Form 10-QSB

10QSB 1 d10qsb.htm FORM 10-QSB Form 10-QSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2005

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Small Business Issuer in Its Charter)

Virginia

000-50548

20-0500300

(State or other jurisdiction of

incorporation or organization)

(Commission file number)

(I.R.S. Employer

Identification No.)


828 Main Street, Lynchburg, VA		24504
(Address of principal executive offices)		(Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 1,600,468 shares of Common Stock, par value $2.67 per share, were outstanding at August 10, 2005.

Transitional Small Business Disclosure Format (check one) Yes ¨ No x

TABLE OF CONTENTS


PART 1 – FINANCIAL INFORMATION		3

Item 1 – Financial Statements		3

Item 2. Management’s Discussion and Analysis or Plan of Operation.		9

Item 3. Controls and Procedures		17

PART II – OTHER INFORMATION		17

Item 1. Legal Proceedings		17

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable.		18

Item 3. Defaults Upon Senior Securities – Not Applicable.		18

Item 4. Submission of Matters to a Vote of Security Holders		18

Item 5. Other Information – Not Applicable		19

Item 6. Exhibits		19

SIGNATURES		19

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

Bank of the James Financial Group, Inc.

Consolidated Balance Sheets

(dollar amounts in thousands) (unaudited)


	As of
	6/30/2005			12/31/2004
Assets

Cash and due from banks	$	4,412		$	3,980

Securities held-to-maturity		8,508			8,999
Securities available-for-sale		14,088			10,912
Loans, net		151,115			140,272
Premises and equipment, net		4,616			4,641
Community Banker’s Bank stock		56			56
Federal Reserve Bank stock		281			281
Federal Home Loan Bank stock		342			290
Interest receivable		948			983
Deferred tax asset		122			117
Other assets		1,019			494

Total Assets	$	185,507		$	171,025

Liabilities and Stockholders’ Equity

Deposits
Noninterest bearing demand		24,056			21,699
NOW, money market and savings		63,161			74,834
Time		79,135			57,301

Total deposits		166,352			153,834

Federal funds purchased		425			999

Income taxes payable		3			—
Interest payable		115			65
Repurchase agreements		4,723			3,259
Other liabilities		24			82

Total liabilities	$	171,642		$	158,239

Stockholders’ equity
Common stock $2.67 par value; authorized 10,000,000 shares; issued and outstanding 1,600,468 shares as of June 30, 2005 and 1,548,658 shares as of December 31, 2004		4,267			4,129
Additional paid-in-capital		7,419			7,237
Accumulated other comprehensive income		(21	)		(13	)
Retained earnings		2,200			1,433

Total stockholders’ equity	$	13,865		$	12,786

Total liabilities and stockholders’ equity	$	185,507		$	171,025

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc.

Consolidated Statements of Operation

(dollar amounts in thousands) (unaudited)


	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Interest income
Loans	$	2,624		$	2,004		$	5,070		$	3,974
Federal funds sold		12			14			26			30
Securities
US Government and agency obligations		242			190			436			344
Other		33			21			49			40

Total interest income		2,911			2,229			5,581			4,388

Interest expense
Federal funds purchased		5			—			10			—
Reverse repurchase agreements		18			7			26			9
Deposits
NOW, money market savings		283			190			565			350
Time deposits		583			395			1,049			817

Total interest expense		889			592			1,650			1,176

Net interest income		2,022			1,637			3,931			3,212

Provision for loan losses		199			54			374			131

Net interest income after provision for loan losses		1,823			1,583			3,557			3,081

Other operating income
Service charges, fees, commissions		554			488			1,010			778
Gain on sale of securities		1			—			6			—

Total other operating income		555			488			1,016			778

Other operating expenses
Salaries and employee benefits		820			628			1,612			1,188
Occupancy		125			84			250			161
Equipment		195			180			382			356
Supplies		65			67			138			136
Outside expenses		225			209			440			406
Marketing		88			76			146			135
Credit expense		57			43			106			66
Other		123			123			262			230
Sarbanes-Oxley compliance		37			—			75			—

Total other operating expenses		1,735			1,410			3,411			2,678

Income before income taxes		643			661			1,162			1,181
Income tax expense		(219	)		(222	)		(395	)		(401	)

Net income	$	424		$	439		$	767		$	780

Income per common share – basic	$	0.26		$	0.28		$	0.49		$	0.51

Income per common share – diluted	$	0.25		$	0.27		$	0.46		$	0.48

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc.

Consolidated Statements of Cash Flows

Six months ended June 30, 2005 and June 30, 2004

(in thousands) (unaudited)


	6/30/2005		6/30/2004
Cash flows from operating activities
Net Income	767		780
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	306		265
Provision for loan losses	374		131
(Increase) decrease in interest receivable	35		(170	)
Increase in other assets	(525	)	(104	)
Increase (decrease) in income taxes payable	3		(33	)
Increase (decrease) in interest payable	50		(8	)
Decrease in other liabilities	(58	)	(19	)

Net cash provided by operating activities	952		842

Cash flows from investing activities
(Increase) decrease in balance of held-to-maturity securities	491		(527	)
Increase in balance of available-for-sale securities	(3,189	)	(5,318	)
Purchases of Federal Home Loan Bank stock	(52	)	(72	)
Origination of loans, net of principal collected	(11,228	)	(9,438	)
Recoveries on loans charged off	11		56
Purchases of premises and equipment	(281	)	(575	)

Net cash used in investing activities	(14,248	)	(15,874	)

Cash flows from financing activities
Net increase in deposits	12,518		12,305
Net decrease in federal funds purchased	(574	)	—
Net increase in repurchase agreements	1,464		3,209
Proceeds from exercise of stock options	320		6

Net cash provided by financing activities	13,728		15,520

Increase in cash and cash equivalents	432		488

Cash and cash equivalents at beginning of period	3,980		10,217

Cash and cash equivalents at end of period	4,412		10,705

See accompanying notes to these consolidated financial statements

Bank of the James Financial Group, Inc.

June 30, 2005 and 2004

Notes to Unaudited Financial Statements

Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial”) pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of and for the six month period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information are contained in Financial’s Annual Report on Form 10-KSB for the year ended December 31, 2004. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2004 included in Financial’s Annual Report on Form 10-KSB. Results for the six month period ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Financial’s critical accounting policy relates to the evaluation of the allowance for loan loss which is based on management’s opinion of an amount that is adequate to absorb loss in the Bank’s existing portfolio. The allowance for loan loss is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan loss (to the extent available due to limited history), specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Bank’s allowance for loan loss could result in material changes in Financial’s financial condition and results of operations. The Bank’s policies with respect to the methodology for determining the allowance for loan loss involve a higher degree of complexity and require management to make subjective judgments that often require assumptions or estimates about uncertain matters. These critical policies and their assumptions are periodically reviewed with the Board of Directors.

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 3 – Earnings Per Share

For the quarters ended June 30, 2005 and 2004, basic earnings per share has been computed based upon the weighted average common shares outstanding of 1,600,468 and 1,544,436, respectively. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in January, 2004 and the 50% stock split effected in the form of a stock dividend paid by Financial in March, 2005.

Currently, only the option shares granted to certain officers and employees of Financial pursuant to the Amended and Restated Stock Option Plan of Financial are considered dilutive under the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following is a summary of the earnings per share calculation for the six months ended June 30, 2005 and 2004.


	Three months ended June 30,				Year to date June 30,
	2005		2004		2005		2004
Net income	$	424,000	$	439,000	$	767,000	$	780,000

Weight average number of shares		1,600,468		1,544,436		1,579,900		1,524,104
Options effect of incremental shares		79,776		93,440		81,566		94,569

Weighted average diluted shares		1,680,244		1,637,876		1,661,466		1,618,673

Basic EPS (weighted avg shares)	$	0.26	$	0.28	$	0.49	$	0.51

Diluted EPS (including option shares)	$	0.25	$	0.27	$	0.46	$	0.48

Note 4 - Stock Options

In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123,” the Company has adopted the disclosure–only option and elected to apply the provisions of APB No. 25 for financial statement purposes. No stock-based employee compensation cost is reflected in net income for these plans.

Pro forma information regarding net income and earnings per share have been determined as if the Company had accounted for its employee stock options using the fair value method, and is presented below.


	Six Months Ended
	June 30, 2005		June 30, 2004
Net Income:
As reported	$	767	$	780
Deduct: total stock-based compensation cost determined under the fair value method, net of tax		68		49

Pro forma	$	699	$	731

Basic earnings per share:
As reported	$	0.49	$	0.51
Pro forma	$	0.44	$	0.48
Diluted earnings per share:
As reported	$	0.46	$	0.48
Pro forma	$	0.42	$	0.45

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the three-month periods ended June 30, 2005 and 2004: dividend yield of 0%, expected volatility of 10%, a risk-free interest rate of 4.08%, and expected lives of 7 years.

Item 2. Management’s Discussion and Analysis or Plan of Operation.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the James Financial Group, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Such factors include, but are not limited to competition, general economic conditions, potential changes in interest rates, and changes in the value of real estate securing loans made by Bank of the James, the wholly-owned subsidiary of Bank of the James Financial Group, Inc.

GENERAL

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. We use historical loss ratios as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is management’s estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that losses on impaired loans be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. See Note 1 to the Consolidated Financial Statements along with “Results of Operations – Allowance for Loan Losses and Loan Loss Reserve” below for further discussion of the allowance for loan losses.

Overview

Bank of the James Financial Group, Inc. (“Financial”) was incorporated on October 3, 2003 under the laws of the Commonwealth of Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) to serve as a bank holding company of the Bank. Effective January 1, 2004, pursuant to an Agreement and Plan of Share Exchange dated October 9, 2003 (the “Agreement”) between Financial and the Bank, and approved by the shareholders of the Bank at a special meeting of shareholders held on December 17, 2003, Financial acquired all of the outstanding stock of the Bank in a statutory share exchange transaction. Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of Financial on a one-for-one basis.

Following completion of the share exchange, Financial became the successor issuer to the Bank pursuant to Rule 12g-3 (promulgated under the Securities Exchange Act of 1934). Prior to the share exchange, the Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof, was required to file reports and other financial information with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Such reports and other information filed by the Bank with the Federal Reserve may be inspected and copied at the public reference facilities maintained by the Federal Reserve in Washington, D.C. at the Freedom of Information Office, 1st Floor of the Martin Building, 20th & C Streets, and in Richmond, Virginia at the Research Library of the Federal Reserve Bank of Richmond, 701 East Byrd Street. The last financial report filed by the Bank with the Federal Reserve was its Form 10-QSB for the quarter ended September 30, 2003, filed on November 13, 2003.

As of the date hereof, the sole business of Financial is the ownership of the capital stock of the Bank. Financial had no business until January 1, 2004 when it acquired the common stock of the Bank and unless otherwise noted all of the financial statements and results referenced for the periods prior to January 1, 2004 herein refer to the results and statements of the Bank.

Financial declared a 10% stock dividend payable to shareholders of record as of January 2, 2004, which dividend was paid on January 27, 2004. Financial declared a 50% stock split effected in the form of a stock dividend payable to shareholders of record as of February 4, 2005, which dividend was paid on March 4, 2005. All earnings per share amounts have been adjusted to reflect these two stock dividends.

The Bank is Financial’s sole subsidiary and is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state chartered bank in 1998 and began banking operations in July 1999. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area.

The operating results of the Bank depend primarily upon its net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits. The Bank’s net income also is affected by its provision for loan loss, as well as the level of its other operating income, including loan fees and service charges, and its other operating expenses, including salaries and employee benefits, occupancy expense, Federal Deposit Insurance Corporation assessments, miscellaneous other expenses, franchise taxes, and income taxes.

The Bank intends to enhance its profitability by increasing its market share in the Region 2000 area, providing additional services to its customers, and controlling costs.

The Bank currently serves its customers through the following five full service offices: the main office located at 828 Main Street in Lynchburg (opened October 25, 2004) (the “Main Street Office”), a branch located at 615 Church Street in Lynchburg (opened July 22, 1999), a branch located at 5204 Fort

Avenue in Lynchburg (opened November 13, 2000), a branch located on South Amherst Highway in Amherst County (opened June 4, 2002), and a branch located at 17000 Forest Road in Forest (the “Forest Branch”) (opened February 4, 2004). In addition, the Bank originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 1027 Water Wheel Drive in Moneta (opened July, 2005).

Effective June 30, 2005, the Bank designated the Main street office as its main office with the Virginia Bureau of Financial Institutions.

The Bank continuously evaluates locations for additional branches and would consider an additional branch in the next twelve months if a suitable location were found. Future branch openings are subject to regulatory approval. The Bank has identified several locations that may be suitable for an additional branch and has begun a preliminary evaluation in order to determine the feasibility of one of the locations. Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 12 months.

The following discussion represents management’s discussion and analysis of the financial condition and results of operations of Financial and the Bank, respectively, as of June 30, 2005 and December 31, 2004 and for the six months ended June 30, 2005. It should be read in conjunction with the condensed financial statements included elsewhere herein.

OFF-BALANCE SHEET ARRANGEMENTS

The Bank is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets and could impact the overall liquidity and capital resources to the extent customers accept and or use these commitments

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


	June 30, 2005
Commitments to extend credit	$	29,327,000
Letters of Credit		2,485,000

Total:	$	31,812,000

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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

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

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The comparison of the financial condition and operating results between June 30, 2005 and December 31, 2004 and June 30, 2004, as applicable, should be read in the context of the length of time for which the Bank has been operating. The Bank began operations on July 22, 1999, opened its second location in November, 2000, opened its mortgage division in April, 2001, opened its third location in June, 2002, opened its fourth location in February, 2004, and opened its fifth location in October, 2004.

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

Financial Condition Summary

June 30, 2005 as Compared to December 31, 2004

Total assets were $185,507,000 on June 30, 2005 compared with $171,025,000 at December 31, 2004. This increase in total assets can be attributed to deposit growth, particularly the continued growth of the Forest Branch. Total deposits grew from $153,834,000 for the year ended December 31, 2004 to $166,352,000 on June 30, 2005, an increase of 8.14%. In addition, the Bank’s effort to increase non-FDIC insured sweep accounts (repurchase agreements) resulted in an increased balance in these accounts to $4,723,000 on June 30, 2005 from $3,259,000 on December 31, 2004.

In addition, the increase in total assets is due to an increase in rates (as a result of the increasing rate environment) that the Bank offers on its deposit products, the addition of new lenders, and the Bank’s reputation for service. Loans, net of unearned income and allowance, increased to $151,115,000 on June 30, 2005 from $140,272,000 on December 31, 2004. Total loans increased to $152,641,000 from $141,691,000 on December 31, 2004. The following summarizes the composition of the Bank’s loan portfolio (dollar amounts in thousands):


	June 30, 2005				June 30, 2004				December 31, 2004
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Commercial	$	32,524	21.31	%	$	34,037	27.14	%	$	35,163	24.82	%
Real estate construction		25,987	17.02	%		12,883	10.27	%		22,251	15.70	%
Real estate mortgage		70,716	46.33	%		58,083	46.32	%		63,215	44.61	%
Consumer		23,044	15.10	%		19,963	15.92	%		21,240	14.99	%
Other		370	0.24	%		431	0.35	%		-178	-0.12	%

Total loans	$	152,641	100.00	%	$	125,397	100.00	%	$	141,691	100.00	%

Non accrual loans increased to $418,000 on June 30, 2005 from $ 380,000 on December 31, 2004. Other real estate owned, which is accounted for in the “other assets” section of Statement of Financial Condition, increased to $618,000 on June 30, 2005 from $85,000 on December 31, 2004. The entire balance as of June 30, 2005 is related to one single family residence that the Bank purchased in foreclosure to protect its collateral position. The Bank anticipates that this property will be sold prior to the end of the third quarter 2005.

Cash and cash equivalents increased to $4,412,000 on June 30, 2005 from $3,980,000 on December 31, 2004. This increase is a result of routine fluctuations in deposits, an increased number of transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.

Securities held-to-maturity decreased to $8,508,000 on June 30, 2005 from $8,999,000 on December 31, 2004. Securities available-for-sale increased to $14,088,000 on June 30, 2005 from $10,912,000 on December 31, 2004. The following table summarizes the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2005 and December 31, 2004:


6/30/2005 (in thousands)

Securities	Amortized Costs		Gross Unrealized					Fair Value
Securities	Amortized Costs		Gains		Losses			Fair Value
Held to Maturity US Gov’t & agency obligations	$	8,508	$	69	$	(14	)	$	8,563

Available for Sale
US Gov’t & agency obligations	$	12,065	$	22	$	(30	)	$	12,057
Mortgage-backed securities		2,055		4		(28	)		2,031

	$	4,120	$	26	$	(58	)	$	14,088


12/31/2004 (in thousands)

Securities	Amortized Costs		Gross Unrealized					Fair Value
Securities	Amortized Costs		Gains		Losses			Fair Value
Held to Maturity
US Gov’t & agency obligations	$	8,999	$	80	$	(33	)	$	9,046

Available for Sale
US Gov’t & agency obligations	$	9,636	$	7	$	(4	)	$	9,639
Mortgage-backed securities		1,295		6		(28	)		1,273

	$	10,931	$	13	$	(32	)	$	10,912

These changes from December 31, 2004 in both securities held-to-maturity and securities available-for-sale was primarily due to management’s effort to improve cash management by allocating cash to investment securities from lower yielding federal funds.

As of June 30, 2005 and December 31, 2004 the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2005 and 2004

Earnings Summary

Net income for the three and six months ended June 30, 2005 was $424,000 and $767,000, respectively, compared to a net income of $439,000 and $780,000 for the same periods in 2004. Basic earnings per common share for the three and six months ended June 30, 2005 were $0.26 and $0.49, respectively, compared to basic earnings per common share of $0.28 and $0.51 for the same periods in 2004. Fully diluted earnings per common share for the three and six months ended June 30, 2005 was $0.25 and $0.46, respectively, compared to fully diluted earnings per common share of $0.27 and $0.48 for the same periods in 2004. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in January, 2004 and the 50% stock split effected in the form of a stock dividend paid by Financial in March, 2005.

The increase in the Bank’s operating revenue was offset by an increase in both interest expense and non-interest expense as discussed below.

These operating results represent an annualized return on shareholders’ equity of 12.56% and 11.63% for the three and six months ended June 30, 2005 compared with 14.73% and 13.41% for the same periods in 2004. The annualized return on average assets for the three and six months ended June 30, 2005 was 0.94% and 0.87% compared with 1.12% and 1.04% for the same period in 2004.

Interest Income; Interest Expense; and Net Interest Income

Interest income increased to $2,911,000 and $5,581,000 for the three and six months ended June 30, 2005 from $2,229,000 and $4,388,000 for the same periods in 2004. This increase was due to an increase in interest earning assets, including loans and investment securities, as well as an increase in rates paid to the Bank on its interest earning assets. In particular, a significant portion of the Bank’s loan portfolio is invested in variable rate loans, the rates on which have continued to increase in the current rising interest rate environment.

Interest expense increased to $889,000 and $1,650,000 for the three and six months ended June 30, 2005 from $592,000 and $1,176,000 for the same periods in 2004. This increase in interest expense was primarily due to both an increase in the aggregate balance in interest bearing deposit accounts and, in response to the interest rate increases by Federal Open Market Committee (“FOMC”), an increase in the interest rates paid by the Bank on deposit accounts. In addition, interest expense increased in part because the Bank has increased the interest rates that it offers on certificates of deposit in response both to competition and the FOMC rate increases. The Bank expects this trend to continue during the current fiscal year.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2005 was $2,022,000 and $3,931,000 compared with $1,637,000 and $3,212,000 for the same periods in 2004. The net interest margin increased to 4.72% and 4.73% for the three and six months ended June 30, 2005 from 4.41% and 4.49% in the same periods a year ago. The growth in net interest income and the increase in net interest margin for the three and six months ended June 30, 2005 as compared with the comparable three and six months in 2004 was due to the increase in average interest-earning assets, which was the result of growth in the loan portfolio funded by the growth in deposits.

Non-Interest Income

Non-interest income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, and the Bank’s ownership interest in a title insurance agency, increased to $555,000 and $1,016,000 for the three and six month periods ended June 30, 2005, from $488,000 and $778,000 for the comparable periods in 2004. This increase was due in large part to an increase in mortgage origination volume from $11,232,000 and $14,418,000 for the three and six month periods ended June 30, 2005 from $7,774,000 and $12,527,000 for the comparable periods in 2004. In addition, revenues from fees and service charges increased as the number of transactional deposit accounts increased.

The Bank, through Bank of the James Mortgage, a Division of Bank of the James (the “Mortgage Division”) originates consumer residential mortgage loans. Through the Mortgage Division, the Bank originates conforming and non-conforming home mortgages in the Region 2000 area, as defined below. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions. The Mortgage Division assumes no credit or interest rate risk on these mortgages. In July, 2005, the Mortgage Division opened it second mortgage origination office. This office is located in Moneta and was opened to serve the Smith Mountain Lake market. The Bank anticipates that this office will contribute additional non-interest income during 2005.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2005 was $1,735,000 and $3,411,000 compared to $1,410,000 and $2,678,000 for the three and six months ended June 30, 2004. The increase in non-interest expense can be attributed to increased occupancy expenses, along with an increase in compensation expense related to an increase in the number of employees necessary to accommodate the Bank’s growth and expansion as well as expense in complying with the Sarbanes-Oxley Act of 2002 (“SOx”). Management expects that the Forest Branch, the Main Street Office, both of which opened in 2004, will generate interest earning assets to compensate for the costs incurred in opening and operating those branches. The cost of compliance with SOx set forth in the Consolidated Statement of Operations reflects only the direct costs to outside consultants and does not include indirect costs including salaries of Bank personnel and administrative costs related to SOx compliance. Total personnel expense increased to $820,000 and $1,612,000 for the three and six month periods ended June 30, 2005, from $628,000 and $1,188,000 for the comparable periods in 2004. Part of this increase was related to the addition of several mortgage loan officers in the Mortgage Division and the higher level of mortgage loan originations. Compensation for some employees of the Mortgage Division is commission-based and therefore subject to fluctuation. The Bank also had increases in depreciation expense, data processing fees, other operating expenses.

Allowance for Loan Losses

The provision for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. The amount added to the allowance for loan loss for the three and six months ended June 30, 2005 was $199,000 and $374,000 compared with $54,000 and $131,000 for the comparable periods in 2004. This increase was

due in large part to growth in the loan portfolio and the application of the loan loss calculation for impaired loans. Management believes that the current allowance for loan loss of $1,526,000 (or 1.00% of total loans) at June 30, 2005 is adequate.

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


	Six months Ended June 30, 2005			Six months Ended June 30, 2004
Balance, beginning of period	$	1,419		$	1,451
Provision for loan losses		374			131
Loans charged off		(278	)		(94	)
Recoveries of loans charged off		11			55

Net charge offs		(267	)		(39	)

Balance, end of period	$	1,526		$	1,543

Income Taxes

For the quarter ended June 30, 2005, the Bank accrued an income tax liability of $219,000 and, based on its 2004 income tax liability, made an estimated income tax payment of $215,000 during the quarter ended June 30, 2005.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Bank’s principal executive officer and principal financial officer have concluded that the Bank’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Bank in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

There were no significant changes in the Bank’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Bank is not involved in any pending legal proceedings at this time, other than routine litigation incidental to its business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable.

Item 3. Defaults Upon Senior Securities – Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

(a)

The Bank held its annual meeting of shareholders on May 12, 2005 at 4:00 p.m. in Lynchburg, Virginia.

(b)

At the annual meeting, the shareholders elected the following directors:

Robert R. Chapman III

Donna Schewel Clark

Richard R. Zechini

Augustus A. Petticolas, Jr.

The terms of the following directors continued after the term of the meeting:

Ronald V. Dolan

Donald M. Giles

James R. Hughes, Jr.

Thomas W. Pettyjohn, Jr.

Kenneth S. White

(c) In addition to the election of the Directors at the annual meeting, the shareholders voted on the following matter: ratify the selection by the Bank of Cherry, Bekaert & Holland, L.L.P., independent public accountants, to audit the financial statements of the Bank for the fiscal year ending on December 31, 2005 (“Proposal Two”).

At the annual meeting, the number of votes for, against or withheld, as well as the number of abstentions and broker non-votes, as to each such matter was as follows:

Proposal One—Election of Directors


Name	Number of Votes Cast For	Number of Votes Against	Number of Abstentions	Number of Broker Non-Votes
Robert R. Chapman III	1,114,908	0	2,888	0
Donna Schewel Clark	1,114,510	0	3,286	0
Richard R. Zechini	1,110,805	0	6,991	0
Augustus A. Petticolas, Jr.	1,114,165	0	3,631	0

Proposal Two—Ratification of Auditors

Number

of Votes

Cast For

Number

of Votes

Against

Number of

Abstentions

Number of Broker

Non-Votes

1,110,805

5,018

4,343

(d) Not applicable.

Item 5. Other Information – Not Applicable

Item 6. Exhibits

The following are filed as Exhibits to this Form 10-QSB


Exhibit No.		Description of Exhibit

31.1		Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 10, 2005

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 10, 2005

32		Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 10, 2005

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BANK OF THE JAMES

Date: August 10, 2005	By	/S/ Robert R. Chapman III Robert R. Chapman III, President (Principal Executive Officer)

	By	/S/ J. Todd Scruggs J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Index of Exhibits


Exhibit No.		Description of Exhibit

31.1		Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 10, 2005

31.2		Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 10, 2005

32		Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002, dated August 10, 2005

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