BOTJ 10-K & 10-Q changes, risk factors and insider trading

Our success depends primarily on the general economic conditions of the primary markets in Virginia in which we operate and where our loans are concentrated. Unlike nationwide banks that are more geographically diversified, thewe Company providesprovide banking and financial services to customers primarily in the Lynchburg metropolitan statistical area (“MSA”). Lynchburg’s MSA, which is, often referred to as Region 2000, consists of approximately 2,122 square miles, andwhich includes the City of Lynchburg and the Counties of Bedford, Campbell, AmherstAmherst, and Appomattox. To a lesser extent, our lending market includes the Roanoke, CharlottesvilleCharlottesville, Harrisonburg, Blacksburg, and HarrisonburgWytheville MSAs. Our branches in localities outside of Region 2000 have a short operating history. As of December 2024,2025, the Lynchburg MSA had an unemployment rate (not seasonally adjusted) of 2.9%,approximately as3.6%, compared to a statewide average unemployment rate of 3.0%.approximately 3.5%, reflecting a modest increase from approximately 3.3% at the end of 2024.

The local economic conditions in these areas have a significant impact on the Company’sour commercial and industrial, real estate and construction loans, the ability of itsour borrowers to repay their loans and the value of the collateral securing these loans. In addition, if theIf population or income growth in the Company’sour market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could result in a reduction ofin the Company’s expansion,our growth and profitability. If the Company’sour market areas experience a downturn or a recession for a prolonged periodperiod, of time, the Companywe could experience significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital. A significant decline in general economic conditions, caused by inflation, recession, pandemics, acts of terrorism, outbreaks of hostilities or other international or domestic calamities, unemployment, or monetary and fiscal policies of the federal government or other factors could impact these local economic conditions and could negatively affect the Company’sour financial condition, results of operations and cash flows.

TheFuture Company’spublic health emergencies could adversely affect our business, financial condition, liquidity and results of operations may be, adversely affected by future public health emergencies.operations.

A substantial majority of our loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower andbut may deteriorate in value during the time the credit is extended. Because most of our loans are concentrated in the Region 2000 area in and surrounding the City of Lynchburg, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. A weakening of the real estate market in our primary market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Additionally, acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

A significant portion of our total loan portfolio containsconsists of real estate loans with balances in excess of $1,000,000. The deterioration of one or a few of these loans could cause a significantsignificantly increase in nonperforming loans, whichloan couldcharge-offs, result in a net loss of earnings, an increase inand the provision for credit losses and an increase in loan charge-offs, all oflosses, which could have a material adverse effect on our financial condition and results of operations.

A majority of our loan portfolio is secured by commercial real estate. Loans secured by commercialCommercial real estate areloans generally viewedhave ashigher having moredefault risk of default than loans secured by residential real estate or consumer loans because repayment of the loans often depends on the successful operation of the property, the borrower’s income streamstream, of the borrowers,and the accuracy of theproperty estimatevaluations of the property’s value at completion ofand construction and the estimated cost of construction.estimates. An adverse development with respect to one lending relationship can expose us to a significantly greater risk of loss as compared with a single-family residential mortgage loanloans because we typically have moremultiple than one loanloans with such borrowers. Additionally, these loans typically involve larger loan balances to single borrowers or groups of related borrowers compared with single-family residential mortgage loans. Therefore, the deterioration of one or a few of these loans could cause a significant decline in the related asset quality. These loans represent higher risk and could result in a sharp increase in loans charged-off and could require us to significantly increase our allowance for credit losses, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.borrowers.

All of the loans that we make are subject to written loan policies adopted by our board of directors and to supervisory guidelines imposed by our regulators. Our loan policies are designed to reduce the risks associated with the loans that we make by requiring our loan officers to take certain steps that vary depending on the type and amount of the loan, prior to closing a loan. These steps include, among other things, making sure the proper liens are documented and perfected on property securing a loan, and requiring proof of adequate insurance coverage on property securing loans. Loans that do not fully comply with our loan policies are known as “exceptions.exceptions,” Wewhich we categorize exceptions as policy exceptions, financial statement exceptionsexceptions, and document exceptions. As a result of these exceptions, such loans may have a higher risk of loan loss than the other loans in our portfolio that fully comply with our loan policies. In addition, we may be subject to regulatory action by federal or state banking authorities if they believe the number of exceptions in our loan portfolio represents an unsafe banking practice.

As a community bank, we have different lending risks than larger banks.banks We provide servicesdue to our focus on individuals and small to medium-sized businesses in our local markets who may have fewer financial resources to weather a downturn in the economy.businesses.

Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to small to medium-sized businesses, professionals and individuals, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories. For instance, smallSmall to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, have fewer financial resources in terms of capital orand borrowing capacity than larger entities,capacity, often need substantial additional capital to expand or competecompete, and may experience significant volatility in operating results. Any one or more of these factors may impair thea borrower’s ability to repay a loan. In addition, the success of a small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact the Company’s market areas could cause the Company to incur substantial credit losses that could negatively affect the Company’s results of operations and financial condition.

We depend on the accuracy and completeness of information aboutprovided by clients and counterparties, and our financial condition could be adversely affected if we rely on misleading information.counterparties.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties,transactions, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify as a matter of course. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers,credit, we may assume that a customer’s audited financial statements conform with U.S. Generally Accepted Accounting Principles (“GAAP”) and fairly present fairly,the in all material respects, thecustomer’s financial condition, results of operations and cash flows of the customer.flows. Our financial condition and results of operations could be negatively impacted to the extentif we rely on financial statements that do not comply with GAAP or are materially misleading.

These policies and procedures necessarily rely on our making various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.collateral. In determining the amount of the allowance for credit losses, we review our loans andloans, our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for credit losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. Any future additions to our allowance could materially decrease our net income.

In addition, the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions (the “BFI”) periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by regulatory authorities mightcould have a material adverse effect on our financial condition and results of operations.

Our allowance for credit losses may not be adequate to cover actual credit losses.

A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and nonperformance on loans.nonperformance. We maintain an allowance for credit losses in accordance with GAAP to provide for such defaults and other nonperformance. As of December 31, 2024,2025, our allowance as a percentage of total loans was 1.22%0.97% and our allowance as a percentage of nonperforming loans was 1,895%.379%. The determination of the appropriate level of allowance is an inherently difficult process and is based on numerous assumptions.assumptions Theand judgments, and the amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, many of which are beyond our control. In addition, our underwriting policies, adherence to credit monitoring processes and risk management systems and controls may not prevent unexpected losses. Our allowance may not be adequate to cover actual credit losses.losses, Moreover,and any increase in our allowance will adversely affect our earnings by decreasing our net income.earnings.

We adopted the Current Expected Credit Losses (“CECL”) accounting standard on January 1, 2023. Prior to CECL, our allowance for credit losses generally considered only past events and current conditions. The CECL methodology requires a forward-looking methodologyapproach that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. The CECL standard requires us to record, at the time of origination, the credit losses expected throughout the life of our loans, as opposed to the previous incurred-loss method, which recorded losses only when it was probable that a loss event had already occurred. CECL necessitates advancedthe modelinguse techniques,of quantitative models, forecasts, and significant relianceassumptions and judgment, and it relies on assumptions, and historical data and estimated relationships that may not always accurately forecastpredict future losses.losses, Implementationparticularly during periods of economic stress or rapid changes in interest rates or the composition of our loan portfolio. In addition, we may rely on third-party vendors, models, software, or data in developing or operating our CECL methodology and forecasts, and any limitations, errors, or deficiencies in such tools or inputs, or in our model governance, validation, and monitoring processes, could result in inaccurate loss estimates. CECL can also result in greater volatility in theour allowance and provision for credit losses,losses. influencedIf by various factors andour assumptions inprove incorrect, if actual credit losses differ materially from our modelingestimates, process,or suchif asregulators, forecastedauditors, economicor conditionsstandard andsetters loanrequire repaymentchanges behavior.to Increasesour inmethodology, assumptions, or inputs, we could be required to increase our allowance for credit losses or additionalotherwise expensesmodify incurredour toestimates, determinewhich thecould allowance canmaterially adversely affect our financial condition and operating results.

The banking and financial services industry is highly competitive. We compete as a financial intermediary with other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms soliciting business from residents of and businesses located in the Virginia localities where thewe Bankoperate has a presence,and surrounding areas and elsewhere.areas. Many of these competing institutions have nationwide or regional operations and have greater resources than we have.have, Wewhile we also face competition from local community institutions. Many of our competitors enjoy competitive advantages, including greater name recognition,recognition and financial resources, a wider geographic presence orpresence, more accessible branch office locations, the ability to offer additional services, greater marketing resources, more favorable pricing alternatives for loans and depositsdeposits, and lower origination and operating costs. We are also subject to lower lending limits than our larger competitors. Our profitability depends upon our continued ability to successfully compete in our market areas. Increased deposit competition could increase our cost of funds and could adversely affect our ability to generate the funds necessary for our lending operations. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. Competition could result in a decrease in loans we originate and could negatively affect our ability to grow and our results of operations.

Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services.pricing.

A significant percentage of our loans are commercial and industrial loans, and we continue to focus on this market segment. While we intend to originate these types of loans in a manner that is consistent with safety and soundness, thesecommercial non-residentialand industrial loans generally expose us to greater risk of loss than one- to four-family residential mortgage loans,loans asbecause repayment of such commercial and industrial loans generally depends, in large part, on the borrower’s business performance and ability to cover operating expenses and debt service. In addition, these types of loans typically involve larger loan balances to single borrowers or groups of related borrowers, asborrowers compared to one- to four-family residential mortgage loans. Changes in economic conditions that are beyond our or the borrower’s control could adversely affect the value of the securityloan forcollateral the loan, includingand the future cash flow of the affected business. As we increasecontinue ourto portfolio oforiginate these loans, we may experience higher levels of non-performing assets or credit losses, or both.

We expect to continue tomay engage in new branch expansion in the future. We may alsoor seek to acquire other financial institutions,institutions or parts of those institutions,institutions in the future, though we have no present plansacquisition in that regard.plans. Expansion involves a number of risks, including, without limitationincluding:

the time lags between theseexpansion activities and the generation of sufficient assets and deposits to support the costs of the expansion;

our entrance into new markets where we lack experience;

the introduction of new products and services with which we have no prior experience into our business;

failure to culturally integrate an acquisition target or new branches or failing to identify and select the optimal candidate for integration or expansion; and failure to identify and retain experienced key management members with local expertise and relationships in new markets.

From time-to-time, we foreclose upon and take title to the real estate serving as collateral for our loans as part of our business. If our OREO balance increases, management expects that our earnings will be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership. Also, atAt the time that we foreclose upon a loan and take possession of a property, we estimate the property’s value of that property using third-party appraisals and opinions and internal judgments. OREO property is valued on our books at the estimated market value of the property, less the estimated costs to sell (or “fair value”).sell. Upon foreclosure, a charge-off to the allowance for credit losses is recorded for any excess between the value of the assetloan on our booksbalance over its fair value. Thereafter, we periodically reassess our judgment of fair value based on updated appraisals or other factors, including, at times, at the request of our regulators.factors. Any declines in our estimate of fair value for OREO will result in valuation adjustments,adjustments withthat anegatively corresponding expense inimpact our consolidated statements of income that is recorded under the line item for “Other real estate expenses.”earnings. As a result, our results of operations are vulnerable to declines in the market for residential and commercial real estate markets in the areas in which we operate. The expenses associated with OREO and property write downs could have a material adverse effect on our results of operations and financial condition. Any increase in non-accrual loans may lead to increases in our OREO balance in the future.balance.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. While the boards of the Company and the Bank intend to take steps to ensure that the capital plan aligns with the Bank’s strategic plan, that all material risks to the Bank are identified and measured and that capital limits are appropriate for the institution’s risk profile, failure to successfully implement such steps could have a material adverse effect on our financial condition and results of operations. We may at some point need to raise additional capital to support any future significantgrowth growth.or to meet regulatory capital requirements. Our ability to raise additional capital, if needed,capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly,We cannot assure that we canwill makebe no assurances of our abilityable to raise additional capital, if needed,capital on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired.impaired, and our financial condition and results of operations could be adversely affected.

IfLoss weof failkey toemployees retaincould adversely affect our key employees, our growth and profitability could be adversely affected.business.

Our success is, and is expected to remain, highly dependent on our executive management team.team We are especially dependent on these executives as well asand other key personnelpersonnel. because, asAs a community bank, we depend on our management team’s ties to the community to generate business forand us, andon our executives have keyexecutives’ expertise needed to implement our business strategy. Our executive management and other key personnel have not signed non-competition covenants.

Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel, or theThe loss of the services of several of such key personnel,personnel could adversely affect our growth strategy and seriously harm our business, results of operations and financial condition.

Severe weather, natural disasters, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, suchSuch events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence ofexpenses, any of these events in the futurewhich could have a material adverse effect on our business, financial condition,condition and results of operations and growth prospects.operations.

As a community bank, ourOur reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. Negative publicity can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, acquisitions and actions taken or threatened by government regulators and community organizations in response to those activities. If our reputation is negatively affected by the actions of our employees or otherwise, there may be an adverse effect on our ability to keep and attract customers, and we might be exposed to litigation and regulatory action.action, Anyany of such eventswhich could harm our business, and, therefore, our operating results may be materially adversely affected. As a financial services company with a high profile inaffect our market area, we are inherently exposed to this risk. While we take steps to minimize reputation risk in dealing with customersbusiness and otheroperating constituencies, we will continue to face additional challenges maintaining our reputation with respect to customers of the Bank in our current primary market area in Region 2000 and in establishing our reputation in new market areas.results.

Our profitability depends substantially upon our net interest income.income, Net interest incomewhich is the difference between the interest earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as NOW accounts, savings accounts, time deposits and other borrowings. Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control.control, Previously interest rate spreads had a sustained period of narrowness due to many factors, such asincluding market conditions, policies of various governmentmonetary and regulatoryfiscal authoritiesauthorities, particularly the Federal Reserve, and competitive pricing pressures, and we cannot predict whether these rate spreads will narrow again. This narrowing of interest rate spreads could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest rates will continue to remain at present levels.pressures. Changes in interest rates may cause significant changes, up or down,changes in our net interest income.income and net interest margin. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates.

Inflation cancould have an adverseadversely impact on our customers and theircustomers’ ability to repay.repay loans.

Inflation risk isdecreases the riskpurchasing thatpower of money and can reduce the value of assets orand income from investments will be worth less in the future as inflation decreases the value of money. Beginning in 2021, there was pronounced rise in inflation and the Federal Reserve raised certain benchmark interest rates in an effort to combat this trend.investments. Our customers may alsobe beadversely affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negativenegatively impact on their ability to repay their loans with us.loans.

the effects of awidespread pandemichealth emergencies or public health crises on the business, customers, employees and third-party service providers of Financial or any of its acquisition targets;

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

economicgeopolitical conflicts, international tensions, and politicalrelated tensionseconomic 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 ofsanctions, which may have a destabilizing effect on financial markets and economic activity; and other risks and uncertainties set forth in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchanges Commission (“SEC”).

Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct four other business activities: mortgage banking through the Bank’s Mortgage Division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment Division”), certain insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance”), and subsequent to 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 credit losses, as well as the level of its noninterest income, including deposit fees and service charges, gains on sales of mortgage loans, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, miscellaneous other expenses, franchise taxes, and income taxes. We anticipate that going forward,expect PWW willto continue to enhanceenhancing our operating results by providing additional noninterest income (generallythrough investment advisory feesfee less operating expenses).income.

For the year ended December 31, 2024,2025, Financial had net income of $7,944,000,$9,022,000, aan decreaseincrease of $760,000$1,078,000 from net income of $8,704,000$7,944,000 for the year ended December 31, 2023.2024.

Net interest income decreasedincreased to $29,236,000$32,807,000 for the current year from $29,740,000$29,236,000 for the year ended December 31, 2023.2024.

The net interest margin decreasedincreased by 1828 basis pointpoints to 3.39% for 2025, compared to 3.11% for 2024,2024. comparedThe tofollowing 3.29%table forsets 2023.forth select financial ratios:

A variety and wide scope of economic factors affect Financial’s success and earnings. Although interest rate trends are one of the most important of these factors, Financial believes that interest rates cannot be predicted with a reasonable level of confidence and therefore does not attempt to do so with complicated economic models. 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 concentratefocusing on any onesingle interest rate scenario, Financial prepares for themultiple oppositeoutcomes, asincluding well,unexpected ones, in order to safeguard its margins against thewide unexpected.swings in interest rates.

Financial’sThe Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an assetasset, or relieving a liability. ActualThe lossesfollowing couldcritical differaccounting significantlypolicies frominvolve thesignificant historicalmanagement factorsjudgment thatand thehave Banka 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 wouldmaterial impact theon transactionsour couldfinancial change.statements.

The allowance for credit losses (“ACL”) on loans represents management’s best estimate of lifetime expected losses in the loan portfolio as of the reporting date. The ACL is initially recognized upon origination or acquisition of loans and reflects management’s ongoing evaluation of the loan portfolio based on current conditions, past events, and reasonable and supportable forecasts of future economic conditions, including anticipated prepayments. AdditionalThe analysisallowance is reduced by charge-offs, net of recoveries of previous losses, and detailedis informationincreased onor decreased by a provision for (or recovery of) credit losses, which is recorded in the ACLConsolidated and loan portfolio quality can be found in “Management’s Discussion and Analysis – AnalysisStatements of Financial Condition – Asset Quality.”Income.

Goodwill,Goodwill resulting from business combinations,combinations represents the excess of consideration transferred over the fair value of net identifiable assets acquired.acquired and is assigned to the applicable reporting unit. Goodwill is tested annually for impairment annually as of September 1, or more frequently if events or changes in circumstances indicate that it may be impaired. The impairment indicators arise. Impairment testingevaluation begins with a qualitative assessment to determine ifwhether furtherit is more likely than not that the fair value of a reporting unit is less than its carrying amount. If necessary, a quantitative testingtest is necessary. If quantitative testing is conducted, impairment is measuredperformed by comparing the reporting unit’s carrying valueamount to its estimated fair value,value. calculatedFair value is determined using discounted cash flow analysis,analyses, marketmarket-based comparables,approaches, or othera relevantcombination methodologies.of valuation methodologies, as appropriate. An impairment charge is recognized iffor the amount by which the carrying value exceeds fair value. Determining fair value involvesrequires significant management judgment, including estimatesassumptions related to projected future cash flow projections,flows, discount rates, growth assumptions,rates, and prevailing market conditions. Intangible assets with finite useful lives, such as core deposit intangibles or customer relationships, are amortized on a straight-line basis over their estimated useful lives. Goodwill is the only intangible asset with an indefinite life reflected on our consolidated balance sheet.

These operating results represent a return on average stockholders’ equity of 12.68% for the year ended December 31, 2025, compared to 12.70% for the year ended December 31, 2024, compared to 17.07% for the year ended December 31, 2023.2024. Our return on average stockholders’ equity decreased duemodestly todespite ourthe decrease13.6% increase in net income anddue theto a significant increase in equity.stockholders’ equity, which grew 23.4% from $64,865,000 at December 31, 2024, to $80,048,000 at December 31, 2025. The return on average assets for the year ended December 31, 2024,2025, was 0.80%0.88% compared to 0.92%0.80% in 2023,2024, primarilyreflecting dueimproved profitability relative to aour decreaseasset in net income and an increase in average assets.base.

Interest income increased to $46,655,000 for the year ended December 31, 2025, from $44,643,000 for the year ended December 31, 2024, from $39,362,000 for the year ended December 31, 2023.2024. This increase was due primarily to angrowth in average earning assets, which increased 3.14% as loan balances increased, and a modest increase in the yields on average earning assets, which primarily consist of loans and investment securities, as discussed below. The increase was driven by an increase in the rates received on loans and investment securities and was partially offset by a decrease in rate received on fed funds sold.

The net interest margin decreasedincreased to 3.39% in 2025 from 3.11% in 20242024, froman 3.29%improvement inof 2023.28 basis points. The average rate on earning assets increased 39modestly by 7 basis points from 4.36% in 2023 to 4.75% in 2024,2024 to 4.82% in 2025, as new loan originations and repricing of variable-rate loans continued at elevated market rates. Meanwhile, the average rate on interest-bearing deposits increaseddecreased from 1.23% in 2023 to 1.92% in 2024.2024 Theto increase was primarily caused by an increase1.68% in average time deposits, which generally pay2025, a higherdecline rateof than24 demandbasis interest-bearingpoints, reflecting the Bank’s pricing discipline as the competitive environment for deposits moderated and savingsmarket deposits,rates fromdeclined. $183,256,000As for the year endedof December 31, 2023,2025, totime $225,894,000deposits forwere $235,328,000, as the yearBank endedsuccessfully Decembermanaged 31,the 2024.overall cost of these deposits downward as maturing certificates of deposit were renewed at lower rates consistent with the declining interest rate environment. Because of Financial’s asset interest rate sensitivity, we anticipate that a decrease in interest rates likely would have a negative impact on our results of operations while an increase likely would have a positive impact on our results of operations.

(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities using the Company’s applicable federal tax rate of 21% for each year. This tax-exempt income is exempt from federal income tax only; no state tax adjustment was included as state net operating loss carryforwards eliminated state income tax liability in both periods presented. Accordingly, 21% represents the full combined marginal rate applied in the tax equivalent calculation.’

Noninterest income has been and will continue to be an important factor for increasing our profitability. Our managementManagement continues to review and consider areas where noninterest income can be increased. Noninterest income (excluding securities gains and losses) consists of income from mortgage originations and sales, service fees, income from life insurance, income from credit and debit card transactions, fees generated by the investment services of Investment, and wealth management fees earned by PWW. Service fees consist primarily of monthly service and minimum account balance fees and charges on transactional deposit accounts, treasury management fees, overdraft charges, and ATM service fees.

The Bank, through the Mortgage Division originates both conforming and non-conforming consumer residential mortgages and reverse mortgage loans primarily in the Region 2000 area as well as in Charlottesville, Harrisonburg, Roanoke, Lexington, Blacksburg, and Blacksburg.Wytheville. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are presold to mortgage banking or other financial institutions. The Mortgage Division and assumes nonegligible credit or interest rate risk on these mortgages. In addition, overall home inventory in our market areas has remains below historical levels. We operate the Mortgage Division primarily with hybridnon-delegated correspondent relationships that allow the Bank to close loans in its name before an investor purchases the loan. By using the Bank’s funds to close the loan (as compared to a broker relationship in which loans are funded by the purchaser of the mortgage), the Bank is able to obtain better pricing due to the slight increase in risk. In 2025 and 2024, approximately 15.04% and 13.21% percent of our loans by total origination amount.

RatesThe remainedMortgage elevatedDivision throughoutoriginated 2024659 mortgage loans, totaling approximately $199,563,000 during the year ended December 31, 2025, as compared with 633 mortgage loans, totaling $190,669,000 in 2024. The increase in originations was due to recentcontinued history.purchase activity in our market areas, including markets served by the Mortgage Division. Loans for new home purchases comprised 81%80.66% of the total volume in 2024,2025, as compared to 80%81% in 2023.2024. The Mortgage Division’s revenue is derived from gains on sales of loans held-for-sale to the secondary market. For the year ended December 31, 2025 and 2024, the Mortgage Division accounted for 7.52%approximately of Financial’s total revenue, as compared with 7.54% of Financial’s total revenue for the year ended December 31, 2023. Mortgage contributed $827,0006.27% and $452,0008.33% toof Financial’s pre-tax net incomeincome, incontributing 2024$699,000 and 2023,$827,000, respectively. Because of the uncertainty surrounding current and near-term economic conditions, management cannot predict future mortgage rates. Management also anticipates that in the near to medium term, if rates continue to stayare above 5%the tomid- 6% range and prices remain relatively steady or increase, refinancing opportunities will be scarce,limited, and the majority of the loan mix will continue to lean towards new home purchases and away from refinancing. The Mortgage Division’s presence in the Wytheville market area continues to develop. Management expects that the Mortgage Division’s reputation in its markets and our offices and producers present an opportunity for us to continue to grow the Mortgage Division’s market share and, in the longer term, revenue.

InWe the third quarter of 2008, we began providingprovide insurance and annuity products to Bank customers and others through the Bank’s Insurance subsidiary. Insurance generates minimal revenue, and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial in 2025.2026.

We conduct our investment advisory business through PWW, whicha wholly-owned subsidiary of Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that had approximately $650 million in assets under management and advisement at the time of the acquisition. PWW operates as a subsidiary of Financial. As of December 31, 2024,2025, PWW’s assetassets under management waswere approximately $853,970,000.$1,028,928,000. PWW generates revenue primarily through investment advisory fees. The investment advisory fees will vary based on the value of assets under management. Assets under management may fluctuate due to both client action and fluctuations in the equity and debt markets. Despite the potential for fluctuation, we anticipate that PWW will continue to contribute meaningfully to the Company’s consolidated net income. For the year ended December 31, 2023, its second year of operations as a subsidiary of Financial,2024, PWW had fee income of $4,197,000.$4,843,000. PWW’s fee income increased to $4,843,000$5,328,000 for the year ended December 31, 2024.2025, representing growth of 10.4%. For the year ended December 31, 20242025 and 2023,2024, PWW accounted for 8.10%approximately 22.5% and 8.04%21.5% of Financial’s totalpre-tax revenue,net income, respectively.

Noninterest income increased to $15,852,000 in 2025 from $15,137,000 in 20242024. fromThe $12,867,000principal components of this change are reflected in 2023.the table below. The following table summarizesdetails our noninterest income for the periods indicated:

The following table details the Company’s noninterest expense for the periods indicated:

For the year ended December 31, 2025, Financial recorded federal income tax expense of $1,997,000, compared to federal income tax expense of $1,851,000 for the year ended December 31, 2024, Financial had federal income tax expense of $1,979,000 as compared to a federal income tax expense of $1,575,000resulting in 2023, which equates to effective tax rates of 19.94%17.92% and 15.32%,18.66%, respectively. OurThe Company’s effective tax rate was lower than the federal statutory corporate tax rate of 21% in 2024both becauseperiods ofprimarily federaldue incometo permanent tax benefits resultingassociated from the tax treatment ofwith earnings on bank-owned life insurance and certain tax-freetax-exempt municipal securities and loans. OurThese effectivebenefits taxwere ratepartially wasoffset lower thanby the statutoryimpact corporate tax rate in 2023 because, in addition to the same factors in 2024, in the fourth quarter we utilized a tax benefit for Virginiaof state income taxtaxes. purposesFor thatthe hasyear accumulatedended asDecember a31, result2025, ofFinancial parentrecorded company-only (i.e., not consolidated) losses over time. This resulted in a one-time credit tototal income tax expense (federal and ledstate) of $2,123,000, compared to atotal sharpincome decreasetax expense (federal and state) of $1,979,000 for the year ended December 31, 2024, resulting in the effective tax raterates inof 202319.05% asand compared19.94%, to 2024.respectively. Note 12 of the consolidated financial statements provides additional information with respect to our 2023 and 2024 federalregarding income tax expense and deferred tax accounts.accounts for 2025 and 2024.

Loans, net of unearned income and the allowance, increased to $661,357,000 on December 31, 2025, from $636,552,000 on December 31, 2024, fromrepresenting $601,921,000growth onof December$24,805,000 31,or 2023.3.9%. Total loans increased primarily due to highercontinued demand and originations in all segments ofacross our lending portfolios, with particular strength in commercial real estate and consumer lendinglending. portfoliosThe othermoderate thangrowth consumerrate open-end and residential construction,reflects the latterBank’s ofdisciplined whichunderwriting declinedapproach byin approximatelya $5,520,000.competitive market environment, as management maintained credit quality standards while selectively pursuing attractive lending opportunities. Competition for qualified borrowers continues to remain strong.strong, with pricing pressure in certain segments as competitors seek to deploy excess liquidity.

Bank of the James Financial Group, Inc.’s (“Financial” or the “Company”) financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). As a community bank primarily serving central Virginia, 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, such as lending activities tied to local real estate markets and small business operations. A variety of factors, particularly regional economic conditions, fluctuations in interest rates, and changes in real estate values in our market area, could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset, or relieving a liability. In addition, GAAP itself may evolve from one previously acceptable method to another, potentially altering the timing of how these events impact our transactions, even if the underlying economics remain unchanged.

The Allowance for Credit Losses on Loans (“ACL”) is management’s estimate of the current expected credit losses in our loan portfolio and held-to-maturity securities portfolio. With the exception of loans related to agriculture,agriculture (for which we use the remaining life method), the Company uses a discounted cash flow model to estimate its current expected credit losses in our loan portfolio and held-to-maturity securities portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. For information on the Company’s policies on the ACL, please refer to Note 2 – “Allowance for Credit Losses - Loans” in the Company’s Form 10-K for the year ended December 31, 2025. See “Management’s Discussion and Analysis Results of Operations – Allowance and Provision for Credit losses” below for further discussion of the allowance for credit losses.

PWW is a Lynchburg, Virginia-based investment advisory firm that generates revenue primarily through investment advisory fees and had approximately $1,010,000,000$1,091,000,000 in assets under management and advisement as of MarchJune 31,30, 2026.

The following discussion represents management’s discussion and analysis presents management’s assessment of the financial condition of the Company as of MarchJune 31,30, 2026 and December 31, 2025, and the results of operations for the three-monththree and six-month periods ended MarchJune 31,30, 2026 and 2025. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

MarchJune 31,30, 2026 as Compared to December 31, 2025

Total assets were $1,061,189,000$1,041,307,000 on MarchJune 31,30, 2026, compared with $1,039,024,000 at December 31, 2025, an increase of 2.13%.0.2%. The increase in total assets was primarily due to growth in federalthe fundsloan soldportfolio and securitiesavailable-for-sale available-for-sale,securities, reflectingwhich deploymentwere oflargely available liquidity, partially offsetfunded by a declinereduction in loanscash (netand ofcash theequivalents, allowanceprimarily forwithin creditfederal losses).funds sold.

Total deposits increaseddecreased from $937,129,000 at December 31, 2025, to $956,552,000$935,184,000 at MarchJune 31,30, 2026, ana increasedecrease of $19,423,000,$1,945,000, or 2.07%.0.2%. The growthdecline was driven primarily by ana increase in noninterest-bearing demand deposits of $13,306,000 and an increasedecrease in NOW, money market, and savings deposits of $6,554,000,$6,920,000, partially offset by growth in noninterest-bearing demand deposits of $4,934,000, while time depositdeposits balancesremained declinedlargely modestlystable, increasing $41,000. The decrease was primarily attributable to the timing of withdrawals by $437,000.certain customers, including foundations and similar organizations, in connection with their fiscal year-end, along with normal seasonal fluctuations in deposit balances. The Company continues to utilize the reciprocal portion of the Insured Cash Sweep (ICS) program for customers requiring full FDIC insurance, and may redeploy the non-reciprocal option as market and liquidity conditions warrant.

Total loans, excluding loans held for salesale, and net of the allowance for credit losses, decreasedincreased to $649,133,000$692,681,000 at MarchJune 31,30, 20262026, from $661,357,000$667,807,000 at December 31, 2025, aan decreaseincrease of 1.85%.$24,874,000, or 3.7%. The declineincrease was driven primarily attributable to loan payoffs. While the Company experiencedby growth in certain commercial and commercial real estate portfolios,lending, theseincluding increasescommercial wereconstruction moreand thanland development loans, partially offset by thea aforementioneddecline paydowns,in non-owner occupied commercial real estate loans and modestly lower residential andloan consumerbalances. lendingSee levelsNote remained8 relativelyto stable.the consolidated financial statements for additional detail on the composition of the loan portfolio.

Loans held for sale totaled $2,877,000$5,651,000 at MarchJune 31,30, 2026 compared to $3,472,000 at December 31, 2025, aan decreaseincrease of 17.14%,62.8%, due primarily to normal quarterly fluctuations inincreased mortgage production and secondary market sales.sales activity within the Bank’s mortgage division.

Subsegments of the loan portfolio are set forth in Note 8 to the consolidated financial statements. As of MarchJune 31,30, 2026, non-owner occupied commercial real estate loans and commercial construction and land development loans totaled $231,256,000$235,952,000, representing approximately 35.3%34.06% of total loans.

Total nonperforming assets, which consist of nonperforming loans and other real estate owned, were $1,450,000$1,091,000 at MarchJune 31,30, 2026, compared with $1,704,000 at December 31, 2025. As discussed under “Results of Operations—Allowance and Provision for Credit Losses,” management believes the allowance for credit losses is adequate to absorb estimated losses inherent in the loan portfolio.

Other real estate owned (“OREO”) represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. The Company had no OREO at MarchJune 31,30, 2026 or December 31, 2025, and did not acquire or dispose of any OREO during the threesix months ended MarchJune 31,30, 2026.

Cash and cash equivalents increaseddecreased to $87,991,000$35,545,000 at MarchJune 31,30, 20262026, from $84,475,000 at December 31, 2025. Cash and cash equivalents consist of cash due from correspondents,correspondent banks, cash in vault, and overnight investments, including federal funds sold. The increasedecrease was primarily attributable to higher federal funds sold balances,sold, which rosedeclined $45,067,000, or 80.6%, to $62,894,000$10,870,000 at MarchJune 31,30, 20262026, compared tofrom $55,937,000 at December 31, 2025,2025. reflectingDuring the deploymentfirst quarter of excess2026, liquidityfederal generatedfunds fromsold increased $6,957,000 to $62,894,000, as deposit inflows and lower loan payoffs.balances generated liquidity even after securities available-for-sale increased $30,571,000 to $244,699,000. During the second quarter of 2026, federal funds sold declined $52,024,000, as overnight liquidity was used primarily to fund strong loan growth, with the decline in total deposits discussed above further reducing federal funds sold.

Securities held-to-maturity decreased slightly to $3,586,000$3,581,000 at MarchJune 31,30, 2026 from $3,590,000 at December 31, 2025, due to normal amortization of premiums.amortization.

Securities available-for-sale, carried at fair value, increased to $244,699,000$236,832,000 at MarchJune 31,30, 2026 from $214,128,000 at December 31, 2025, an increase of $30,571,000.$22,704,000. The increase reflectsprimarily $33,628,000reflected $34,639,000 of securities purchases funded by the reinvestment of excess liquidity from deposit inflows,purchases, partially offset by $1,686,000$3,830,000 of maturities, calls, and paydownspaydowns, $5,588,000 of sales, and a $1,371,000 declinechanges in the fair value of the portfolio. The pre-tax fair value of the portfolio resultingdeclined fromby $1,159,000 and $2,531,000 during the three and six months ended June 30, 2026, respectively, primarily as a result of changes in market interest ratesrates. duringAfter giving effect to the quarter,applicable which21% contributedincome totax arate $1,083,000and increasethe $1,000 reclassification adjustment for gains included in net income, these declines resulted in increases of $917,000 and $2,000,000 in after-tax accumulated other comprehensive loss.loss for the three- and six-month periods, respectively. As of MarchJune 31,30, 2026, the portfolio had a net unrealized lossesloss onposition securitiesof available-for-saleapproximately totaled $20,278,000$21,438,000 pre-tax and $16,020,000$16,937,000 after tax. These unrealized losses arewere primarily attributable to changes in market interest rates,rates. and managementManagement does not expectintend to realize such losses, as the Bank has the intent and ability to holdsell these securities untiland does not believe it is more likely than not that the Company will be required to sell them before recovery of fairtheir valueamortized orcost maturity.basis.

LiquidTotal liquid assets, on a consolidated basis, totaled $332,690,000$272,377,000 at MarchJune 31,30, 2026, consisting of cash, interest-bearing and noninterest-bearing deposits with banks, federal funds sold, and available-for-sale securities. Of this amount, approximately $113,093,000 of available-for-sale securities was pledged as collateral as described below, leaving approximately $159,284,000 of unencumbered liquid assets. This representscompares anto increasetotal fromliquid assets of $298,603,000 at December 31, 2025, of which approximately $115,735,000 was pledged, leaving approximately $182,868,000 unencumbered. Total liquid assets decreased $26,226,000, or 8.8%, and unencumbered liquid assets decreased $23,584,000, or 12.9%, primarily reflecting higherthe balancesdecline in cash and cash equivalents (driven by lower federal funds sold), andpartially offset by growth in the available-for-sale securities available-for-sale due to the deployment of excess liquidity generated from deposit inflows.portfolio.

If additional liquidity is needed, the Bank can purchase up to $58,000,000$69,000,000 of Fed funds through correspondent relationships. In addition, the Bank has total borrowing capacity with the Federal Home Loan Bank of Atlanta (“FHLBA”) of approximately $46,593,000$45,655,000 based on pledged collateral, consisting of approximately $16,893,000$15,683,000 supported by pledged loans and approximately $29,700,000$29,971,000 supported by pledged investment securities. The Bank may obtain additional FHLBA capacity by pledging additional eligible loans or investment securities. As of MarchJune 31,30, 2026, the Bank had no borrowings from any of these sources. Management believes that liquid assets were adequate at MarchJune 31,30, 2026 and anticipates additional liquidity from deposit growth and loan repayments.

Stockholders’ equity totaled $81,284,000$83,153,000 at MarchJune 31,30, 2026, compared with $80,048,000 at December 31, 2025, an increase of 1.54%.3.9%. The increase primarily reflected net income of $2,774,000,$6,014,000 for the six months ended June 30, 2026, partially offset by dividends paid to common stockholders of $455,000$909,000 and a $1,083,00$2,000,000 increase in accumulated other comprehensive loss related to unrealized losses on available-for-sale securities during the period.

At MarchJune 31,30, 2026, deposits in accounts with balances exceeding the FDIC insurance limit of $250,000 totaled approximately $299,728,000$286,760,000 (31.34%30.66% of total deposits), compared with $289,069,000 (30.85% of total deposits) at December 31, 2025. Excluding collateralized public deposits, uninsured deposits totaled approximately $259,615,000$251,128,000 (27.14%26.85% of total deposits) at MarchJune 31,30, 2026, compared with $252,818,000 (26.98% of total deposits) at December 31, 2025. These amounts are based on account balances without applying FDIC aggregation rules across accounts or ownership capacities and may differ from the actual uninsured portion. The Bank had no brokered deposits or other uninsured deposit-like instruments at MarchJune 31,30, 2026 or December 31, 2025.

The Tier 1 risk-basedcapital capitalto average total assets ratio increased to 9.38% at June 30, 2026 from 9.05% at December 31, 2025, as growth in Tier 1 capital outpaced growth in average total assets. Tier 1 capital increased to $98,577,000 from $93,748,000, primarily due to net income of $2,774,000$6,014,000 for the threesix months ended MarchJune 31,30, 2026, partially offset by the $455,000$909,000 dividend paid to common stockholders.stockholders, while average total assets grew to $1,050,767,000 from $1,035,821,000.

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Thethe Company is not subject to the capital requirements imposed by the Bank Holding Company Act. Consequently, Thethe Company does not calculate its financial ratios on a consolidated basis. If calculated, management expects that the capital ratios for the Company on a consolidated basis at MarchJune 31,30, 2026 would be substantiallymodestly equivalentlower tothan those of the Bank.Bank, primarily due to the impact of goodwill and intangible assets recorded in connection with the PWW acquisition.

On April 23, 2026, the federalFederal bankingReserve agenciesBoard, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly adopted a final rule modifying the community bank leverage ratio (“CBLR”) framework,framework. The final rule lowers the CBLR requirement from greater than 9% to greater than 8% and extends the grace period during which a qualifying community banking organization that temporarily fails to satisfy the qualifying criteria may continue to use the CBLR framework from two consecutive quarters to four consecutive quarters, subject to a limit of eight quarters in any rolling five-year period and provided the institution maintains a leverage ratio greater than 7%. The final rule does not change existing eligibility criteria. The final rule became effective July 1, 2026, as further described in Note 10 to the consolidated financial statements.2026. The Bank has not elected to use the CBLR framework and continues to calculate its regulatory capital ratios under the generally applicable risk-based capital rules described above. Management iscontinues evaluatingto evaluate whether to opt into the CBLR framework when the final rule becomes effective.framework.

Comparison of the Three and Six Months Ended MarchJune 31,30, 2026 and 2025

NetFor the three and six months ended June 30, 2026, net interest income increased to $8,734,000$9,254,000 forand the three months ended March 31, 2026,$17,988,000 from $7,719,000$8,250,000 and $15,969,000 for the same periodperiods in 2025, reflecting growth in the loan portfolio, higher yields on earning assetsassets, and a lower10.5% costand of10.9% interest-bearingdecline liabilities,in includingtotal interest expense for the impact of deposit repricingthree and six month periods, respectively, driven in part by the elimination of interest expense on capital notes following their retirement in the second quarter of 2025.

The annualized return on average assets was 1.07%1.23% and 1.15% for the three and six months ended MarchJune 31,30, 2026, compared with 0.33%1.06% and 0.70% for the same periodperiods in 2025. The improvement reflects thegrowth in net income, which outpaced a modest increase in netaverage incometotal drivenassets by higher net interest income, growth in noninterest income, lower noninterest expense, and a recovery of credit losses inover the currentsame period.periods.

InThe the eventeffect of decliningfuture changes in market interest rates,rates on net interest margin couldwill comedepend under pressure, particularly inon the shortrelative term,timing asand earningmagnitude assetof yieldsrepricing may reprice more quickly than funding costs givenacross the Company’s asset-sensitiveinterest-earning position.assets and interest-bearing liabilities.

Noninterest income totaled $3,964,000$4,476,000 and $8,440,000 for the three and six months ended MarchJune 31,30, 2026, compared to $3,283,000$4,075,000 and $7,358,000 for the same periodperiods in 2025, representing an increase of 20.8%.2025. The increase for theboth quarterperiods was primarily attributable to highergrowth gainsacross onseveral sales of loans held for sale, increased wealth management fees, andnoninterest income fromcategories, anas SBICdetailed fund investment, while service fee income remained relatively stable.below.

The major components of noninterest income for the three and six months ended MarchJune 31,30, 2026, as compared to the comparable periodperiods in 2025, were as follows: