-maturity is based on the same factors as the decision to invest in securities available-for-sale except that management invests surplus funds in securities held-to-maturity only after concluding that such funds will not be necessary for liquidity purposes during the term of such security. However, the held-to-maturity securities may be pledged for such purposes as short term borrowings and as collateral for public deposits.

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The portfolio of securities available-for-sale increased to $161,267,000 as of December 31, 2021 from $90,185,000 as of December 31, 2020. The increase was due to the use of excess cash from our increased deposit balances to purchase securities available-for-sale. The increase was offset in part by a decrease in the fair value of available-for-sale securities caused by rising interest rates. Out of an abundance of caution, during the first six months of 2020, the Bank sold available-for-sale securities to increase cash and cash equivalents in light of the uncertainties surrounding the COVID-19 pandemic. Because the need for additional liquidity did not materialize, the Bank reinvested some of the proceeds. The Bank realized $7,860,000 from pay-downs related to the normal amortization of principal related to the Bank’s mortgage backed securities, calls, and maturities. During 2021, the Bank did not sell any available-for-sale securities. During 2021, the Bank purchased $83,964,000 of available-for-sale securities.

The following table shows the maturities of held-to-maturity and available-for-sale securities at fair value at December 31, 2021 and 2020 and 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

Weighted average yield 2.88% 3.23%

Available-for-sale securities

U.S Treasury

Weighted average yield 1.37%

U.S. Agency

Mortgage Backed Securities

Municipals

Corporates

Total portfolio

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Securities Portfolio Maturity Distribution / Yield Analysis

(dollars in thousands)

Held-to-maturity

U.S. Agency

Weighted average yield 2.99% 2.99%

Available-for-sale securities

U.S Treasury

Weighted average yield 1.38%

U.S. Agency

Mortgage Backed Securities

Municipals

Corporates

Weighted average yield 2.22% 4.40%

Total portfolio

Cash surrender value of bank-owned life insurance

The Company has funded bank-owned life insurance (BOLI) for a small group of its officers. The Company is the owner and sole beneficiary of the BOLI policies. As of December 31, 2021, the BOLI had a cash surrender value of $18,785,000, an increase of $2,430,000 from the cash surrender value of $16,355,000 as of December 31, 2020. The Company purchased an additional $2,000,000 in BOLI during 2021. 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

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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 this transaction, the Company recorded $3.0 million in goodwill and $8.4 million of amortizable intangible assets, which primarily relate to the value of customer relationships. The goodwill is not deductible for tax purposes. The Company is amortizing these intangible assets over a 15-year period using the straight line method. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The fair values are subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other.

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. 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, investors and borrowers. 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.

Funding sources for the Bank primarily include paid-in capital and customer-based deposits but also include borrowed funds and cash flow from operations. The Bank has in place several agreements that will provide alternative sources of funding, including, but not limited to, lines of credit, sale of investment securities, purchase of federal funds, advances through the Federal Home Loan Bank of Atlanta (“FHLBA”) and correspondents, and brokered certificate of deposit arrangements. Management believes that the Bank has the ability to meet its liquidity needs.

At December 31, 2021, liquid assets, which include cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, and securities available-for-sale totaled $344,420,000 as compared to $191,071,000 at December 31, 2020. Management deems liquidity to be sufficient. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately $24,055,000 (current market value) of these securities are pledged to secure public deposits and $8,104,000 (current market value) are pledged to secure 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.

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While we have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic, management continues to monitor our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. Based in part on recent loan activity including loans made pursuant to the PPP as discussed below under “ASSET QUALITY,” the Bank is monitoring liquidity to ensure it is able to fund future loans and withdrawals related to the use of PPP funds.

The following table sets forth non-deposit sources of funding:

Funding Sources

(dollars in thousands)

Source Capacity Outstanding Available

Federal funds purchased lines (unsecured) $ 33,000 $ — $ 33,000

Federal funds purchased lines (secured) 7,294 — 7,294

Reverse repurchase agreements 5,000 — 5,000

Source Capacity Outstanding Available

Federal funds purchased lines (unsecured) $ 33,000 $ — $ 33,000

Federal funds purchased lines (secured) 8,055 — 8,055

Reverse repurchase agreements 5,000 — 5,000

(1)Currently the Bank has in place pledged collateral in the form of 1-4 family residential mortgages in the amount of approximately $28,187,000 against which $0 was drawn and outstanding on December 31, 2021. Additional collateral would be required to be pledged in order for the full $235,788,000 to be available.

At the end of 2021, approximately 34.76%, or $202,812,000 of the loan portfolio could mature or could reprice within a one-year period. At December 31, 2021, non-deposit sources of available funds totaled $281,082,000, which included $235,788,000 available from the FHLBA.

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 loan losses).

On June 7, 2012, the Federal Reserve issued a series of proposed rules that would revise and strengthen its risk-based and leverage capital requirements and its method for calculating risk-weighted assets. The rules were proposed to implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. On July 2, 2013, the Federal Reserve approved certain revisions to the proposals and finalized new capital requirements for banking organizations.

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Effective January 1, 2015, the final rules require 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 (unchanged from the previous requirement); and (iv) a leverage ratio of 4.0% of total assets. These initial capital requirements were phased in over a five-year period. The phase was completed, as of January 1, 2019 and the rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

With respect to the Bank, the rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the FDIA by (i) introducing a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well-capitalized status being 8.0% (as compared to the previous 6.0%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well-capitalized.

The capital requirements also include changes in the risk weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and nonresidential mortgage loans that are 90 days past due or otherwise on non-accrual status, a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital, and increased risk-weights (from 0% to up to 600%) for equity exposures.

Pursuant to the Regulatory Relief Act, on September 17, 2019, the federal banking agencies adopted a final rule regarding a community bank leverage ratio. Under the final rule, which was effective on January 1, 2020, 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 (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio framework (qualifying community banking organizations). 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 will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

The Bank’s regulatory capital levels exceed those established for well-capitalized institutions.

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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, 2021 and 2020.

Analysis of Capital for Bank of the James (Bank only)

(dollars in thousands)

December 31, December 31,

Tier 1 capital

Tier 2 capital

Allowance for loan losses $ 6,915 $ 7,156

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.

During the first quarter of 2017, Financial closed a private placement of unregistered debt securities (the “2017 Offering”) pursuant to which Financial issued $5,000,000 in principal of notes (the “2017 Notes”). The 2017 Notes were scheduled to mature on January 24, 2022, but were subject to prepayment in whole or in part on or after January 24, 2018 at Financial’s sole discretion on 30 days written notice to the holders. The Company contributed $3,000,000 of the proceeds from the 2017 Offering to the Bank as additional paid in capital. The remainder of the proceeds were retained at the parent level to service the debt and pay dividends.

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

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balance of the 2020 Notes as presented on the December 31, 2021 consolidated balance sheet is net of unamortized issuance costs.

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

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 because the of the Company’s decision to contribute $3,000,000 in proceeds from the 2017 Offering to the Bank.

Stockholders’ Equity

Stockholders’ equity increased by $2,697,000 from $66,732,000 on December 31, 2021 to $69,429,000 on December 31, 2020 because of net income of $7,589,000, less cash dividends paid, less a comprehensive loss of $3,178,000 resulting from a decrease in the market value (mark to market) of available-for-sale securities.

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 decreased to $954,000 on December 31, 2021 from $2,063,000 on December 31, 2020. As set forth in tabular form below, total charge-offs during 2021 were $91,000 compared to $448,000 in 2020. In 2021, the Bank recovered $350,000 in loans previously charged-off as compared with recoveries of $227,000 in 2020.

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We also classify other real estate owned (OREO) as a nonperforming asset. OREO is the value of real property acquired by the Bank following default by the borrower. During the twelve months ended December 31, 2021 the Bank acquired two (2) OREO properties and disposed of three (3) OREO properties and as of December 31, 2021 is carrying two (2) OREO properties at a value of $761,000, as compared to three (3) properties with a value of $1,105,000 as of December 31, 2020. The OREO properties are available for sale and are being actively marketed on the Bank’s website and through other means. The following table represents the changes in OREO balance in 2021 and 2020.

OREO Changes

(dollars in thousands)

Year Ended December 31,

Balance at the beginning of the year (net) $ 1,105 $ 2,339

Transfers from Loans 111 18

Capitalized costs — —

Valuation Adjustment — (437)

Gain (loss) on disposition (87) 29

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

Non-accrual loans plus OREO decreased to $1,715,000 on December 31, 2021 from $3,168,000 on December 31, 2020, a decrease of 45.88%.

We also classify troubled debt restructurings (TDRs) as both performing and nonperforming assets. We measure impaired loans 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 impaired loan is less than the recorded investment. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. These concessions typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Performing TDRs decreased to $372,000 on December 31, 2021 from $392,000 on December 31, 2020.

The following table sets forth the number of outstanding TDR contracts and the total amount of the Bank’s TDRs as of December 31, 2021 and 2020.

Troubled Debt Restructurings

(dollars in thousands)

December 31,

Number of performing TDR contracts 3 3

Number of nonperforming TDR contracts — —

Total number of TDR contracts 3 3

Amount of performing TDR contracts $ 372 $ 392

Amount of nonperforming TDR contracts — —

Total amount of TDRs contracts $ 372 $ 392

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The amount allocated during the year to the provision for loan losses represents management’s analysis of the existing loan portfolio and credit risks. Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb the estimated losses inherent in the loan portfolio. Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower.

In performing its loan loss analysis, the Bank assigns a risk rating to each commercial loan in the Bank’s portfolio.

The Bank’s allowance for loan losses decreased 3.37% from $7,156,000 on December 31, 2020 to $6,915,000 on December 31, 2021, primarily due to an decrease in the general reserves, which led to a $500,000 recovery of loan loss provision. The general reserve component decreased significantly as compared to the prior year end due to improvements in qualitative factor adjustments related to the COVID-19 pandemic. Management intends to continue to be proactive in quantifying and mitigating the ongoing risk associated with all asset classes. Management has provided for the anticipated losses on its non-accrual loans through specific impairment in the allowance for loan losses.

At December 31, 2021, the allowance for loan losses was 1.19% of total loans outstanding, versus 1.17% of total loans outstanding at December 31, 2020. The allowance to total loans, excluding PPP loans, decreased to 1.20% at December 31, 2021 from 1.25% at December 31, 2020. Because the PPP loans are guaranteed in full by the U.S. Small Business Administration, management determined that these loans should be excluded from the calculation. At December 31, 2021, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions continue to deteriorate due to the COVID-19 pandemic, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying potential credit losses is a subjective process. Therefore, the Company maintains a general reserve to cover credit losses within the portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

The decrease in the allowance for loan losses was largely driven by decreased qualitative factor adjustments related to the ongoing COVID-19 pandemic, primarily in relation to the economy and the fact that all loans previously granted principal and/or interest deferrals have returned to normal payment status. In addition, the reduction in the year-over-year loan balance resulted in a reduced need to maintain a higher allowance for loan losses. The reduction of the specific reserve from $4,000 to $0 was immaterial.

No non-accrual loans were excluded from impaired loans at December 31, 2021 and 2020. If interest on these loans had been accrued, such income cumulatively would have approximated $177,000 and $158,000 at December 31, 2021 and 2020, respectively. Loan payments received on non-accrual loans are applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings. These loans were included in the nonperforming loan totals listed below. The following table sets forth the detail of loans charged-off, recovered, and the changes in the allowance for loan losses as of the dates indicated:

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The following table shows the balance and percentage of the Bank’s allowance for loan losses allocated to each major category of loans:

Allocation of Allowance for Loan 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

Total nonaccrual loans $ 955 $ 2,063

Foreclosed Properties

Commercial Real Estate — 410

Consumer 66 —

Residential — —

Total foreclosed properties $ 761 $ 1,105

Repossessed Assets — —

Total Nonperforming assets $ 1,716 $ 3,168

Total nonperforming loans as a percentage of total loans 0.16% 0.34%

Total nonperforming loans as a percentage of total assets 0.10% 0.24%

Total nonaccrual loans as a percentage of total loans 0.16% 0.34%

The allowance for loan losses as a percentage of nonaccrual loans increased from 2020 to 2021 due to the sharp decrease in nonaccrual loans for the same periods.

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Asset Quality as it Relates to COVID-19

Although management believes that the risk has diminished somewhat, it remains possible that our commercial, commercial real estate, residential and consumer borrowers may encounter economic difficulties related to the COVID-19 pandemic. This could lead to to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings. Any potential financial impacts are unknown at this time.

We previously developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. Accordingly, we offered short-term modifications made in response to COVID-19 to certain borrowers who were current and otherwise not past due. These included short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, deferral of principal only (interest only payments), or other delays in payment that are insignificant. During the year ended December 31, 2020, the Bank modified a total of 191 loans with a total principal balance of approximately $95 million. No loans granted deferral status remain in deferral at December 31, 2021.

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

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

Management continues to closely monitor loans in these categories.

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 acceptable levels of risk to changes in interest rates. Management seeks to meet this goal by influencing the maturity and re-pricing characteristics of the various lending and deposit taking lines of business and by managing discretionary balance sheet asset and liability portfolios.

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Management also is attempting to mitigate interest rate risk by limiting the dollar amount of loans carried on its balance sheet that have fixed rates in excess of five years. To reduce our exposure to interest rate risks inherent with longer term fixed rate loans, we generally do not hold such mortgages on our books. The Bank established the Mortgage Division to serve potential customers that desired fixed rate loans in excess of five years.

Management monitors interest rate levels on a daily basis and meets in the form of an Enterprise Risk Management and Asset/Liability Committee (“ALCO”) meeting at least quarterly, or when a special situation arises (e.g., FOMC unscheduled rate change). The following reports and/or tools are used to assess the current interest rate environment and its impact on Financial’s earnings and liquidity: monthly and year-to-date net interest margin and spread calculations, monthly and year-to-date balance sheet and income statements versus budget (including quarterly interest rate shock analysis), quarterly economic value of equity analysis, a weekly survey of rates offered by other local competitive institutions, and gap analysis which matches maturities or repricing dates of interest sensitive assets to those of interest sensitive liabilities.

Financial currently subscribes to computer simulated modeling tools made available through its consultant, FinPro, Inc., to aid in asset/liability analysis. In addition to monitoring by ALCO, the board is informed of the current asset/liability position and its potential effect on earnings at least quarterly.

Other Borrowings

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

On December 29, 2021 Financial borrowed $11,000,000 from National Bank of Blacksburg pursuant to a secured promissory note (the “NBB Note”). The NBB Note bears interest at the rate of 4.00%, and is being amortized over a fifteen year period with a balloon payment of approximately $9,375,000 due on December 31, 2024. The note is secured by a first priority lien on approximately 4.95% of the Bank’s common stock. The balance of the NBB Note is presented on the December 31, 2021 consolidated balance sheet under “other borrowings” and is net of unamortized issuance costs. A portion of the proceeds were used to purchase 100% of the capital stock of PWW.

Financial uses borrowing in conjunction with deposits to fund lending and investing activities. Borrowings include funding of a short and long-term nature.

Short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. short-term borrowings may also include federal funds purchased, which are unsecured overnight borrowings from other financial institutions, which totaled $0 as of December 31, 2021 and December 31, 2020. Unsecured federal funds lines and their respective limits are maintained with the following institutions: Community Bankers’ Bank, $13,000,000, PNC Bank $6,000,000, First National Bankers’ Bank, $10,000,000, and Zions Bank, $4,000,000. In addition, the Bank maintains a $5,000,000 reverse repurchase agreement with Truist Bank whereby securities may be pledged as collateral in exchange for funds for a minimum of 30 days with a maximum of 90 days. The Bank also maintains a secured federal funds line with Community Bankers’ Bank whereby it may pledge securities as collateral with no specified minimum or maximum amount or term. The amount outstanding on the Community Bankers’ Bank secured fed funds line was $0 as of December 31, 2021 and 2020.

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Additional borrowings may be obtained through the Federal Home Loan Bank of Atlanta (“FHLBA”). The Bank’s remaining available credit through the FHLBA was $235,788,000 as of December 31, 2021, the most recent calculation. Currently the Bank has in place pledged collateral in the amount of approximately $28,187,000 against which $0 was drawn and outstanding on December 31, 2021. Additional collateral would be required to be pledged in order for the full $235,788,000 to be available.

Off-Balance Sheet Arrangements

At December 31, 2021, the Bank had rate lock commitments to originate mortgage loans through its Mortgage Division amounting to approximately $21,039,000 and loans held for sale of $1,628,000. The Bank recorded $144,000 in other assets in relation to its interest rate lock commitments at December 31, 2021. The Bank has entered into corresponding commitments with third party investors to sell each of these loans that close. No other obligation exists.

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

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

Contract Amounts

(dollars in thousands) at

December 31,

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Bank deems necessary.

Management does not anticipate any material losses as a result of these transactions.

The Bank rents, under non-cancelable leases eight of its banking facilities and one mortgage production office. “Note 23 – Leases” in the Notes to Consolidated Financial Statements provides information on the Company’s liability under the Company’s leases of significance.

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Expansion Plans

Subject to regulatory approval, the Bank anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the real property the Bank is holding for potential branch expansion.

Boonsboro Road, (Lynchburg), Virginia. In 2021the Bank has purchased a building that formerly operated as a branch bank for another institution located at 4501 Boonsboro Road, Lynchburg, Virginia 24503. While the Bank does not anticipate opening a branch at this location until the fall of 2022, the Bank believes the investment needed to upfit this property will be minimal and primarily related to aesthetics due to the fact this location was a former bank branch.

Timberlake Road Area, Campbell County (Lynchburg), Virginia. As previously disclosed, the Bank has purchased certain undeveloped real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has not determined when it will open a branch at this location. The Bank has determined that the existing structure is not suitable for use as a bank branch. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit the property at the undeveloped Timberlake location will be between $900,000 and $1,500,000.

Atherholt Road, Lynchburg, Virginia. On December 31, 2021, the Bank purchased real property located at 1925 Atherholt Road, Lynchburg, Virginia. The building currently serves as the offices for Financial’s wholly-owned subsidiary, PWW. PWW is currently leasing the space from the Bank on a month-to-month basis. While the Bank currently does not have a timeline for a branch at this location, the space is attractive for a branch due to its close proximity to Centra’s Lynchburg General Hospital. The investment needed to upfit the property will be minimal.

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

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements and their effect on us, see “Impact of Recent Accounting Pronouncements” in Note 24 to the consolidated financial statements included in Item 8 of this Form 10-K.

Item 7A.Quantitative and Qualitative Disclosure About Market Risk

Not applicable

Item 8.Financial Statements and Supplementary Data

The following financial statements are filed as a part of this report:

Management’s Annual Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Balance Sheets, December 31, 2021 and December 31, 2020

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Statements of Income, Years Ended December 31, 2021 and December 31, 2020

Statements of Comprehensive Income, Years Ended December 31, 2021 and December 31, 2020

Statements of Changes in Stockholders’ Equity, Years Ended December 31, 2021 and December 31, 2020

Statements of Cash Flows, Years Ended December 31, 2021 and December 31, 2020

Notes to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Bank of the James Financial Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Bank of the James Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – General Component – Qualitative Factors

Description of the Matter

As described in Note 2 (Summary of Significant Accounting Policies) and Note 5 (Loans and Allowance for Loan Losses) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in its loan portfolio. At December 31, 2021, the allowance for loan losses totaled $6,915,000, consisting solely of general components. The general component of the allowance is based on historical loss experience adjusted for qualitative factors. The qualitative factors are described in Note 2 and are determined based on management’s ongoing evaluation of the factors, which may impact the quality of the Company’s loan portfolio.

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Management exercised significant judgment when assessing the qualitative factors used in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.

Evaluating the qualitative factors for directional consistency and for reasonableness.

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company's auditor since 2006.

Roanoke, Virginia

March 29, 2022

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

_____________________________________________________________________________

December 31, December 31,

Securities available-for-sale, at fair value 161,267 90,185

Cash value - bank owned life insurance 18,785 16,355

Customer relationship intangibles 8,406 -

Liabilities and Stockholders' Equity

Deposits

Interest payable 46 85

Commitments and Contingencies

Stockholders' equity

Accumulated other comprehensive (loss) income (1,386) 1,792

Total liabilities and stockholders' equity $ 987,634 $ 851,386

See Notes to Consolidated Financial Statements

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

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For the Year Ended

December 31,

Securities

US Government and agency obligations 875 690

Mortgage backed securities 462 217

Municipals - tax exempt 52 11

Interest bearing deposits 33 89

Interest Expense

Deposits

NOW, money market savings 564 804

(Recovery of) provision for loan losses (500) 2,548

Net interest income after (recovery of) provision for loan losses 27,579 22,598

Noninterest income

Gain on sales of loans held for sale 8,265 7,812

Service charges, fees and commissions 2,496 2,033

Gain on sales and calls of securities, net - 644

Noninterest expenses

Professional, data processing, and other outside expense 4,094 3,691

Other real estate expenses, net 102 443

Earnings per common share - basic $ 1.60 $ 1.04

Earnings per common share - diluted $ 1.60 $ 1.04

See Notes to Consolidated Financial Statements

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

For the Year Ended

December 31,

Other comprehensive (loss) income:

Unrealized (losses) gains on securities available-for-sale (4,022) 2,918

Reclassification adjustment for gains included in net income (1) - (644)

Other comprehensive (loss) income, net of tax (3,178) 1,797

(1)Gains are included in “gain on sales and calls of securities, net” on the consolidated statements of income.

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

See Notes to Consolidated Financial Statements

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands except per share amounts)

Accumulated

Additional Other

Shares Common Paid-in Retained Comprehensive

Outstanding Stock Capital Earnings (Loss) Income Total

Dividends paid on common stock ($0.28 per share) - - - (1,215) - (1,215)

Other comprehensive income - - - - 1,797 1,797

Dividends paid on common stock ($0.28 per share) - - - (1,271) - (1,271)

Cash in lieu of fractional shares - (2) (14) - - (16)

Other comprehensive (loss) - - - - (3,178) (3,178)

See Notes to Consolidated Financial Statements

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

For the Year Ended December 31,

Cash flows from operating activities

Depreciation and amortization 2,059 2,029

Stock based compensation expense 106 106

Net amortization and accretion of premiums and discounts on securities 516 405

Amortization of debt issuance costs 4 2

(Gain) on sales of available-for-sale securities - (644)

(Gain) on sales of loans held for sale (8,265) (7,812)

(Recovery of ) provision for loan losses (500) 2,548

Loss (gain) on sale of other real estate owned 87 (29)

Impairment of other real estate owned - 437

Benefit for deferred income taxes 114 (838)

Bank owned life insurance income (430) (436)

Decrease (increase) in interest receivable 286 (484)

Decrease (increase) in other assets (269) (474)

(Decrease) in interest payable (39) (88)

Increase in other liabilities 788 566

Net cash provided by operating activities $ 15,785 $ 5,199

Cash flows from investing activities

Purchases of securities available-for-sale $ (83,964) $ (51,150)

Proceeds from sale of securities available-for-sale - 13,313

Purchases of bank owned life insurance (2,000) (2,280)

Life insurance proceeds - 405

(Redemption) purchase of Federal Home Loan Bank stock 227 (45)

Proceeds from sale of other real estate owned 368 844

Origination of loans, net of principal collected 25,854 (31,226)

Cash paid in acquisition, net of cash received (10,400) -

Purchases of premises and equipment (2,909) (1,751)

Net cash (used in) investing activities $ (64,464) $ (62,053)

Cash flows from financing activities

Principal payments on finance lease obligations (414) (414)

Repurchase of common stock (427) (275)

Cash in lieu of fractional shares (16)

Dividends paid to common stockholders (1,271) (1,215)

Proceeds from bank loan 10,985 -

Proceeds from sale of capital notes, net of issuance costs - 10,025

Retirement of capital notes - (5,000)

See Notes to Consolidated Financial Statements

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BANK OF THE JAMES FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

Net cash provided by financing activities $ 130,946 $ 118,629

Increase in cash and cash equivalents 82,267 61,775

Cash and cash equivalents at beginning of period $ 100,886 $ 39,111

Cash and cash equivalents at end of period $ 183,153 $ 100,886

Non cash transactions

Bank of the James Financial Group Inc BOTJ US Equity

BOTJ · 10-K · period ended 2021-12-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosure About Market Risk

Item 8.Financial Statements and Supplementary Data

Bank of the James Financial Group Inc BOTJ US Equity☆

BOTJ · 10-K · period ended 2021-12-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosure About Market Risk

Item 8.Financial Statements and Supplementary Data

Bank of the James Financial Group Inc BOTJ US Equity