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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2023

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________

Virginia | 001-35402 | 20-0500300
(State or other jurisdiction of incorporation or organization) | (Commission file number) | (I.R.S. Employer Identification No.)
828 Main Street, Lynchburg, VA |  | 24504
(Address of principal executive offices) |  | (Zip Code)

(434) 846-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer |  | ☐ |  | Accelerated filer |  | ☐
Non-accelerated filer |  | ☒ |  | Smaller reporting company |  | ☒
Emerging growth company |  | ☐ |  |  |  |

______________________

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

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, 2.14 per share par value |  | BOTJ |  | The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,543,338 shares of Common Stock, par value $2.14 per share, were outstanding at November 13, 2023.
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Table of Contents

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION |
Item 1. Consolidated Financial Statements | 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 51
Item 4. Controls and Procedures | 51
PART II – OTHER INFORMATION |
Item 1. Legal Proceedings | 51
Item 1A. Risk Factors | 51
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | 51
Item 3. Defaults Upon Senior Securities | 52
Item 4. Mine Safety Disclosures | 52
Item 5. Other Information | 52
Item 6. Exhibits | 53
SIGNATURES | 53

Table of Contents

PART I – FINANCIAL INFORMAT ION

Item 1. Consolidated Financial Statem ents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts) (2023 unaudited)

| September 30, |  | December 31,
Assets | 2023 |  | 2022
Cash and due from banks | $ 20,105 |  | $ 30,025
Federal funds sold | 79,424 |  | 31,737
Total cash and cash equivalents | 99,529 |  | 61,762
Securities held-to-maturity, at amortized cost (fair value of $3,028 in 2023 and $3,135 in 2022) net of allowance for credit loss of $0 in 2023 | 3,626 |  | 3,639
Securities available-for-sale, at fair value | 181,977 |  | 185,787
Restricted stock, at cost | 1,541 |  | 1,387
Loans, net of allowance for credit losses of $7,320 in 2023 and $6,259 in 2022 | 599,585 |  | 605,366
Loans held for sale | 3,325 |  | 2,423
Premises and equipment, net | 18,371 |  | 17,974
Interest receivable | 2,707 |  | 2,736
Cash value - bank owned life insurance | 21,443 |  | 19,237
Other real estate owned | - |  | 566
Customer relationship intangibles | 7,425 |  | 7,845
Goodwill | 2,054 |  | 2,054
Other assets | 19,304 |  | 17,795
Total assets | $ 960,887 |  | $ 928,571
Liabilities and Stockholders' Equity |  |  |
Deposits |  |  |
Noninterest bearing demand | $ 154,628 |  | $ 154,884
NOW, money market and savings | 524,721 |  | 560,479
Time deposits | 200,854 |  | 132,775
Total deposits | 880,203 |  | 848,138
Capital notes, net | 10,041 |  | 10,037
Other borrowings | 10,030 |  | 10,457
Interest payable | 381 |  | 89
Other liabilities | 10,103 |  | 9,624
Total liabilities | $ 910,758 |  | $ 878,345
Commitments and Contingencies |  |  |
Stockholders' equity |  |  |
Preferred stock; authorized 1,000,000 shares; none issued and outstanding | $ - |  | $ -
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 4,543,338 as of September 30, 2023 and 4,628,657 as of December 31, 2022 | 9,723 |  | 9,905

1

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Additional paid-in-capital | 35,253 |  | 36,068
Retained earnings | 34,931 |  | 31,034
Accumulated other comprehensive (loss) | (29,778) |  | (26,781)
Total stockholders' equity | $ 50,129 |  | $ 50,226
Total liabilities and stockholders' equity | $ 960,887 |  | $ 928,571

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2

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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

| For the Three Months Ended |  | For the Nine Months Ended
| September 30, |  | September 30,
Interest Income | 2023 |  | 2022 |  | 2023 |  | 2022
Loans | $ 7,990 |  | $ 6,830 |  | $ 23,251 |  | $ 18,909
Securities |  |  |  |  |  |  |
U.S. Government and agency obligations | 321 |  | 331 |  | 962 |  | 911
Mortgage backed securities | 435 |  | 437 |  | 1,255 |  | 1,196
Municipals - taxable | 286 |  | 257 |  | 853 |  | 812
Municipals - tax exempt | 18 |  | 32 |  | 55 |  | 55
Dividends | 8 |  | 5 |  | 49 |  | 36
Corporates | 139 |  | 144 |  | 423 |  | 395
Interest bearing deposits | 134 |  | 101 |  | 375 |  | 135
Federal Funds sold | 812 |  | 262 |  | 1,601 |  | 463
Total interest income | 10,143 |  | 8,399 |  | 28,824 |  | 22,912
Interest Expense |  |  |  |  |  |  |
Deposits |  |  |  |  |  |  |
NOW, money market savings | 894 |  | 133 |  | 1,916 |  | 374
Time deposits | 1,683 |  | 143 |  | 3,918 |  | 467
FHLB borrowings | - |  | - |  | 31 |  | -
Finance leases | 22 |  | 24 |  | 66 |  | 73
Other borrowings | 98 |  | 117 |  | 297 |  | 339
Capital notes | 82 |  | 82 |  | 245 |  | 245
Total interest expense | 2,779 |  | 499 |  | 6,473 |  | 1,498
Net interest income | 7,364 |  | 7,900 |  | 22,351 |  | 21,414
Recovery of credit losses | (164) |  | (300) |  | (278) |  | (900)
Net interest income after recovery of credit losses | 7,528 |  | 8,200 |  | 22,629 |  | 22,314
Noninterest income |  |  |  |  |  |  |
Gain on sales of loans held for sale | 989 |  | 1,472 |  | 3,065 |  | 4,675
Service charges, fees and commissions | 1,004 |  | 1,313 |  | 2,942 |  | 2,563
Wealth management fees | 1,050 |  | 959 |  | 3,098 |  | 2,935
Life insurance income | 139 |  | 113 |  | 405 |  | 338
Other | 19 |  | (3) |  | 179 |  | 8
Total noninterest income | 3,201 |  | 3,854 |  | 9,689 |  | 10,519
Noninterest expenses |  |  |  |  |  |  |
Salaries and employee benefits | 4,683 |  | 4,529 |  | 13,296 |  | 13,051
Occupancy | 458 |  | 445 |  | 1,389 |  | 1,348
Equipment | 501 |  | 647 |  | 1,813 |  | 1,870
Supplies | 118 |  | 116 |  | 399 |  | 380
Professional, data processing, and other outside expense | 1,371 |  | 1,619 |  | 4,154 |  | 3,544
Marketing | 204 |  | 222 |  | 683 |  | 661
Credit expense | 218 |  | 244 |  | 623 |  | 765
Other real estate expenses, net | 3 |  | 195 |  | 36 |  | 207
FDIC insurance expense | 126 |  | 121 |  | 321 |  | 382

3

See accompanying notes to these consolidated financial statements

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Amortization of intangibles | 46 |  | 140 |  | 420 |  | 420
Other | 412 |  | 601 |  | 957 |  | 1,491
Total noninterest expenses | 8,140 |  | 8,879 |  | 24,091 |  | 24,119
Income before income taxes | 2,589 |  | 3,175 |  | 8,227 |  | 8,714
Income tax expense | 511 |  | 601 |  | 1,631 |  | 1,709
Net Income | $ 2,078 |  | $ 2,574 |  | $ 6,596 |  | $ 7,005
Weighted average shares outstanding - basic and diluted | 4,543,338 |  | 4,683,581 |  | 4,568,789 |  | 4,721,423
Earnings per common share - basic and diluted | $ 0.46 |  | $ 0.55 |  | $ 1.44 |  | $ 1.48

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4

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands) (unaudited)

| For the Three Months |  | For the Nine Months
| Ended September 30, |  | Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Net Income | $ 2,078 |  | $ 2,574 |  | $ 6,596 |  | $ 7,005
Other comprehensive loss: |  |  |  |  |  |  |
Unrealized (loss) on securities available-for-sale | (5,462) |  | (7,368) |  | (3,794) |  | (32,530)
Tax effect | 1,147 |  | 1,548 |  | 797 |  | 6,832
Other comprehensive loss, net of tax | (4,315) |  | (5,820) |  | (2,997) |  | (25,698)
Comprehensive (loss) income | $ (2,237) |  | $ (3,246) |  | $ 3,599 |  | $ (18,693)

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5

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(dollar amounts in thousands) (unaudited)

| For the Nine Months Ended September 30,
| 2023 |  | 2022
Cash flows from operating activities |  |  |
Net Income | $ 6,596 |  | $ 7,005
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation and amortization | 1,079 |  | 1,022
Net amortization (accretion) of premiums and discounts on securities | (579) |  | 338
Amortization of debt issuance costs | 10 |  | 10
(Gain) on sales of loans held for sale | (3,065) |  | (4,675)
Proceeds from sales of loans held for sale | 126,245 |  | 176,736
Origination of loans held for sale | (124,082) |  | (173,732)
Recovery of credit losses | (278) |  | (900)
Loss on sale of other real estate owned | 3 |  | -
Impairment of other real estate owned | 23 |  | 195
Amortization of intangibles | 420 |  | 420
Bank owned life insurance income | (405) |  | (338)
Loss on disposition of equipment | 2 |  | -
Decrease (increase) in interest receivable | 29 |  | (318)
(Increase) in other assets | (154) |  | (838)
Increase (decrease) in interest payable | 292 |  | (9)
(Decrease) increase in other liabilities | (167) |  | 447
Net cash provided by operating activities | $ 5,969 |  | $ 5,363
Cash flows from investing activities |  |  |
Purchases of securities available-for-sale | $ (8,166) |  | $ (71,581)
Proceeds from maturities, calls and paydowns of securities available-for-sale | 8,775 |  | 8,861
Purchases of bank owned life insurance | (1,800) |  | -
Purchase of Federal Home Loan Bank stock | (154) |  | (63)
Proceeds from sale of other real estate owned | 540 |  | -
Origination of loans, net of principal collected | 4,814 |  | (36,748)
Purchases of premises and equipment | (1,478) |  | (921)
Net cash provided by (used in) investing activities | $ 2,531 |  | $ (100,452)
Cash flows from financing activities |  |  |
Net increase (decrease) in deposits | $ 32,065 |  | $ (3,987)
Principal payments on finance lease obligations | (274) |  | (267)
Principal payments on other borrowings | (427) |  | (393)
Repurchase of common stock | (997) |  | (1,402)
Dividends paid to common stockholders | (1,100) |  | (995)
Net cash provided by (used in) financing activities | $ 29,267 |  | $ (7,044)
Increase (decrease) in cash and cash equivalents | 37,767 |  | (102,133)
Cash and cash equivalents at beginning of period | $ 61,762 |  | $ 183,153
Cash and cash equivalents at end of period | $ 99,529 |  | $ 81,020
Supplemental schedule of noncash investing and financing activities |  |  |
Noncash transactions |  |  |
Fair value adjustment for securities available-for-sale | $ (3,793) |  | $ (32,530)

6

See accompanying notes to these consolidated financial statements

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Supplemental disclosures of cash flow information |  |  |
Cash transactions |  |  |
Cash paid for interest | $ 6,181 |  | $ 1,507
Cash paid for income taxes | 1,465 |  | 1,430

7

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2023 and 2022

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

|  |  |  |  |  | Accumulated |
|  |  |  | Additional |  | Other |
| Shares |  | Common | Paid-in | Retained | Comprehensive |
| Outstanding |  | Stock | Capital | Earnings | (Loss) | Total
Balance at December 31, 2021 | 4,740,657 |  | $ 10,145 | $ 37,230 | $ 23,440 | $ (1,386) | $ 69,429
Net Income | - |  | - | - | 2,139 | - | 2,139
Dividends paid on common stock ($0.07 per share) | - |  | - | - | (332) | - | (332)
Other comprehensive (loss) | - |  | - | - | - | (10,657) | (10,657)
Balance at March 31, 2022 | 4,740,657 |  | $ 10,145 | $ 37,230 | $ 25,247 | $ (12,043) | $ 60,579
Net Income | - |  | - | - | 2,292 | - | 2,292
Dividends paid on common stock ($0.07 per share) | - |  | - | - | (332) | - | (332)
Other comprehensive (loss) | - |  | - | - | - | (9,221) | (9,221)
Balance at June 30, 2022 | 4,740,657 |  | $ 10,145 | $ 37,230 | $ 27,207 | $ (21,264) | $ 53,318
Net Income | - |  | - | - | 2,574 | - | 2,574
Dividends paid on common stock ($0.07 per share) | - |  | - | - | (331) | - | (331)
Repurchase of common stock | (112,000) |  | (240) | (1,162) | - | - | (1,402)
Other comprehensive (loss) | - |  | - | - | - | (5,820) | (5,820)
Balance at September 30, 2022 | 4,628,657 |  | $ 9,905 | $ 36,068 | $ 29,450 | $ (27,084) | $ 48,339
Balance at December 31, 2022 | 4,628,657 |  | $ 9,905 | $ 36,068 | $ 31,034 | $ (26,781) | $ 50,226
Net Income | - |  | - | - | 1,984 | - | 1,984
Dividends paid on common stock ($0.08 per share) | - |  | - | - | (370) | - | (370)
Repurchase of common stock | (68,619) |  | (147) | (666) | - | - | (813)
Adoption of ASU 2016-13 | - |  | - | - | (1,599) | - | (1,599)

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Other comprehensive income | - |  | - | - | - | 2,583 | 2,583
Balance at March 31, 2023 | 4,560,038 |  | $ 9,758 | $ 35,402 | $ 31,049 | $ (24,198) | $ 52,011
Net Income | - |  | - | - | 2,534 | - | 2,534
Dividends paid on common stock ($0.08 per share) | - |  | - | - | (364) | - | (364)
Repurchase of common stock | (16,700) |  | (35) | (149) | - | - | (184)
Other comprehensive (loss) | - |  | - | - | - | (1,265) | (1,265)
Balance at June 30, 2023 | 4,543,338 |  | $ 9,723 | $ 35,253 | $ 33,219 | $ (25,463) | $ 52,732
Net Income | - |  | - | - | 2,078 | - | 2,078
Dividends paid on common stock ($0.08 per share) | - |  | - | - | (366) | - | (366)
Other comprehensive (loss) | - |  | - | - | - | (4,315) | (4,315)
Balance at September 30, 2023 | 4,543,338 |  | $ 9,723 | $ 35,253 | $ 34,931 | $ (29,778) | $ 50,129

9

See accompanying notes to these consolidated financial statements

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Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

Bank of the James Financial Group, Inc.’s (“Financial” or the “Company”) primary market area consists of the area commonly referred to as Region 2000 which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Within the last several years, the Company expanded into Charlottesville, Roanoke, Blacksburg, Harrisonburg, Lexington, Rustburg, and Wytheville.

The unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In management’s opinion the accompanying financial statements, which unless otherwise noted are unaudited, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information is contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2022. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2022 included in Financial’s Annual Report on Form 10-K. Results for the three and nine month periods ended September 30, 2023 is not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Note 2 – Significant Accounting Policies and 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. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses for loans.

Significant Accounting Policies and Estimates

Application of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements and notes for the year ended December 31, 2022 and are contained in the Company’s 2022 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

ASU 2016-13: On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. At adoption, the after

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Note 2 – Significant Accounting Policies and Estimates (continued)

tax impact to retained earnings was an approximate reduction of $1.6 million based on our evaluation as of that date. This adjustment consisted of increases to the allowance for credit losses on loans, as well as the Company’s allowance for unfunded loan commitments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did no t have any other-than-temporarily impaired investment securities. The Company did no t record an allowance for credit losses for securities classified as available-for-sale or held-to-maturity upon adoption.

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Allowance for Credit Losses - Held-to-Maturity Securities

The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit rating, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. Currently, the Company’s held-to-maturity securities consist completely of securities covered by the explicit or implied guarantee of the United States government or one of its agencies.

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company did no t have an allowance for credit losses on held-to-maturity securities as of September 30, 2023 or upon adoption of ASC 326.

Allowance for Credit Losses - Available-for-Sale Securities

Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.

As set forth under “Interest receivable” on the Company’s Consolidated Balance Sheets, accrued interest receivable on available-for-sale securities totaled approximately $1.09 million at September 30, 2023 and was excluded from the estimate of credit losses.

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Note 2 – Significant Accounting Policies and Estimates (continued)

Allowance for Credit Losses - Loans

The allowance for loan credit losses represents an amount which, in management’s judgment, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.

The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates and/or gross domestic product (“GDP”), to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statements of Income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the allowance for credit losses for both loans and held-to-maturity securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest totaled approximately $1.62 million on loans and $16 thousand on held-to-maturity securities at September 30, 2023, and is included in “Interest Receivable” on the Company’s Consolidated Balance Sheets.

ASU 2022-02: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the financial statements.

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Note 3 – Earnings Per Common Share (EPS)

The following is a summary of the earnings per share calculation for the three and nine months ended September 30, 2023 and 2022.

| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Net income | $ 2,078,000 |  | $ 2,574,000 |  | $ 6,596,000 |  | $ 7,005,000
Weighted average number of shares outstanding - basic and diluted | 4,543,338 |  | 4,683,581 |  | 4,568,789 |  | 4,721,423
Earnings per common share - basic and diluted | $ 0.46 |  | $ 0.55 |  | $ 1.44 |  | $ 1.48

In 2022, all restricted stock units (RSUs) were excluded from calculating diluted earnings per share as the Company elected to settle units vesting in 2022 wholly in cash. There are currently no outstanding RSUs as of September 30, 2023. There were no potentially dilutive shares outstanding in 2023 and 2022. Consequently, the weighted average shares and weighted average diluted shares were identical.

Note 4 – Stock Based Compensation

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards.

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

On January 2, 2019, the Company granted its first block of equity compensation under the 2018 Incentive Plan consisting of 24,500 restricted stock units. The recipients of restricted stock units do not receive shares of the Company’s stock immediately, but instead may receive shares, cash in lieu of shares, or a combination thereof upon satisfying the requisite service period specified by the terms and conditions of the grant. Additionally, the recipients of restricted stock units do not enjoy the rights of holder of the Company’s common stock until the units have vested and as such, they do not have voting rights or rights to nonforfeitable dividends. The related compensation expense is based on the fair value of the Company’s stock. The RSUs granted in 2019 vested over 3 years in thirds. The first one-third vested on January 2, 2020, the second one-third vested on January 2, 2021 and the final one-third vested January 2, 2022. The value of all of the vested portions of the grant were settled with cash payments and no shares were issued.

The total expense recognized for the three and nine months ended September 30, 2023 and 2022 in connection with the restricted stock unit awards was $0. At September 30, 2023, there is no further unrecognized stock-based compensation expense related to the restricted stock units granted on January 2, 2019 as all units have vested and have been settled.

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Note 5 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Fair Value on a Recurring Basis

Securities Available-for-Sale

Fair values of securities available-for sale are based on quoted prices available in an active market. If quoted prices are available, these securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow.

Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s securities are considered to be Level 2 securities.

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Note 5 – Fair Value Measurements (continued)

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

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

The below tables summarize the Company’s financial assets that were measured at fair value on a recurring basis during the period.

|  |  |  | Carrying Value at September 30, 2023 (in thousands)
|  |  |  | Quoted Prices |  | Significant |  | Significant
|  |  |  | in Active |  | Other |  | Unobservable
|  | Balance as of |  | Markets for |  | Observable |  | Inputs
|  | September 30, |  | Identical Assets |  | Inputs |  | (Level 3)
Description |  | 2023 |  | (Level 1) |  | (Level 2) |  |
U.S. Treasuries | $ | 4,884 |  | $ | — |  | $ | 4,884 |  | $ | —
U.S. agency obligations |  | 59,528 |  |  | — |  |  | 59,528 |  |  | —
Mortgage-backed securities |  | 65,285 |  |  | — |  |  | 65,285 |  |  | —
Municipals |  | 37,780 |  |  | — |  |  | 37,780 |  |  | —
Corporates |  | 14,500 |  |  | — |  |  | 14,500 |  |  | —
Total available-for-sale securities | $ | 181,977 |  | $ | — |  | $ | 181,977 |  | $ | —
IRLCs - asset |  | 50 |  |  | — |  |  | — |  |  | 50
Total assets at fair value | $ | 182,027 |  | $ | — |  | $ | 181,977 |  | $ | 50

|  |  |  | Carrying Value at December 31, 2022 (in thousands)
|  |  |  | Quoted Prices |  | Significant |  | Significant
|  |  |  | in Active |  | Other |  | Unobservable
| Balance as of |  | Markets for |  | Observable |  | Inputs
| December 31, |  | Identical Assets |  | Inputs |  | (Level 3)
Description | 2022 |  | (Level 1) |  | (Level 2) |  |
U.S. Treasuries | $ | 4,741 |  | $ | — |  | $ | 4,741 |  | $ | —
U.S. agency obligations |  | 59,273 |  |  | — |  |  | 59,273 |  |  | —
Mortgage-backed securities |  | 67,842 |  |  | — |  |  | 67,842 |  |  | —
Municipals |  | 37,855 |  |  | — |  |  | 37,855 |  |  | —
Corporates |  | 16,076 |  |  | — |  |  | 16,076 |  |  | —
Total available-for-sale securities | $ | 185,787 |  | $ | — |  | $ | 185,787 |  | $ | —
IRLCs – asset |  | 91 |  |  | — |  |  | — |  |  | 91
Total assets at fair value | $ | 185,878 |  | $ | — |  | $ | 185,787 |  | $ | 91

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Note 5 – Fair Value Measurements (continued)

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

| Quantitative information about Level 3 Fair Value Measurements for September 30, 2023
| (dollars in thousands)
| Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range (Weighted Average) (1)
Assets |  |  |  |  |  |  |  |
IRLCs – asset | $ | 50 |  | Market approach |  | Range of pull through rate |  | 70% - 100% (85%)

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

| Quantitative information about Level 3 Fair Value Measurements for December 31, 2022
| (dollars in thousands)
| Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range (Weighted Average) (1)
Assets |  |  |  |  |  |  |  |
IRLCs - asset | $ | 91 |  | Market approach |  | Range of pull through rate |  | 70% - 100% (85%)

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

Fair Value on a Non-recurring Basis

Collateral Dependent Loans with an ACLL

In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. As of September 30, 2023, we had no collateral dependent loans with an ACLL.

Loans held for sale

Loans held for sale are carried at cost which approximates estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the period ended September 30, 2023. Gains and losses on the sale of loans are recorded within gains on sales of loans held for sale on the Consolidated Statements of Income.

Other real estate owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of ASC 820.

Real estate acquired through foreclosure is transferred to OREO. The measurement of loss associated with OREO is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. The value of OREO property is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2).

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Note 5 – Fair Value Measurements (continued)

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

There was no OREO as of September 30, 2023.

The following table summarizes the Company’s collateral dependent loans and OREO measured at fair value on a nonrecurring basis as of December 31, 2022 (in thousands):

|  |  |  | Carrying Value at December 31, 2022
Description | Balance as of December 31, 2022 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Impaired loans* | $ | 854 |  | $ | — |  | $ | — |  | $ | 854
Other real estate owned |  | 566 |  |  | — |  |  | — |  |  | 566

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

The following table sets forth information regarding the quantitative inputs used to value assets classified as Level 3:

| Quantitative information about Level 3 Fair Value Measurements for December 31, 2022
| (dollars in thousands)
| Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range (Weighted Average) (1)
Assets |  |  |  |  |  |  |  |
Impaired loans | $ | 854 |  | Discounted appraised value |  | Selling cost |  | 0% - 10% (8%)
|  |  |  |  |  | Discount for lack of marketability and age of appraisal |  | 0% - 20% (6%)
OREO |  | 566 |  | Discounted appraised value |  | Selling cost |  | 10%
|  |  |  |  |  | Discount for lack of marketability and age of appraisal |  | 0% - 27% (26%)

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

Financial Instruments

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

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Note 5 – Fair Value Measurements (continued)

The estimated fair values, and related carrying or notional amounts, of Financial’s financial instruments and their placement in the fair value hierarchy at September 30, 2023 and December 31, 2022 was as follows (in thousands):

|  |  | Fair Value Measurements at September 30, 2023 using
|  |  | Quoted Prices |  | Significant |  |  |  |
|  |  | in Active |  | Other |  | Significant |  |
|  |  | Markets for |  | Observable |  | Unobservable |  |
| Carrying |  | Identical Assets |  | Inputs |  | Inputs |  |
Assets | Amounts |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | Balance
Cash and due from banks | $ 20,105 |  | $ 20,105 |  | $ - |  | $ - |  | $ 20,105
Federal funds sold | 79,424 |  | 79,424 |  | - |  | - |  | 79,424
Securities |  |  |  |  |  |  |  |  |
Available-for-sale | 181,977 |  | - |  | 181,977 |  | - |  | 181,977
Held-to-maturity, net | 3,626 |  | - |  | 3,028 |  | - |  | 3,028
Restricted stock | 1,541 |  | - |  | 1,541 |  | - |  | 1,541
Loans, net (1) | 599,585 |  | - |  | - |  | 561,420 |  | 561,420
Loans held for sale | 3,325 |  | - |  | 3,325 |  | - |  | 3,325
Interest receivable | 2,707 |  | - |  | 2,707 |  | - |  | 2,707
BOLI | 21,443 |  | - |  | 21,443 |  | - |  | 21,443
Derivatives - IRLCs | 50 |  | - |  | - |  | 50 |  | 50
Liabilities |  |  |  |  |  |  |  |  |
Deposits | $ 880,203 |  | $ - |  | $ 876,005 |  | $ - |  | 876,005
Capital notes | 10,041 |  | - |  | 9,411 |  | - |  | 9,411
Other borrowings | 10,030 |  | - |  | 9,532 |  | - |  | 9,532
Interest payable | 381 |  | - |  | 381 |  | - |  | 381
|  |  | Fair Value Measurements at December 31, 2022 using
|  |  | Quoted Prices |  | Significant |  |  |  |
|  |  | in Active |  | Other |  | Significant |  |
|  |  | Markets for |  | Observable |  | Unobservable |  |
| Carrying |  | Identical Assets |  | Inputs |  | Inputs |  |
Assets | Amounts |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | Balance
Cash and due from banks | 30,025 |  | $ 30,025 |  | $ - |  | $ - |  | $ 30,025
Federal funds sold | 31,737 |  | 31,737 |  | - |  | - |  | 31,737
Securities |  |  |  |  |  |  |  |  |
Available-for-sale | 185,787 |  | - |  | 185,787 |  | - |  | 185,787
Held-to-maturity | 3,639 |  | - |  | 3,135 |  | - |  | 3,135
Restricted stock | 1,387 |  | - |  | 1,387 |  | - |  | 1,387
Loans, net (1) | 605,366 |  | - |  | — |  | 564,802 |  | 564,802
Loans held for sale | 2,423 |  | - |  | 2,423 |  | - |  | 2,423
Interest receivable | 2,736 |  | - |  | 2,736 |  | - |  | 2,736
BOLI | 19,237 |  | - |  | 19,237 |  | - |  | 19,237
Derivatives - IRLCs | 91 |  | - |  | — |  | 91 |  | 91
Liabilities |  |  |  |  |  |  |  |  |
Deposits | $ 848,138 |  | $ - |  | $ 850,102 |  | $ - |  | $ 850,102
Capital notes | 10,037 |  | - |  | 9,200 |  | - |  | 9,200
Other borrowings | 10,457 |  | - |  | 9,438 |  | - |  | 9,438
Interest payable | 89 |  | - |  | 89 |  | - |  | 89

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

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Note 6 – Securities

The following tables summarize the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of September 30, 2023 and December 31, 2022 (amounts in thousands):

| September 30, 2023
| Amortized |  | Gross Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
Held-to-maturity |  |  |  |  |  |  |  |  |  |  |
U.S. agency obligations | $ | 3,626 |  | $ | — |  | $ | (598) |  | $ | 3,028
Available-for-sale |  |  |  |  |  |  |  |  |  |  |
U.S. Treasuries | $ | 4,967 |  | $ | — |  | $ | (83) |  | $ | 4,884
U.S. agency obligations |  | 69,591 |  |  | — |  |  | (10,063) |  |  | 59,528
Mortgage-backed securities |  | 78,702 |  |  | — |  |  | (13,417) |  |  | 65,285
Municipals |  | 50,884 |  |  | — |  |  | (13,104) |  |  | 37,780
Corporates |  | 15,527 |  |  | — |  |  | (1,027) |  |  | 14,500
| $ | 219,671 |  | $ | — |  | $ | (37,694) |  | $ | 181,977
| December 31, 2022
| Amortized |  | Gross Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
Held-to-maturity |  |  |  |  |  |  |  |  |  |  |
U.S. agency obligations | $ | 3,639 |  | $ | — |  | $ | (504) |  | $ | 3,135
Available-for-sale |  |  |  |  |  |  |  |  |  |  |
U.S. Treasuries | $ | 4,912 |  | $ | — |  | $ | (171) |  | $ | 4,741
U.S. agency obligations |  | 68,833 |  |  | — |  |  | (9,560) |  |  | 59,273
Mortgage-backed securities |  | 78,955 |  |  | — |  |  | (11,113) |  |  | 67,842
Municipals |  | 49,951 |  |  | — |  |  | (12,096) |  |  | 37,855
Corporates |  | 17,037 |  |  | — |  |  | (961) |  |  | 16,076
| $ | 219,688 |  | $ | — |  | $ | (33,901) |  | $ | 185,787

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Note 6 – Securities (continued)

The following tables summarize the fair value of securities available for sale as of September 30, 2023 and securities available for sale and held-to- maturity as of December 31, 2022 and the corresponding amounts of unrealized losses. Management uses the valuation as of month-end in determining when securities are in an unrealized loss position (amounts in thousands):

September 30, 2023 | Less than 12 months |  | More than 12 months |  | Total
| Fair |  | Unrealized |  | Fair |  | Unrealized |  | Fair |  | Unrealized
| Value |  | Losses |  | Value |  | Losses |  | Value |  | Losses
Available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasuries | $ | — |  | $ | — |  | $ | 4,884 |  | $ | 83 |  | $ | 4,884 |  | $ | 83
U.S. agency obligations |  | 996 |  |  | 1 |  |  | 58,532 |  |  | 10,062 |  |  | 59,528 |  |  | 10,063
Mortgage-backed securities |  | 5,154 |  |  | 120 |  |  | 60,131 |  |  | 13,297 |  |  | 65,285 |  |  | 13,417
Municipals |  | 1,638 |  |  | 183 |  |  | 36,142 |  |  | 12,921 |  |  | 37,780 |  |  | 13,104
Corporates |  | — |  |  | — |  |  | 6,500 |  |  | 1,027 |  |  | 6,500 |  |  | 1,027
Total | $ | 7,788 |  | $ | 304 |  | $ | 166,189 |  | $ | 37,390 |  | $ | 173,977 |  | $ | 37,694
December 31, 2022 | Less than 12 months |  | More than 12 months |  | Total
| Fair |  | Unrealized |  | Fair |  | Unrealized |  | Fair |  | Unrealized
| Value |  | Losses |  | Value |  | Losses |  | Value |  | Losses
Held-to-maturity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. agency obligations | $ | 3,135 |  | $ | 504 |  | $ | — |  | $ | — |  | $ | 3,135 |  | $ | 504
Available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasuries |  | 4,741 |  |  | 171 |  |  | — |  |  | — |  |  | 4,741 |  |  | 171
U.S. agency obligations |  | 27,708 |  |  | 2,838 |  |  | 31,565 |  |  | 6,722 |  |  | 59,273 |  |  | 9,560
Mortgage-backed securities |  | 42,024 |  |  | 5,656 |  |  | 25,818 |  |  | 5,457 |  |  | 67,842 |  |  | 11,113
Municipals |  | 10,847 |  |  | 2,245 |  |  | 27,008 |  |  | 9,851 |  |  | 37,855 |  |  | 12,096
Corporates |  | 6,568 |  |  | 469 |  |  | 1,508 |  |  | 492 |  |  | 8,076 |  |  | 961
Total temporarily impaired securities | $ | 95,023 |  | $ | 11,883 |  | $ | 85,899 |  | $ | 22,522 |  | $ | 180,922 |  | $ | 34,405

As of September 30, 2023, the Bank owned 121 securities in an unrealized loss position. Of the securities, 51 were S&P rated AAA, 63 were rated AA, five were rated A, one was rated BBB, and one was non-rated. As of September 30, 2023, 53 of these securities were municipal issues, 60 were backed by the U.S. government, and eight were issues of publicly traded domestic corporations. The Company monitors its municipal and corporate securities by periodically reviewing the issuer’s cash-flow and revenue streams, as well as other economic factors that could affect the issuer’s ability to service and/or repay the debt.

The Company has evaluated available for sale securities in an unrealized loss position for credit related impairment at September 30, 2023 and concluded no impairment existed based on a combination of factors, which included: (1) the securities are of high credit quality (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuers to settle the securities at a price less than the par value of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments before recovery of its amortized cost basis, nor is it likely that management will be required to sell the securities. As such, there was no t an allowance for credit losses on available-for-sale securities at September 30, 2023.

The Company’s held-to-maturity portfolio is covered by the explicit or implied guarantee of the United States government or one of its agencies and rated investment grade or higher. As a result, the Company did not have an allowance for credit losses on held-to-maturity securities as of September 30, 2023 or upon adoption of ASC 326.

All held-to-maturity and available for sale securities were current with no securities past due or on nonaccrual as of September 30, 2023.

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Note 6 – Securities (continued)

There were no sales of available-for-sale securities during the three and nine months ended September 30, 2023 and 2022.

The amortized costs and fair values of securities at September 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

| September 30, 2023
| Amortized |  |
| Costs |  | Fair Value
Held-to-maturity: |  |  |
Due in one year or less | $ - |  | $ -
Due after one year through five years | - |  | -
Due after five years through ten years | 2,422 |  | 2,079
Due after ten years | 1,204 |  | 949
Total securities Held-to-maturity | $ 3,626 |  | $ 3,028
| Amortized |  |
| Costs |  | Fair Value
Available-for-sale: |  |  |
Due in one year or less | $ 5,963 |  | $ 5,879
Due after one year through five years | 43,680 |  | 39,461
Due after five years through ten years | 66,288 |  | 56,046
Due after ten years | 103,740 |  | 80,591
Total securities Available-for-sale | $ 219,671 |  | $ 181,977

Note 7 – Business Segments

The Company has three reportable business segments: (i) a traditional full-service community banking segment, (ii) a mortgage loan origination business, and (iii) a registered investment advisory business (sometimes referred to as the wealth management business). The community banking business segment includes Bank of the James which provides loans, deposits, investments and insurance to retail and commercial customers throughout Region 2000 and other areas within Central Virginia. The mortgage segment provides a variety of mortgage loan products principally within Region 2000. Mortgage loans are originated and sold in the secondary market through purchase commitments from investors with servicing released. Because of the pre-arranged purchase commitments, there is minimal risk to the Company. The investment advisory business offers investment advisory services through Financial’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc.

All of the Company’s reportable segments are service based. The mortgage business is a gain on sale business and the investment advisory business is fee for service based, while the Bank’s primary source of revenue is net interest income. The Bank also provides a referral network for the mortgage origination business and the investment advisory business. The mortgage business may also be in a position to refer its customers to the Bank for banking services when appropriate.

Information about reportable business segments and reconciliation of such information to the consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 was as follows (dollars in thousands):

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Note 7 – Business Segments (continued)

Business Segments |  |  |  |  | Investment |  |
| Community |  |  |  | Advisory |  |
| Banking |  | Mortgage |  | Services |  | Total
For the three months ended September 30, 2023 |  |  |  |  |  |  |
Net interest income | $ 7,364 |  | $ - |  | $ - |  | $ 7,364
Recovery of credit losses | (164) |  | - |  | - |  | (164)
Net interest income after recovery of credit losses | 7,528 |  | - |  | - |  | 7,528
Noninterest income | 1,162 |  | 989 |  | 1,050 |  | 3,201
Noninterest expenses | 6,661 |  | 1,073 |  | 406 |  | 8,140
Income (loss) before income taxes | 2,029 |  | (84) |  | 644 |  | 2,589
Income tax expense (benefit) | 393 |  | (17) |  | 135 |  | 511
Net income (loss) | $ 1,636 |  | $ (67) |  | $ 509 |  | $ 2,078
Total assets | $ 945,407 |  | $ 3,781 |  | $ 11,699 |  | $ 960,887
For the three months ended September 30, 2022 |  |  |  |  |  |  |
Net interest income | $ 7,900 |  | $ - |  | $ - |  | $ 7,900
Recovery of credit losses | (300) |  | - |  | - |  | (300)
Net interest income after recovery of credit losses | 8,200 |  | - |  | - |  | 8,200
Noninterest income | 1,423 |  | 1,472 |  | 959 |  | 3,854
Noninterest expenses | 7,095 |  | 1,280 |  | 504 |  | 8,879
Income before income taxes | 2,528 |  | 192 |  | 455 |  | 3,175
Income tax expense | 505 |  | 40 |  | 56 |  | 601
Net income | $ 2,023 |  | $ 152 |  | $ 399 |  | $ 2,574
Total assets | $ 944,890 |  | $ 4,081 |  | $ 13,599 |  | $ 962,570
|  |  |  |  | Investment |  |
| Community |  |  |  | Advisory |  |
| Banking |  | Mortgage |  | Services |  | Total
For the nine months ended September 30, 2023 |  |  |  |  |  |  |
Net interest income | $ 22,351 |  | $ - |  | $ - |  | $ 22,351
Recovery of credit losses | (278) |  | - |  | - |  | (278)
Net interest income after recovery of credit losses | 22,629 |  | - |  | - |  | 22,629
Noninterest income | 3,526 |  | 3,065 |  | 3,098 |  | 9,689
Noninterest expenses | 19,751 |  | 2,705 |  | 1,635 |  | 24,091
Income before income taxes | 6,404 |  | 360 |  | 1,463 |  | 8,227
Income tax expense | 1,248 |  | 76 |  | 307 |  | 1,631
Net income | $ 5,156 |  | $ 284 |  | $ 1,156 |  | $ 6,596
Total assets | $ 945,407 |  | $ 3,781 |  | $ 11,699 |  | $ 960,887
For the nine months ended September 30, 2022 |  |  |  |  |  |  |
Net interest income | $ 21,414 |  | $ - |  | $ - |  | $ 21,414
Recovery of credit losses | (900) |  | - |  | - |  | (900)
Net interest income after recovery of credit losses | 22,314 |  | - |  | - |  | 22,314
Noninterest income | 2,909 |  | 4,675 |  | 2,935 |  | 10,519
Noninterest expenses | 18,596 |  | 3,889 |  | 1,634 |  | 24,119
Income before income taxes | 6,627 |  | 786 |  | 1,301 |  | 8,714
Income tax expense | 1,310 |  | 165 |  | 234 |  | 1,709
Net income | $ 5,317 |  | $ 621 |  | $ 1,067 |  | $ 7,005
Total assets | $ 944,890 |  | $ 4,081 |  | $ 13,599 |  | $ 962,570

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Note 8 – Loans, allowance for credit losses and OREO

On January 1, 2023, the Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Accordingly, the Company’s financials results for reporting periods beginning after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts have not been adjusted and continue to be reported with legacy GAAP. For a detailed discussion of the impact of the adoption of ASU 2016-13 and information related to loans and credit quality, including accounting policies and methodologies used to estimate the allowance for credit losses, see Note 1.

The Company’s primary portfolio segments have changed to align with the methodology applied in estimating the allowance for credit losses under CECL and are reflected as such in the disclosures as of and for the period ended September 30, 2023 as provided below.

Previously, management’s established methodology used to determine the adequacy of the allowance for credit losses that assessed the risks and losses expected in the loan portfolio. For purposes of determining the allowance for credit losses prior to the adoption of CECL, the Bank segmented certain loans in the portfolio by product type. Within these segments, the Bank sub-segmented its portfolio into classes, based on the associated risks. The classifications set forth below for December 31, 2022 and prior periods do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management determined that after the adoption of CECL, the classifications set forth below were more appropriate for use in identifying and managing risk in the loan portfolio.

Loan Segments After CECL Adoption: |  | Loan Classes After CECL Adoption:
Commercial |  | Commercial and Industrial Loans
Commercial Real Estate |  | Commercial Mortgages – Owner Occupied
|  | Commercial Mortgages – Non-Owner Occupied
|  | Commercial Construction/Land
Consumer |  | Consumer Open-End
|  | Consumer Closed-End
Residential |  | Residential Mortgages
|  | Residential Consumer Construction/Land

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

A summary of loans, net (1) is as follows (dollars in thousands):

| As of
| September 30, 2023
Commercial | $ 65,827
Commercial Real Estate: |
Commercial Mortgages-Owner Occupied | 128,646
Commercial Mortgages-Non-Owner Occupied | 177,073
Commercial Construction/Land | 23,745
Consumer |
Consumer Open-End | 52,023
Consumer Closed-End | 25,908
Residential: |
Residential Mortgages | 103,273
Residential Consumer Construction/Land | 30,410
Total loans | $ 606,905
Less allowance for credit losses | 7,320
Net loans | $ 599,585
| As of
| December 31, 2022
Commercial | $ 95,885
Commercial Real Estate: |
Commercial Mortgages-Owner Occupied | 135,189
Commercial Mortgages-Non-Owner Occupied | 206,701
Commercial Construction | 12,135
Consumer |
Consumer Unsecured | 2,828
Consumer Secured | 95,131
Residential: |
Residential Mortgages | 43,049
Residential Consumer Construction | 20,707
Total loans | $ 611,625
Less allowance for credit losses | 6,259
Net loans | $ 605,366

(1)Includes net deferred costs of $982 and $1,114 as of September 30, 2023 and December 31, 2022, respectively.

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

The following table presents the amortized cost basis of collateral dependent loans by loan segment:

Collateral Dependent Loans |  | September 30, 2023
(dollars in thousands) |  | Business/Other Assets |  | Real Estate
Commercial |  | $ 394 |  | $ -
Commercial Real Estate |  | - |  | 3,736
Consumer |  | - |  | 307
Residential |  | - |  | 1,114
Total |  | $ 394 |  | $ 5,157

Impaired loans by class as of and for the period ended December 31, 2022 were as follows:

|  | Impaired Loans
|  | (dollars in thousands)
|  | As of and For the Year Ended December 31, 2022
|  |  |  | Unpaid |  |  |  | Average |  | Interest
|  | Recorded |  | Principal |  | Related |  | Recorded |  | Income
2022 |  | Investment (1) |  | Balance |  | Allowance |  | Investment |  | Recognized
With No Related Allowance Recorded: |  |  |  |  |  |  |  |  |
| Commercial | $ - |  | $ - |  | $ - |  | 9 |  | -
| Commercial Real Estate |  |  |  |  |  |  |  |  |
| Commercial Mortgages-Owner Occupied | 554 |  | 581 |  | - |  | 1,573 |  | 48
| Commercial Mortgage Non-Owner Occupied | 518 |  | 526 |  | - |  | 310 |  | 23
| Commercial Construction | - |  | - |  | - |  | - |  | -
| Consumer |  |  |  |  |  |  |  |  |
| Consumer Unsecured | - |  | - |  | - |  | - |  | -
| Consumer Secured | 249 |  | 249 |  | - |  | 154 |  | 12
| Residential |  |  |  |  |  |  |  |  |
| Residential Mortgages | 1,345 |  | 1,428 |  | - |  | 1,331 |  | 54
| Residential Consumer Construction | - |  | - |  | - |  | - |  | -
With an Allowance Recorded: |  |  |  |  |  |  |  |  |
| Commercial | $ - |  | $ - |  | $ - |  | - |  | -
| Commercial Real Estate |  |  |  |  |  |  |  |  |
| Commercial Mortgages-Owner Occupied | - |  | - |  | - |  | - |  | -
| Commercial Mortgage Non-Owner Occupied | - |  | - |  | - |  | - |  | -
| Commercial Construction | - |  | - |  | - |  | - |  | -
| Consumer |  |  |  |  |  |  |  |  |
| Consumer Unsecured | - |  | - |  | - |  | - |  | -
| Consumer Secured | - |  | - |  | - |  | - |  | -
| Residential |  |  |  |  |  |  |  |  |
| Residential Mortgages | - |  | - |  | - |  | - |  | -
| Residential Consumer Construction | - |  | - |  | - |  | - |  | -
Totals: |  |  |  |  |  |  |  |  |
| Commercial | $ - |  | $ - |  | $ - |  | $ 9 |  | $ -
| Commercial Real Estate |  |  |  |  |  |  |  |  |
| Commercial Mortgages-Owner Occupied | 554 |  | 581 |  | - |  | 1,573 |  | 48
| Commercial Mortgage Non-Owner Occupied | 518 |  | 526 |  | - |  | 310 |  | 23
| Commercial Construction | - |  | - |  | - |  | - |  | -
| Consumer |  |  |  |  |  |  |  |  |
| Consumer Unsecured | - |  | - |  | - |  | - |  | -
| Consumer Secured | 249 |  | 249 |  | - |  | 154 |  | 12
| Residential |  |  |  |  |  |  |  |  |
| Residential Mortgages | 1,345 |  | 1,428 |  | - |  | 1,331 |  | 54
| Residential Consumer Construction | - |  | - |  | - |  | - |  | -
|  | $ 2,666 |  | $ 2,784 |  | $ - |  | $ 3,377 |  | $ 137

(1)Recorded Investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

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

The following tables present the activity in the allowance for credit losses for the year-to-date periods ended and the distribution of the allowance by segment as of September 30, 2023 and December 31, 2022.

| Allowance for Credit Losses and Recorded Investment in Loans
| (dollars in thousands)
| As of and For the Nine Months Ended September 30, 2023
|  |  | Commercial |  |  |  |  |  |
2023 | Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
Allowance for Credit Losses: |  |  |  |  |  |  |  |  |
Beginning Balance, December 31, 2022 | $ 1,102 |  | $ 2,902 |  | $ 904 |  | $ 1,351 |  | $ 6,259
Adoption of ASU 2016-13 | (526) |  | 1,157 |  | 257 |  | 357 |  | 1,245
Charge-Offs | (137) |  | - |  | (56) |  | (3) |  | (196)
Recoveries | 50 |  | 91 |  | 42 |  | 17 |  | 200
Provision (Recovery of) | 23 |  | (187) |  | (41) |  | 17 |  | (188)
Ending Balance, September 30, 2023 | 512 |  | 3,963 |  | 1,106 |  | 1,739 |  | 7,320
Ending Balance: Individually evaluated | - |  | - |  | - |  | - |  | -
Ending Balance: Collectively evaluated | 512 |  | 3,963 |  | 1,106 |  | 1,739 |  | 7,320
Totals: | $ 512 |  | $ 3,963 |  | $ 1,106 |  | $ 1,739 |  | $ 7,320
Financing Receivables: |  |  |  |  |  |  |  |  |
Ending Balance: Individually evaluated | $ 394 |  | $ 3,736 |  | $ 307 |  | $ 1,114 |  | $ 5,551
Ending Balance: Collectively evaluated | 65,433 |  | 325,728 |  | 77,624 |  | 132,569 |  | 601,354
Totals: | $ 65,827 |  | $ 329,464 |  | $ 77,931 |  | $ 133,683 |  | $ 606,905

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

| As of and For the Year Ended December 31, 2022
|  |  | Commercial |  |  |  |  |  |
2022 | Commercial |  | Real Estate |  | Consumer |  | Residential |  | Total
Allowance for Credit Losses: |  |  |  |  |  |  |  |  |
Beginning Balance | $ 1,471 |  | $ 3,637 |  | $ 860 |  | $ 947 |  | $ 6,915
Charge-Offs | - |  | (137) |  | (25) |  | - |  | (162)
Recoveries | 104 |  | 212 |  | 18 |  | 72 |  | 406
Provision (Recovery of) | (473) |  | (810) |  | 51 |  | 332 |  | (900)
Ending Balance | 1,102 |  | 2,902 |  | 904 |  | 1,351 |  | 6,259
Ending Balance: Individually evaluated for impairment | - |  | - |  | - |  | - |  | -
Ending Balance: Collectively evaluated for impairment | 1,102 |  | 2,902 |  | 904 |  | 1,351 |  | 6,259
Totals: | $ 1,102 |  | $ 2,902 |  | $ 904 |  | $ 1,351 |  | $ 6,259
Financing Receivables: |  |  |  |  |  |  |  |  |
Ending Balance: Individually evaluated for impairment | $ - |  | $ 1,072 |  | $ 249 |  | $ 1,345 |  | $ 2,666
Ending Balance: Collectively evaluated for impairment | 95,885 |  | 352,953 |  | 97,710 |  | 62,411 |  | 608,959
Totals: | $ 95,885 |  | $ 354,025 |  | $ 97,959 |  | $ 63,756 |  | $ 611,625

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

Credit Quality Indicators

The Bank’s internal risk rating system is in place to grade commercial and commercial real estate loans. Category ratings are reviewed periodically by lenders and the credit review area of the Bank based on the borrower’s individual situation. Additionally, internal and external monitoring and review of credits are conducted on an annual basis.

Below is a summary and definition of the Bank’s risk rating categories:

RATING 1 |  | Excellent
RATING 2 |  | Above Average
RATING 3 |  | Satisfactory
RATING 4 |  | Acceptable / Low Satisfactory
RATING 5 |  | Monitor
RATING 6 |  | Special Mention
RATING 7 |  | Substandard
RATING 8 |  | Doubtful
RATING 9 |  | Loss

We segregate loans into the above categories based on the following criteria and we review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:

“Pass.” These are loans having risk ratings of 1 through 4. Pass loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

“Monitor.” These are loans having a risk rating of 5. Monitor loans have currently acceptable risk but may have the potential for a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may currently or in the future be characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

“Special Mention.” These are loans having a risk rating of 6. Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. These loans do warrant more than routine monitoring due to a weakness caused by adverse events.

“Substandard.” These are loans having a risk rating of 7. Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provides evidence that it is probable that the Bank will be unable to collect all amounts due.

“Doubtful.” These are loans having a risk rating of 8. Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

“Loss.” These are loans having a risk rating of 9. Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

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

The table below details the amortized cost of the classes of loans by credit quality indicator and year of origination as of September 30, 2023.

| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
| 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Cost Basis |  | Total |  | Revolving Loans Converted to Term
Commercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 5,114 |  | $ 4,921 |  | $ 9,499 |  | $ 7,010 |  | $ 2,974 |  | $ 19,014 |  | $ 16,426 |  | $ 64,958 |  | $ 43
Special Mention | - |  | - |  | - |  | 134 |  | - |  | - |  | 269 |  | 403 |  | -
Substandard | - |  | 19 |  | 233 |  | - |  | 7 |  | 207 |  | - |  | 466 |  | 180
Total | $ 5,114 |  | $ 4,940 |  | $ 9,732 |  | $ 7,144 |  | $ 2,981 |  | $ 19,221 |  | $ 16,695 |  | $ 65,827 |  | $ 223
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Mort. - Owner Occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 6,944 |  | $ 22,122 |  | $ 46,430 |  | $ 8,181 |  | $ 9,141 |  | $ 32,094 |  | $ 1,115 |  | $ 126,027 |  | $ 162
Special Mention | - |  | - |  | - |  | - |  | - |  | 462 |  | - |  | 462 |  | -
Substandard | 94.00 |  | 107 |  | - |  | 46 |  | 290 |  | 1,620 |  | - |  | 2,157 |  | -
Total | $ 7,038 |  | $ 22,229 |  | $ 46,430 |  | $ 8,227 |  | $ 9,431 |  | $ 34,176 |  | $ 1,115 |  | $ 128,646 |  | $ 162
Commercial Mort. - Non-Owner Occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 11,874 |  | $ 52,960 |  | $ 35,694 |  | $ 10,344 |  | $ 4,466 |  | $ 54,146 |  | $ 6,416 |  | $ 175,900 |  | $ -
Special Mention | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Substandard | - |  | - |  | - |  | - |  | 1,173 |  | - |  | - |  | 1,173 |  | -
Total | $ 11,874 |  | $ 52,960 |  | $ 35,694 |  | $ 10,344 |  | $ 5,639 |  | $ 54,146 |  | $ 6,416 |  | $ 177,073 |  | $ -
Commercial Construction/Land |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 553 |  | $ 6,290 |  | $ 9,935 |  | $ 3,096 |  | $ 635 |  | $ 473 |  | $ 2,357 |  | $ 23,339 |  | $ -
Special Mention | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Substandard | - |  | - |  | 406 |  | - |  | - |  | - |  | - |  | 406 |  | -
Total | $ 553 |  | $ 6,290 |  | $ 10,341 |  | $ 3,096 |  | $ 635 |  | $ 473 |  | $ 2,357 |  | $ 23,745 |  | $ -
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer - Open-End |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ - |  | $ - |  | $ - |  | $ - |  | $ - |  | $ - |  | $ 51,804 |  | $ 51,804 |  | $ 1,081
Special Mention | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Substandard | - |  | - |  | - |  | - |  | - |  | - |  | 219 |  | 219 |  | -
Total | $ - |  | $ - |  | $ - |  | $ - |  | $ - |  | $ - |  | $ 52,023 |  | $ 52,023 |  | $ 1,081
Consumer - Closed-End |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 4,128 |  | $ 11,680 |  | $ 675 |  | $ 562 |  | $ 8,034 |  | $ 665 |  | $ - |  | $ 25,744 |  | $ -
Special Mention | - |  | - |  | - |  | 15 |  | - |  | - |  | - |  | 15 |  | -
Substandard | - |  | - |  | - |  | - |  | 32 |  | 117 |  | - |  | 149 |  | -
Total | $ 4,128 |  | $ 11,680 |  | $ 675 |  | $ 577 |  | $ 8,066 |  | $ 782 |  | $ - |  | $ 25,908 |  | $ -

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Table of Contents

Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Mortgages |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 22,245 |  | $ 24,834 |  | $ 10,276 |  | $ 9,110 |  | $ 7,260 |  | $ 26,378 |  | $ - |  | $ 100,103 |  | $ -
Special Mention | - |  | - |  | - |  | - |  | - |  | 1,716 |  | - |  | 1,716 |  | -
Substandard | - |  | - |  | - |  | 105 |  | 56 |  | 1,293 |  | - |  | 1,454 |  | -
Total | $ 22,245 |  | $ 24,834 |  | $ 10,276 |  | $ 9,215 |  | $ 7,316 |  | $ 29,387 |  | $ - |  | $ 103,273 |  | $ -
Residential Consumer Constr./Land |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 6,116 |  | $ 10,745 |  | $ 6,270 |  | $ 2,520 |  | $ 2,173 |  | $ 2,586 |  | $ - |  | $ 30,410 |  | $ -
Special Mention | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Substandard | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |  | -
Total | $ 6,116 |  | $ 10,745 |  | $ 6,270 |  | $ 2,520 |  | $ 2,173 |  | $ 2,586 |  | $ - |  | $ 30,410 |  | $ -
Totals: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ 56,974 |  | $ 133,552 |  | $ 118,779 |  | $ 40,823 |  | $ 34,683 |  | $ 135,356 |  | $ 78,118 |  | $ 598,285 |  | $ 1,286
Special Mention | - |  | - |  | - |  | 149 |  | - |  | 2,178 |  | 269 |  | 2,596 |  | -
Substandard | 94 |  | 126 |  | 639 |  | 151 |  | 1,558 |  | 3,237 |  | 219 |  | 6,024 |  | 180
Total | $ 57,068 |  | $ 133,678 |  | $ 119,418 |  | $ 41,123 |  | $ 36,241 |  | $ 140,771 |  | $ 78,606 |  | $ 606,905 |  | $ 1,466

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

The following table details the current period gross charge-offs of loans by year of origination as of September 30, 2023

Current Period Gross Charge-Offs by Origination Year (in thousands)
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total | Revolving Loans Converted to Term
Commercial | $ - | $ - | $ - | $ 17 | $ - | $ 120 | $ - | $ 137 | $ -
Commercial Real Estate: |  |  |  |  |  |  |  |  |
Commercial Mortgages-Owner Occupied | - | - | - | - | - | - | - | - | -
Commercial Mortgages-Non-Owner Occupied | - | - | - | - | - | - | - | - | -
Commercial Construction/Land | - | - | - | - | - | - | - | - | -
Consumer: |  |  |  |  |  |  |  |  |
Consumer Open-End | - | - | - | - | - | 6 | 6 | 12 | -
Consumer Closed-End | - | 25 | 19 | - | - | - | - | 44 | -
Residential: |  |  |  |  |  |  |  |  |
Residential Mortgages | - | - | - | - | - | 3 | - | 3 | -
Residential Consumer Construction/Land | - | - | - | - | - | - | - | - | -
Total | $ - | $ 25 | $ 19 | $ 17 | $ - | $ 129 | $ 6 | $ 196 | $ -

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

The following tables present credit quality information by class of loans as of December 31, 2022.

Credit Quality Information - by Class
December 31, 2022
2022 |  | Pass |  |  | Monitor |  |  | Special |  |  | Substandard |  |  | Doubtful |  |  | Totals
|  |  |  |  |  |  |  | Mention |  |  |  |  |  |  |  |  |
Commercial | $ | 89,889 |  | $ | 4,418 |  | $ | 1,465 |  | $ | 113 |  | $ | — |  | $ | 95,885
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Mortgages-Owner Occupied |  | 132,686 |  |  | 1,931 |  |  | — |  |  | 572 |  |  | — |  |  | 135,189
Commercial Mortgages-Non-Owner Occupied |  | 204,810 |  |  | — |  |  | 1,182 |  |  | 709 |  |  | — |  |  | 206,701
Commercial Construction |  | 12,126 |  |  | 9 |  |  | — |  |  | — |  |  | — |  |  | 12,135
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Unsecured |  | 2,809 |  |  | — |  |  | 19 |  |  | — |  |  | — |  |  | 2,828
Consumer Secured |  | 94,788 |  |  | — |  |  | — |  |  | 343 |  |  | — |  |  | 95,131
Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Mortgages |  | 41,591 |  |  | — |  |  | — |  |  | 1,458 |  |  | — |  |  | 43,049
Residential Consumer Construction |  | 19,178 |  |  | 1,529 |  |  | — |  |  | — |  |  | — |  |  | 20,707
Totals | $ | 597,877 |  | $ | 7,887 |  | $ | 2,666 |  | $ | 3,195 |  | $ | — |  | $ | 611,625

Loans on Non-Accrual Status

(dollars in thousands)

| CECL |  | Incurred Loss
| September 30, 2023 |  | December 31, 2022
| Nonaccrual Loans |  | Nonaccrual Loans
| With No Allowance | With an Allowance | Total |  |
Commercial | $ 72 | $ - | $ 72 |  | $ -
Commercial Real Estate: |  |  |  |  |
Commercial Mortgages – Owner Occupied | 107 | - | 107 |  | -
Commercial Mortgages-Non-Owner Occupied | - | - | - |  | 518
Commercial Construction/Land | 406 | - | 406 |  | -
Consumer |  |  |  |  |
Consumer Open-End | - | - | - |  | -
Consumer Closed-End | - | - | - |  | 20
Residential: |  |  |  |  |
Residential Mortgages | - | - | - |  | 95
Residential Consumer Construction | - | - | - |  | -
Total | $ 585 | $ - | $ 585 |  | $ 633

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

The following tables present an aging analysis of the loan portfolio by class and past due as of September 30, 2023 and December 31, 2022.

Age Analysis of Past Due Loans as of September 30, 2023
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Recorded
|  |  |  |  |  |  |  | Greater |  |  |  |  |  |  |  |  |  |  |  | Investment
2023 |  | 30-59 Days |  |  | 60-89 Days |  |  | than |  |  | Total Past |  |  |  |  |  | Total |  |  | > 90 Days &
|  | Past Due |  |  | Past Due |  |  | 90 Days |  |  | Due |  |  | Current |  |  | Loans |  |  | Accruing
Commercial | $ | 72 |  | $ | — |  | $ | — |  | $ | 72 |  | $ | 65,755 |  | $ | 65,827 |  | $ | —
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Mortgages-Owner Occupied |  | — |  |  | 107 |  |  | — |  |  | 107 |  |  | 128,539 |  |  | 128,646 |  |  | —
Commercial Mortgages-Non-Owner Occupied |  | — |  |  | — |  |  | — |  |  | — |  |  | 177,073 |  |  | 177,073 |  |  | —
Commercial Construction/Land |  | — |  |  | — |  |  | — |  |  | — |  |  | 23,745 |  |  | 23,745 |  |  | —
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Open-End |  | 175 |  |  | — |  |  | — |  |  | 175 |  |  | 51,848 |  |  | 52,023 |  |  | —
Consumer Closed-End |  | 162 |  |  | — |  |  | — |  |  | 162 |  |  | 25,746 |  |  | 25,908 |  |  | —
Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Mortgages |  | 595 |  |  | — |  |  | — |  |  | 595 |  |  | 102,678 |  |  | 103,273 |  |  | —
Residential Consumer Construction/Land |  | — |  |  | — |  |  | — |  |  | — |  |  | 30,410 |  |  | 30,410 |  |  | —
Total | $ | 1,004 |  | $ | 107 |  | $ | — |  | $ | 1,111 |  | $ | 605,794 |  | $ | 606,905 |  | $ | —

Age Analysis of Past Due Loans as of December 31, 2022
2022 |  |  |  |  |  |  |  | Greater |  |  |  |  |  |  |  |  |  |  |  | Investment
|  | 30-59 Days |  |  | 60-89 Days |  |  | than |  |  | Total Past |  |  |  |  |  | Total |  |  | > 90 Days &
|  | Past Due |  |  | Past Due |  |  | 90 Days |  |  | Due |  |  | Current |  |  | Loans |  |  | Accruing
Commercial | $ | 52 |  | $ | 194 |  | $ | — |  | $ | 246 |  | $ | 95,639 |  | $ | 95,885 |  | $ | —
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial Mortgages-Owner Occupied |  | — |  |  | — |  |  | — |  |  | — |  |  | 135,189 |  |  | 135,189 |  |  | —
Commercial Mortgages-Non-Owner Occupied |  | 55 |  |  | — |  |  | — |  |  | 55 |  |  | 206,646 |  |  | 206,701 |  |  | —
Commercial Construction |  | — |  |  | 397 |  |  | — |  |  | 397 |  |  | 11,738 |  |  | 12,135 |  |  | —
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Unsecured |  | 15 |  |  | — |  |  | — |  |  | 15 |  |  | 2,813 |  |  | 2,828 |  |  | —
Consumer Secured |  | 62 |  |  | — |  |  | 13 |  |  | 75 |  |  | 95,056 |  |  | 95,131 |  |  | —
Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Mortgages |  | 139 |  |  | — |  |  | 95 |  |  | 234 |  |  | 42,815 |  |  | 43,049 |  |  | —
Residential Consumer Construction |  | — |  |  | — |  |  | — |  |  | — |  |  | 20,707 |  |  | 20,707 |  |  | —
Total | $ | 323 |  | $ | 591 |  | $ | 108 |  | $ | 1,022 |  | $ | 610,603 |  | $ | 611,625 |  | $ | —

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

Occasionally, the Bank modifies loans to borrowers experiencing financial difficulties by providing principal forgiveness, term extensions, interest rate reductions or payment deferrals. As the effect of most modifications is already included in the allowance for credit losses due to the measurement methodologies used in its estimate, the allowance for credit losses is typically not adjusted upon modification. When principal forgiveness is provided at modification, the amount forgiven is charged against the allowance for credit losses.

There were no loan modifications to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023.

Troubled Debt Restructurings (TDR)

There were no loan modifications that would have been classified as TDRs during the three and nine months ended September 30, 2022.

There were no loan modifications classified as TDRs within the last twelve months that defaulted during the three and nine months ended September 30, 2022.

The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the accounting guidance for TDRs.

ACL on Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable by the Company. The allowance for off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for loan credit losses. The allowance for credit losses for unfunded loan commitments of $690,000 at September 30, 2023, is separately classified within Other Liabilities on the Consolidated Balance Sheets.

The following table presents the balance and activity in the ACL for unfunded commitments for the nine months ended September 30, 2023:

Allowance for Credit Losses on Unfunded Commitments |
Balance, December 31, 2022 | $ -
Adoption of ASU 2016-13 | 779
Recovery of credit losses | (89)
Balance September 30, 2023 | $ 690

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

Other Real Estate Owned

We also classify other real estate owned (OREO) as a nonperforming asset. OREO represents real property owned by the Bank which was acquired through purchase at foreclosure or from the borrower through a deed in lieu of foreclosure. OREO decreased to $0 on September 30, 2023 from $566 on December 31, 2022. The decrease was a result of the sale of two OREO properties for a total of $540, one of which had previously been written down by $26. The following table represents the changes in OREO balance during the nine months ended September 30, 2023 and year ended December 31, 2022.

OREO Changes

(dollars in thousands)

| Nine Months Ended Year Ended
| September 30, 2023 |  | December 31, 2022
Balance at the beginning of the year (net) | $ | 566 |  | $ | 761
Transfers from loans |  | — |  |  | —
Capitalized costs |  | — |  |  | —
Valuation adjustments |  | (23) |  |  | (195)
Sales proceeds |  | (540) |  |  | —
Loss on disposition |  | (3) |  |  | —
Balance at the end of the period (net) | $ | — |  | $ | 566

At September 30, 2023 and December 31, 2022, the Company had no consumer mortgage loans secured by residential real estate for which foreclosure was in process. The Company held no residential real estate properties in other real estate owned as of September 30, 2023 and December 31, 2022.

Note 9 – Revenue Recognition

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

Service Charges

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Fees and Commissions

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

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Note 9 – Revenue Recognition (continued)

Wealth Management Fees

The Company earns fees from its contracts with its investment advisory clients to manage client assets and for the provision of miscellaneous services. These fees are primarily earned over time as the Company charges its clients on a quarterly (which may not be a calendar quarter) basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of the client’s assets under management at quarter end.

Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company

also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Note 10 – Acquisitions

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed.

On December 31, 2021, Financial completed its acquisition of all the outstanding shares of Pettyjohn, Wood & White, Inc. (“PWW”), a Lynchburg, Virginia-based investment advisory firm with approximately $650 million in assets under management and advisement at the time of the acquisition. The acquisition was undertaken to enhance Financial’s service line offerings as well as augment its noninterest income streams. Following the acquisition, PWW operates as a subsidiary of Financial. The transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. The fair values were subject to refinement for up to one year after the closing date of the acquisition.

The acquisition date fair value of the consideration transferred upon closing on December 31, 2021 totaled $10.5 million, which was paid in cash. The preliminary fair values of the assets acquired and liabilities assumed were $9.3 million and $1.8 million, respectively, resulting in an acquisition date balance of goodwill totaling approximately $3.0 million. The principal component of the assets acquired was $8.4 million of amortizable intangible assets, which primarily relate to the value of customer relationships acquired with the acquisition of PWW. The Company is amortizing these intangible assets over a 15-year period using the straight-line method. The Company has selected September 1 of each year as the date to perform the annual impairment test. The Company performed a qualitative assessment of goodwill at September 1, 2022, and concluded that no impairment existed. Intangible assets with definite useful lives are amortized over estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

In accordance with the acquisition agreement, a working capital adjustment was paid in 2022 totaling approximately $818 thousand to the former owners of PWW. As such, Financial adjusted the total consideration transferred by increasing its investment in PWW by the amount of cash paid and also recorded a corresponding increase to the balance of goodwill. Additionally, in 2022, it was determined a valid IRC 338(h)(10) election was filed, which in effect, will treat the acquisition of PWW’s outstanding shares as an asset acquisition for tax purposes. The balance of goodwill was reduced by $1.8 million with a corresponding increase to deferred income taxes (included in the other assets caption) to appropriately reflect this determination. The adjusted balance of goodwill of $2.1 million is expected to be deductible for income tax purposes.

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Note 11 – Recent accounting pronouncements and other authoritative guidance

In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements”. These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. Transition can be done either retrospectively or prospectively. The Company does not expect the adoption of ASU 2023-01 to have a material impact on its consolidated financial statements.

In December 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company continues to assess the impact on the Company’s transition away from LIBOR for its loan and other financial instruments and has determined that there is minimal exposure.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Resu lts of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

the stability of the overall banking industry in the United States;

liquidity and perceived liquidity in the banking industry in the United States;

economic and political tensions with China, the ongoing war between Russia and Ukraine and potential expansion of combatants, and the sanctions imposed on Russia by numerous countries and private companies, all of which may have a destabilizing effect on financial markets and economic activity; and

other risks and uncertainties set forth in this Annual Report on Form 10-K and, from time to time, in our other filings with the Securities and Exchanges Commission (“SEC”).

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

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Financial specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.

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GENERAL

Critical Accounting Policies

Bank of the James Financial Group, Inc.’s (“Financial”) financial statements are prepared in accordance with accounting principles generally accepted in th e 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 expected 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 credit losses (ACLL) is management’s estimate of the probable losses expected in our loan portfolio For information on the Company's policies on the ACLL beginning with adoption of CECL on January 1, 2023, please refer to Note 2 – “Accounting Standards Adopted in 2023.” See “Management Discussion and Analysis Results of Operations – Allowance and Provision for Credit losses” below for further discussion of the allowance for credit losses.

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquired entity, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected September 1 of each year as the date to perform the annual impairment test. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of their net assets, including goodwill. If the fair value of a reporting unit is less than its carrying value, an expense may be required to write down the related goodwill to record an impairment loss. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Intangible assets with finite useful lives are amortized over their estimated useful lives to their estimated residual values, if any. Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.

Overview

Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to as the “Bank”). We conduct four other business activities: mortgage banking through the Bank’s Mortgage Division (which we refer to as “Mortgage”), investment services through the Bank’s Investment division (which we refer to as “Investment Division”), insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as “Insurance business”), and as of December 31, 2021, investment advisory services through the Company’s wholly-owned subsidiary, Pettyjohn, Wood & White, Inc., which we refer to as “PWW.”

The Bank is a Virginia banking corporation headquartered in Lynchburg, Virginia. The Bank was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1998 and began banking operations in July 1999. The Bank was organized to engage in general retail and commercial banking business. The Bank is a community-oriented financial institution that provides varied banking services to individuals, small and medium-sized businesses, and professional concerns. Historically, our primary market area has been the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg. Recently, the Bank has begun to expand to other areas in Virginia, specifically Roanoke, Charlottesville, Harrisonburg, Blacksburg, Lexington and Rustburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market areas.

We conduct our investment advisory business through PWW, which 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. PWW generates revenue primarily through investment advisory fees.

The Bank’s principal office is located at 828 Main Street, Lynchburg, Virginia 24504 and its telephone number is (434) 846-2000. The Bank also maintains a website at www.bankofthejames.bank.

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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 gains on sales of loans held for sale and service charges, and investment advisory fees, and its noninterest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.

The Bank intends to enhance its profitability by increasing its market share in our service areas, providing additional services to its customers, and controlling costs.

The Bank services its banking customers through the following locations in Virginia:

Full-Service Branches

The main office located at 828 Main Street in Lynchburg (the “Main Street Office”),

A branch located at 5204 Fort Avenue in Lynchburg (the “Fort Avenue Branch”),

A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”),

A branch located at 4105 Boonsboro Road in Lynchburg (the “Peakland Branch”),

A branch located at 4698 South Amherst Highway in Amherst County (the “Madison Heights Branch”),

A branch located at 17000 Forest Road in Forest (the “Forest Branch”),

A branch located at 164 South Main Street, Amherst, Virginia (the “Amherst Branch”),

A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford, Virginia, located off of Independence Boulevard (the “Bedford Branch”),

A branch located at 1110 Main Street, Altavista, Virginia (the “Altavista Branch”),

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

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

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

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

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

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

A branch located at 2101 Electric Rd, Roanoke, Virginia (the “Oak Grove Branch”), and

A branch l ocated at 13 Village Highway, Rustburg, Virginia (the “Rustburg Branch”).

Limited Service Branches

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

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

Loan Production Offices

Residential mortgage loan production office located at the Forest Branch,

Residential mortgage loan production office located at 570 West Main St., Wytheville, Virginia

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

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

The Investment division and the Insurance business operate primarily out of offices located at the Main Street Office. PWW operates our investment advisory business primarily from its offices at 1925 Atherholt Road in Lynchburg.

The Bank continuously evaluates areas located within our service areas to identify additional viable branch locations. Based on this ongoing evaluation, the Bank may acquire one or more additional suitable sites.

Subject to regulatory approval, the Bank may open additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch locations that the Bank currently is considering, including the following properties that we own and are holding for expansion:

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Real property located in the Timberlake Road area of Campbell County (Lynchburg), Virginia. The Timberlake property is not suitable for its intended use as a branch bank. Management anticipates that it will be necessary to raze the current structures and replace it with appropriate new construction. The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit and construct a branch at this location could be between $900,000 and $1,500,000.

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

Real property located at 19792 Main Street, Buchanan, Virginia. On August 7, 2023, the Bank purchased real property located at 19792 Main Street, Buchanan, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that the cost to upfit the building will be modest. Subject to regulatory approval, the Bank does not anticipate that it will open a branch at this location prior to the first quarter of 2024.

Real Property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. On September 18, 2023, the Bank purchased real property located at 2935 Rockfish Valley Highway, Nellysford, Virginia. The building on the property previously served as a bank branch for another financial institution. The Bank anticipates that the cost to upfit the building will be minimal. The property is a subject to a restrictive covenant that prohibits the Bank from using the property for any banking-related activity until the covenant expires in September 2025.

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

The Bank continues to evaluate suitable branch locations and may acquire one or more properties for expansion in the next 12 months. Future branch openings are subject to regulatory approval.

OFF-BALANCE SHEET ARRANGEMENTS

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

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

| September 30, 2023
| (in thousands)
Commitments to extend credit | $ | 180,365
Letters of Credit |  | 3,208
Total | $ | 183,573

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved

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in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation of the customer.

The Bank has rate lock commitments to originate mortgage loans through its Mortgage Division. The Bank has entered into corresponding commitments with third party investors to sell each of these loans that close. No other obligation exists. As a result of these contractual relationships with these investors, the Bank is not exposed to losses nor will it ultimately realize gains related to its rate lock commitments due to changes in interest rates.

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition of Financial as of September 30, 2023 and December 31, 2022 and the results of operations of Financial for the three and nine month periods ended September 30, 2023 and 2022. This discussion should be read in conjunction with the financial statements included elsewhere herein.

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

Financial Condition Summary

September 30, 2023 as Compared to December 31, 2022

Total assets were $960,887,000 on September 30, 2023 compared with $928,571,000 at December 31, 2022, an increase of 3.48%. The increase in total assets was primarily due to increases in cash and cash equivalents (primarily Federal funds sold) and, to a lesser extent, the cash value of bank-owned life insurance.

Total deposits increased from $848,138,000 as of December 31, 2022 to $880,203,000 on September 30, 2023, an increase of 3.78%. The increase resulted in large part from increases in time deposits and was offset in part by a decrease in NOW, money market and savings deposits. The increase in time deposits generally was driven by our customers’ decisions to lock in higher rates.

Total loans, excluding loans held for sale, decreased to $606,905,000 on September 30, 2023 from $611,625,000 on December 31, 2022. As discussed in more detail in Note 8, we have changed the classification of our loans to align with the methodology applied in estimating the allowance for credit losses under the newly-adopted current expected credit loss methodology (CECL). Because of this change, it is difficult to compare prior periods with the new segmentation dictated by CECL. Generally, however, the decrease in our loan growth was due to decreased loan demand in all segments due to increased interest rates. Loans, excluding loans held for sale and net of deferred fees and costs and the allowance for credit losses, decreased to $599,585,000 on September 30, 2023 from $605,366,000 on December 31, 2022, a decrease of 0.95%. The following summarizes the position of the Bank’s loan portfolio as of the dates indicated by dollar amount and percentages (dollar amounts in thousands):

| September 30, 2023 |  | December 31, 2022
| Amount |  | Percentage (%) |  | Amount |  | Percentage (%)
Commercial | $ | 65,827 |  |  | 10.84 |  | $ | 95,885 |  |  | 15.68
Commercial Real Estate |  | 329,464 |  |  | 54.29 |  |  | 354,025 |  |  | 57.88
Consumer |  | 77,931 |  |  | 12.84 |  |  | 97,959 |  |  | 16.02
Residential |  | 133,683 |  |  | 22.03 |  |  | 63,756 |  |  | 10.42
Total loans | $ | 606,905 |  |  | 100.00 |  | $ | 611,625 |  |  | 100.00

Total nonperforming assets, which consist of non-accrual loans, loans past due 90 days or more and still accruing, and OREO decreased to $585,000 on September 30, 2023 from $1,199,000 on December 31, 2022. As of September 30, 2023, we had no OREO as compared to $566,000 on December 31, 2022. Non-performing loans decreased from $633,000 at December 31, 2022 to $585,000 at September 30, 2023.

As discussed in more detail below under “Results of Operations—Allowance and Provision for Credit Losses,” management has provided for the anticipated losses on these loans in the allowance for credit losses. Loan payments received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

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Due to changes in economic conditions following the COVID-19 pandemic, including labor shortages, supply chain disruptions, inflation and the rising interest rate environment, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, allowance for credit losses, and loan modifications. Any potential financial impacts are unknown at this time.

OREO represents real property acquired by the Bank for debts previously contracted, including through foreclosure or deeds in lieu of foreclosure. On December 31, 2022, the Bank was carrying two OREO properties on its books at a value of $566,000. The Bank acquired no OREO properties and disposed of both OREO properties during the nine months ended September 30, 2023. As a result, the OREO balance decreased to $0.

Cash and cash equivalents increased to $99,529,000 on September 30, 2023 from $61,762,000 on December 31, 2022. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including Federal funds sold). This increase was due primarily to an increase in Federal funds sold. This increase was offset by a decrease of $9,920,000 in cash and due from banks from December 31, 2022 to September 30, 2023. In addition, cash and cash equivalents are subject to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts.

Securities held-to-maturity were essentially flat, decreasing slightly to $3,626,000 on September 30, 2023 from $3,639,000 on December 31, 2022. This decrease is a result of normal amortization of premiums within the held-to-maturity portfolio.

Securities available-for-sale, which are carried on the balance sheet at fair market value, decreased slightly to $181,977,000 on September 30, 2023, from $185,787,000 on December 31, 2022. During the nine months ended September 30, 2023, the Bank purchased $8,166,000 in available-for-sale securities. The market value of the securities available-for-sale decreased slightly. During the nine months ended September 30, 2023 the Bank did not sell any securities available-for-sale and received $8,775,000 in proceeds from calls, maturities, and paydowns of securities available-for-sale, which contributed to the decrease. There remains an unrealized tax-effected loss of $29,778,000 (or $37,694,000 prior to the tax benefit). Financial does not expect to realize the losses as it has the intent and ability to hold the securities until their recovery, which may be at maturity.

Financial’s investment in Federal Home Loan Bank of Atlanta (FHLBA) stock totaled $643,000 at September 30, 2023 as compared to $489,000 at December 31, 2022. FHLBA stock is generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Liquidity and Capital

At September 30, 2023, Financial, on a consolidated basis, had liquid assets of $281,506,000 in the form of cash, interest-bearing and noninterest-bearing deposits with banks, and available-for-sale investments. The Bank has pledged

approximately $34,000,000 (market value) of our available-for-sale securities as collateral with correspondent banks, including the FHLBA, for collateralized lines of credit;

approximately, $33,000,000 (market value) of our available-for-sale securities as security for public deposits; and

approximately $35,800,000 (par value) of our available-for-sale securities as collateral for advances under the Federal Reserve’s Bank Term Funding Program.

Further, if additional liquidity is needed, the Bank has the ability to purchase up to $53,000,000 of Fed funds through the Bank’s correspondent relationships, borrow from the FHLBA using investments within the Bank’s portfolio as collateral, and to borrow from the Federal Reserve Bank’s discount window. In addition to the above, the Bank has borrowing capacity with the FHLBA of approximately $21,700,000 related to loans it has pledged to the FHLBA.

As of September 30, 2023, the Bank has no borrowings from any of these sources. Immediately following the failure of Silicon Valley Bank, out of an abundance of caution the Bank borrowed $14,000,000 from the FHLBA to test its contingency funding plan. Approximately two weeks later, the Bank repaid the advance. During the first nine months of 2023, the Bank did not experience any unusual inflows or outflows of deposits.

Management believes that liquid assets were adequate at September 30, 2023. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments from customers.

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While we have not experienced any unusual pressure on our deposit balances or our liquidity position, management continues to closely monitor our sources and uses of funds in order to meet our cash flow requirements while maximizing profits. The Company’s total uninsured deposits, which are the amount of deposits, subject to the aggregation rules, that exceed the FDIC insurance limit (currently $250,000) were approximately $217,000,000, or 24.57% of our total deposits, at September 30, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

At September 30, 2023, the Bank had a leverage ratio of approximately 9.48%, a Tier 1 risk-based capital ratio and a CET1 ratio of approximately 12.11% and a total risk-based capital ratio of approximately 13.11%. As of September 30, 2023 and December 31, 2022, the Bank’s regulatory capital levels exceeded those established for well-capitalized institutions. The following table sets forth the minimum capital requirements and the Bank’s capital position as of September 30, 2023 and December 31, 2022:

Bank Level Only Capital Ratios

Analysis of Capital for Bank of the James (Bank only) |  |  |  |
(dollars in thousands) |  |  |  |
| September 30, |  | December 31, |  |  |  |
Analysis of Capital | 2023 |  | 2022 |  |  |  |
Tier 1 capital |  |  |  |  |  |  |
Common Stock | $ 3,742 |  | $ 3,742 |  |  |  |
Surplus | 22,325 |  | 22,325 |  |  |  |
Retained earnings | 63,442 |  | 57,840 |  |  |  |
Total Tier 1 capital | $ 89,509 |  | $ 83,907 |  |  |  |
Common Equity Tier 1 Capital (CET1) | $ 89,509 |  | $ 83,907 |  |  |  |
Tier 2 capital |  |  |  |  |  |  |
Allowance for credit losses | $ 7,320 |  | $ 6,259 |  |  |  |
Total Tier 2 capital: | $ 7,320 |  | $ 6,259 |  |  |  |
Total risk-based capital | $ 96,829 |  | $ 90,166 |  |  |  |
Risk weighted assets | $ 738,831 |  | $ 752,515 |  |  |  |
Average total assets | $ 943,952 |  | $ 934,277 |  |  |  |
| Actual |  | Regulatory Benchmarks
|  |  |  |  | For Capital |  | For Well
| September 30, |  | December 31, |  | Adequacy |  | Capitalized
| 2023 |  | 2022 |  | Purposes (1) |  | Purposes
Capital Ratios: |  |  |  |  |  |  |
Tier 1 capital to average total assets | 9.48% |  | 8.98% |  | 4.000% |  | 5.000%
Common Equity Tier 1 capital | 12.11% |  | 11.15% |  | 7.000% |  | 6.500%
Tier 1 risk-based capital ratio | 12.11% |  | 11.15% |  | 8.500% |  | 8.000%
Total risk-based capital ratio | 13.11% |  | 11.98% |  | 10.500% |  | 10.000%

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

The above tables set forth the capital position and analysis for the Bank only. Because total assets on a consolidated basis are less than $3,000,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated basis. If calculated, the capital ratios for the Company on a consolidated basis at September 30, 2023 would be lower than those of the Bank because a portion of proceeds from the sale of notes previously issued by the holding company were contributed to the Bank as equity.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule was fully implemented on January 1, 2019 and implemented a capital conservation buffer of

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2.5%. As a result, the Bank is required to have a minimum ratio of Tier 1 capital to average total assets of 4.00% (exclusive of the capital conservation buffer), a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive of the capital conservation buffer), and a Tier 1 risk-based capital ratio of 8.5% (inclusive of the capital conservation buffer). Failure to maintain the capital conservation buffer will limit the ability of the Bank and Financial to pay dividends, repurchase shares or pay discretionary bonuses. The rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Earnings Summary

Financial had net income including all operating segments of $2,078,000 and $6,596,000 for the three and nine months ended September 30, 2023, compared to $2,574,000 and $7,005,000 for the comparable periods in 2022. Basic and diluted earnings per common share for the three and nine months ended September 30, 2023 were $0.46 and $1.44, compared to basic and diluted earnings per share of $0.55 and $1.48 for the three and nine months ended September 30, 2022.

The decrease in net income for the three and nine months ended September 30, 2023, as compared to the prior year periods was due primarily to a significant increase in interest expense of $2,280,000 and $4,975,000 in the three and nine months ended September 30, 2023 from the comparable periods in 2022. The decrease in net income was offset in part by a significant increase in interest income of $1,744,000 and $5,912,000 in the three and nine months ended September 30, 2023 from the comparable periods in 2022.

These operating results represent an annualized return on average stockholders’ equity of 15.68% and 17.20% for the three and nine month periods ended September 30, 2023, compared with 19.47% and 15.45% for the three and nine months ended September 30, 2022. The decrease for the three month period ended September 30, 2023 from the same period in 2022 was due to a decrease in earnings. The increase for the nine month period ended September 30, 2023 as compared to the same period in 2022 was due to a decrease in average stockholders’ equity, which resulted from a decrease in the value of available-for-sale securities which was caused by an application of the mark-to-market accounting rules. In addition, between August 2022 and April 2023, the Company repurchased approximately 197,000 shares of its common stock pursuant to two separate stock repurchase plans. In addition to having a positive impact on earnings per share, these repurchases decreased stockholders’ equity and average stockholders’ equity, leading to a positive impact to the return on stockholders’ equity ratio. The Company had an annualized return on average assets of 0.86% and 0.93% for the three and nine month periods ended September 30, 2023 compared with 1.05% and 0.95% for the three and nine months ended September 30, 2022. The decrease largely resulted from a decrease in net income. The decrease was partially offset by a decrease in average assets, which was caused in part by a decrease in the value of the securities available-for-sale as discussed above. In addition, the average assets for the nine months ended September 30, 2022 reflect the impact of a significant short-term deposit related to a customer transaction.

See “Noninterest Income” below for mortgage business and wealth management segment discussions.

Interest Income, Interest Expense, and Net Interest Income

For the three and nine months ended September 30, 2023, interest income increased to $10,143,000 and $28,824,000 from $8,399,000 and $22,912,000 for the same periods in 2022, due primarily to an increase in interest rates received on our interest earning assets. The average rate on loans was 5.13% and 4.99% for the three and nine months ended September 30, 2023, as compared to 4.37% and 4.18% for the same periods in 2022. The rate on total average earning assets increased during the three and nine months ended September 30, 2023 because of a general increase in market rates. The average rate on average earning assets was 4.43% and 4.30% for the three and nine months ended September 30, 2023 as compared to 3.64% and 3.31% for the three and nine months ended September 30, 2022.

Interest expense increased significantly to $2,779,000 and $6,473,000 for the three and nine months ended September 30, 2023 from $499,000 and $1,498,000 for the three and nine months ended September 30, 2022. The increase for the three and nine months resulted primarily from an increase in deposit balances and an increase interest rates paid on deposits during the first nine months of the year. The Company’s average rate paid on interest bearing deposits was 1.43% and 1.10% for the three and nine months ended September 30, 2023 as compared to 0.15% and 0.16% for the same periods in 2022. The Company’s average rate paid on interest bearing liabilities was 1.49% and 1.18% for the three and nine months ended September 30, 2023 as compared to 0.26% and 0.27% for the same periods in 2022.

The fundamental source of the Bank’s net revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and nine months ended September 30, 2023 was $7,364,000 and $22,351,000 as compared to $7,900,000 and $21,414,000 for the same periods in 2022. The net interest margin was 3.21% and 3.33% for the three and nine months ended September 30, 2023 as compared to 3.42% and 3.09% for the comparable periods in 2022. The decrease in the net interest margin for the three month period was primarily due to the rates on interest bearing liabilities repricing more rapidly than the rates on interest earning assets. The increase for the nine month period ended September 30, 2023, was in large part due to interest rates on interest

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bearing assets increasing more rapidly than the rates received on interest bearing liabilities during the first half of the year. Due to rising inflation, economic uncertainties have arisen that are likely to impact net interest margin. The FOMC implemented a series of interest rate increases that has negatively impacted our net interest margin and is likely to continue to cause long-term uncertainty. Other financial impacts could occur, though such potential impacts are unknown at this time. Because of the interest rate environment, the Bank may need to continue to raise deposit rates, which would have an adverse impact on our margin and profitability. Management expects the Company’s interest rate margin to remain the same or compress in near to mid-term.

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I below.

Noninterest Income

Noninterest income is comprised primarily of fees and charges on transactional deposit accounts, gains on sales of mortgage loans held for sale, commissions on sales of investments, fees generated from treasury management services, fees generated from our investment advisory business, and bank-owned life insurance income.

Noninterest income decreased to $3,201,000 and $9,689,000 for the three and nine month periods ended September 30, 2023 from $3,854,000 and $10,519,000 for same periods in 2022. The decrease for both periods was due to a decrease in gain on sales of loans held for sale, which was primarily caused by a decrease in loan origination volume at the Mortgage division. For the three month period ended September 30, 2023, the decrease was also due to a decrease in service charges, fees and commissions, primarily debit card fees. These decreases were offset in part by an increase in wealth management fees from PWW.

The Bank, through its Mortgage division, originates both conforming and non-conforming consumer residential mortgage loans in the markets we serve. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage division are presold to major national mortgage banking or financial institutions. The Mortgage division assumes, except in limited circumstances such as first payment default, no credit or interest rate risk on these mortgages.

Purchase mortgage originations totaled $37,811,000 and $105,228,000, or 89% and 84.80%, respectively, of the total mortgage loans originated in the three and nine months ended September 30, 2023, as compared to $41,436,000 and $128,840,000, or 81.37% and 74.16%, respectively, of the total mortgage loans originated in the same periods in 2022. Because of a rising mortgage interest rate environment, management anticipates that in the short-term purchase mortgage originations will continue to represent a significant percentage of mortgage originations. Management also believes that a continued increase in long-term market interest rates could limit refinancing activity.

Mortgage rates increased dramatically in 2022 and 2023 and these increases continue to have a negative impact on mortgage origination volume. Because of uncertainty surrounding current and near-term economic conditions arising from inflation, and geopolitical and economic concerns, management cannot predict future mortgage rates. Management also believes that the rising interest rates could put revenue from the mortgage segment under additional pressure and mortgage originations will continue to trail 2022.

Our Investment division provides brokerage services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third-party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by two dual employees of the Bank and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment division’s financial impact on our consolidated revenue has been immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates the Investment division’s impact on noninterest income will remain immaterial for the remainder of 2023.

We conduct our investment advisory business through PWW, which Financial acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment advisory firm that has approximately $680 million in assets under management and advisement as of September 30, 2023. PWW operates as a subsidiary of Financial. 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.

The Bank provides insurance and annuity products to Bank customers and others, through the Bank’s Insurance subsidiary. The Bank has three employees that are licensed to sell insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial. Management anticipates that Insurance’s impact on noninterest income will remain immaterial for the remainder of 2023.

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Noninterest Expense

Noninterest expense for the three and nine months ended September 30, 2023 decreased by $739,000 and $28,000 to $8,140,000 and $24,091,000 from $8,879,000 and $24,119,000 for the same periods in 2022, decreases of 8.32% and 0.12%, respectively. These decreases resulted primarily from decreases in equipment, other real estate expenses and other expenses. Other expense decreased in the three and nine months ended September 30, 2023 because the Bank recorded a one-time expense related to a previously disclosed fraud in the third quarter of 2022. The decrease in the three months ended September 30, 2023 was also due to an adjustment in amortization of intangibles. The decreases for both periods were offset in part by modest increases in salaries and employee benefits. FDIC insurance expense increased for the three months ended September 30, 2023, primarily due to an adjustment in the accrual. Total personnel expense was $4,683,000 and $13,296,000 for the three and nine month period ended September 30, 2023 as compared to $4,529,000 and $13,051,000 for the same periods in 2022. Personnel expense remained relatively flat because of management’s decision to not fill every vacancy.

Allowance and Provision for Credit Losses

The allowance for credit losses represents an amount that, in our judgment, will be adequate to absorb probable losses expected in the loan portfolio. The provision for credit losses increases the allowance, and loans charged-off, net of recoveries, reduce the allowance. The provision for the allowance for credit losses is charged to earnings to bring the total allowance to a level deemed appropriate by management. As discussed below, loans having a risk rating of 7 or below that are significantly past due, and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due, are evaluated for specific impairment. The general reserve component is based on an evaluation of general economic conditions, actual and expected credit losses, and loan performance measures. Based on the application of the credit loss calculation, the Bank recovered $164,000 and $278,000 for the three and nine months ended September 30, 2023 as compared with recoveries of $300,000 and $900,000 for the same periods in 2022. The decrease in loans, net of allowance for credit losses from December 31, 2022 to September 30, 2023 was the primary factor driving the recovery.

We adopted CECL effective January 1, 2023. The provision for the three and nine months ended September 30, 2023 was determined under CECL while the provision for the same periods in 2022 was determined under the incurred loss model. As a result of the adoption of CECL, we recorded a net decrease to retained earnings of $1,599,000 as of January 1, 2023 for the cumulative effect of adopting CECL. The change from incurred loss method to CECL impacts the comparability of the allowance between periods.

At September 30, 2023, the allowance for credit losses was 1.21% of total loans outstanding, versus 1.02% and 1.03% of total loans outstanding at December 31, 2022 and September 30, 2022, respectively. The increase in the allowance for credit losses was largely driven by the adoption of CECL. The allowance for credit losses for individually evaluated loans was $0 at both September 30, 2023 and December 31, 2022. As shown in Note 8, the total balance in the allowance increased, from $6,259,000 (under the incurred loss method) as of December 31, 2022 to $7,320,000 (under CECL) on September 30, 2023.

Charged-off loans, which are loans that management deems uncollectible, are charged against the allowance for credit losses and constitute a realized loss. We had charged-off loans of $144,000 and $196,000 for the three and nine month periods ended September 30, 2023 as compared to $1,000 and $10,000 for the same periods in 2022. While a charged-off loan may subsequently be collected, such recoveries generally are realized over an extended period of time. We had recoveries of $8,000 and $200,000 for the three and nine month periods ended September 30, 2023 as compared to recoveries of $79,000 and $389,000 for the same periods in 2022.

No nonaccrual loans were excluded from the individually evaluated loan disclosures at September 30, 2023 and December 31, 2022. If interest on these loans had been accrued, such income cumulatively would have approximated $43,000 and $79,000 on September 30, 2023 and December 31, 2022, respectively. Loan payments received on nonaccrual loans are applied to principal. When a loan is placed on nonaccrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings.

Income Taxes

For the three and nine months ended September 30, 2023, Financial had an income tax expense of $511,000 and $1,631,000 as compared to $601,000 and $1,709,000 for the same periods in 2022. This represents an effective tax rate of 19.74% and 19.82% for the three and nine months ended September 30, 2023 as compared with 18.93% and 19.61% for the three and nine months ended September 30, 2022. Our effective rate was lower than the statutory corporate tax rate in all periods primarily because of federal

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income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and interest earned on tax free municipal bonds.

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Schedule I

Net Interest Margin Analysis |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Average Balance Sheets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
For the Three Months Ended September 30, 2023 and 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2023 |  | 2022
|  |  |  |  |  |  | Average |  |  |  |  |  |  |  | Average
| Average |  | Interest |  | Rates |  | Average |  | Interest |  | Rates
| Balance |  | Income/ |  | Earned/ |  | Balance |  | Income/ |  | Earned
| Sheet |  | Expense |  | Paid |  | Sheet |  | Expense |  | /Paid
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees (1)(2) | $ | 612,021 |  | $ | 7,917 |  | 5.13% |  | $ | 615,208 |  | $ | 6,776 |  | 4.37%
Loans held for sale |  | 4,421 |  |  | 73 |  | 6.55% |  |  | 4,217 |  |  | 54 |  | 5.08%
Federal funds sold |  | 61,026 |  |  | 812 |  | 5.28% |  |  | 46,147 |  |  | 262 |  | 2.25%
Interest-bearing bank balances |  | 7,972 |  |  | 134 |  | 6.67% |  |  | 18,853 |  |  | 101 |  | 2.13%
Securities (3) |  | 222,969 |  |  | 1,204 |  | 2.14% |  |  | 230,986 |  |  | 1,210 |  | 2.08%
Federal agency equities |  | 1,249 |  |  | 8 |  | 2.54% |  |  | 1,271 |  |  | 5 |  | 1.56%
CBB equity |  | 116 |  |  | — |  | - % |  |  | 116 |  |  | — |  | - %
Total earning assets |  | 909,774 |  |  | 10,148 |  | 4.43% |  |  | 916,798 |  |  | 8,408 |  | 3.64%
Allowance for credit losses |  | (7,563) |  |  |  |  |  |  |  | (6,633) |  |  |  |  |
Non-earning assets |  | 51,335 |  |  |  |  |  |  |  | 58,820 |  |  |  |  |
Total assets | $ | 953,546 |  |  |  |  |  |  | $ | 968,985 |  |  |  |  |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand interest bearing |  | 399,690 |  |  | 677 |  | 0.67% |  |  | 459,755 |  |  | 114 |  | 0.10%
Savings |  | 121,311 |  |  | 217 |  | 0.71% |  |  | 138,016 |  |  | 19 |  | 0.05%
Time deposits |  | 196,169 |  |  | 1,683 |  | 3.40% |  |  | 130,885 |  |  | 143 |  | 0.43%
Total interest bearing deposits |  | 717,170 |  |  | 2,577 |  | 1.43% |  |  | 728,656 |  |  | 276 |  | 0.15%
Other borrowed funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other borrowings |  | 10,112 |  |  | 98 |  | 3.84% |  |  | 10,672 |  |  | 117 |  | 4.35%
Financing leases |  | 3,194 |  |  | 22 |  | 2.73% |  |  | 3,546 |  |  | 24 |  | 2.69%
Capital Notes |  | 10,040 |  |  | 82 |  | 3.24% |  |  | 10,035 |  |  | 82 |  | 3.24%
Total interest-bearing liabilities |  | 740,516 |  |  | 2,779 |  | 1.49% |  |  | 752,909 |  |  | 499 |  | 0.26%
Noninterest bearing deposits |  | 152,485 |  |  |  |  |  |  |  | 156,946 |  |  |  |  |
Other liabilities |  | 7,981 |  |  |  |  |  |  |  | 6,679 |  |  |  |  |
Total liabilities |  | 900,982 |  |  |  |  |  |  |  | 916,534 |  |  |  |  |
Stockholders' equity |  | 52,564 |  |  |  |  |  |  |  | 52,451 |  |  |  |  |
Total liabilities and stockholders’ equity | $ | 953,546 |  |  |  |  |  |  | $ | 968,985 |  |  |  |  |
Net interest earnings |  |  |  | $ | 7,369 |  |  |  |  |  |  | $ | 7,909 |  |
Net interest margin |  |  |  |  |  |  | 3.21% |  |  |  |  |  |  |  | 3.42%
Interest spread |  |  |  |  |  |  | 2.94% |  |  |  |  |  |  |  | 3.38%

(1)

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Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.

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Net Interest Margin Analysis |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Average Balance Sheets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
For the Nine Months Ended September 30, 2023 and 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2023 |  | 2022
|  |  |  |  |  |  | Average |  |  |  |  |  |  |  | Average
| Average |  | Interest |  | Rates |  | Average |  | Interest |  | Rates
| Balance |  | Income/ |  | Earned/ |  | Balance |  | Income/ |  | Earned
| Sheet |  | Expense |  | Paid |  | Sheet |  | Expense |  | /Paid
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees (1)(2) | $ | 618,152 |  | $ | 23,082 |  | 4.99% |  | $ | 600,286 |  | $ | 18,779 |  | 4.18%
Loans held for sale |  | 3,548 |  |  | 169 |  | 6.37% |  |  | 3,978 |  |  | 130 |  | 4.37%
Federal funds sold |  | 42,148 |  |  | 1,601 |  | 5.08% |  |  | 82,142 |  |  | 463 |  | 0.75%
Interest-bearing bank balances |  | 8,718 |  |  | 375 |  | 5.75% |  |  | 18,853 |  |  | 135 |  | 0.96%
Securities (3) |  | 223,391 |  |  | 3,563 |  | 2.13% |  |  | 220,863 |  |  | 3,384 |  | 2.05%
Federal agency equities |  | 1,291 |  |  | 49 |  | 5.07% |  |  | 1,244 |  |  | 36 |  | 3.87%
CBB equity |  | 116 |  |  | — |  | - % |  |  | 116 |  |  | — |  | - %
Total earning assets |  | 897,364 |  |  | 28,839 |  | 4.30% |  |  | 927,482 |  |  | 22,927 |  | 3.31%
Allowance for credit losses |  | (7,611) |  |  |  |  |  |  |  | (6,829) |  |  |  |  |
Non-earning assets |  | 55,636 |  |  |  |  |  |  |  | 66,214 |  |  |  |  |
Total assets | $ | 945,389 |  |  |  |  |  |  | $ | 986,867 |  |  |  |  |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand interest bearing |  | 409,373 |  |  | 1,557 |  | 0.51% |  |  | 456,851 |  |  | 318 |  | 0.09%
Savings |  | 122,943 |  |  | 359 |  | 0.39% |  |  | 131,266 |  |  | 56 |  | 0.06%
Time deposits |  | 176,628 |  |  | 3,918 |  | 2.97% |  |  | 136,949 |  |  | 467 |  | 0.46%
Total interest bearing deposits |  | 708,944 |  |  | 5,834 |  | 1.10% |  |  | 725,066 |  |  | 841 |  | 0.16%
Other borrowed funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FHLB borrowings |  | 821 |  |  | 31 |  | 5.05% |  |  | — |  |  | — |  | - %
Other borrowings |  | 10,255 |  |  | 297 |  | 3.87% |  |  | 10,805 |  |  | 339 |  | 4.19%
Financing leases |  | 3,284 |  |  | 66 |  | 2.69% |  |  | 3,640 |  |  | 73 |  | 2.68%
Capital Notes |  | 10,039 |  |  | 245 |  | 3.26% |  |  | 10,034 |  |  | 245 |  | 3.26%
Total interest-bearing liabilities |  | 733,343 |  |  | 6,473 |  | 1.18% |  |  | 749,545 |  |  | 1,498 |  | 0.27%
Noninterest bearing deposits |  | 153,268 |  |  |  |  |  |  |  | 170,208 |  |  |  |  |
Other liabilities |  | 7,504 |  |  |  |  |  |  |  | 6,511 |  |  |  |  |
Total liabilities |  | 894,115 |  |  |  |  |  |  |  | 926,264 |  |  |  |  |
Stockholders’ equity |  | 51,274 |  |  |  |  |  |  |  | 60,603 |  |  |  |  |
Total liabilities and stockholders’ equity | $ | 945,389 |  |  |  |  |  |  | $ | 986,867 |  |  |  |  |
Net interest earnings |  |  |  | $ | 22,366 |  |  |  |  |  |  | $ | 21,429 |  |
Net interest margin |  |  |  |  |  |  | 3.33% |  |  |  |  |  |  |  | 3.09%
Interest spread |  |  |  |  |  |  | 3.12% |  |  |  |  |  |  |  | 3.04%

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(1)Net accretion or amortization of deferred loan fees and costs are included in interest income.

(2)Nonperforming loans are included in the average balances. However, interest income and yields calculated do not reflect any accrued interest associated with non-accrual loans.

(3)The interest income and yields calculated on securities have been tax affected to reflect any tax-exempt interest on municipal securities. Assumed income tax rates of 21% were used for the periods presented.

## Item 3. Quantitative and Qualitative Disclosures About Mark et Risk

Not applicable

Item 4. Controls and Pro cedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Financial’s management, including Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no significant changes during the quarter ended September 30, 2023, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934) or in other factors that could have significantly affected those controls subsequent to the date of our most recent evaluation of internal controls over financial reporting.

PART II – OTHER INFORMATI ON

Item 1. Legal Procee dings

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

Item 1A. Risk Fact ors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023. There have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2022.

## Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

(a)Not applicable.

(b)Not applicable.

(c)On February 6, 2023, the Company’s board of directors approved a stock repurchase plan to purchase up to $998,000 of the Company’s common stock. The plan authorizes the Company to make purchases from March 8, 2023 through March 7, 2024, unless extended or sooner terminated. The plan allowed the Company to make purchases in open market transactions or privately negotiated transactions, in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Pursuant to the Plan, the Company purchased an aggregate of 85,319 shares between the adoption date and April 6, 2023. Because the Company used substantially all of the funds allocated under the Plan, on April 18, 2023, the Company’s board of directors terminated the repurchase plan. Following the termination, the Company does not have a stock repurchase plan in place and consequently repurchased no shares during the quarter ended September 30, 2023.

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Item 3. Defaults Upon Senior Secur ities

Not applicable

Item 4. Mine Safety Disclo sures

Not applicable

Item 5. Other Informat ion

Not applicable

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Item 6. Exhib its

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 November 13, 2023
31.2 | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 13, 2023
32.1 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002, dated November 13, 2023
101 | The following materials from Bank of the James Financial Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets (unaudited) as of September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2023 and 2022 (iv) Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2023 and 2022 (v) Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2023 and 2022; (vi) Notes to Unaudited Consolidated Financial Statements.

SIGNATUR ES

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

| BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: November 13, 2023 | By /S/ Robert R. Chapman III Robert R. Chapman III, President (Principal Executive Officer)
Date: November 13, 2023 | By /S/ J. Todd Scruggs J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

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