BANK OF THE JAMES FINANCIAL GROUP INC

Bank of the James Financial Group Inc. operates in the retail and commercial banking industry within Virginia, conducting business from 19 full-service offices, two limited service offices, and two residential mortgage loan production offices. The company's primary market area is Region 2000, which encompasses the Town of Altavista, Amherst County, Appomattox County, the Town of Bedford, Bedford County, Campbell County, and the City of Lynchburg, with a total population of approximately 267,000 ¹. The company has expanded into additional markets including Charlottesville, Roanoke, Harrisonburg, Lexington, Buchanan, Nellysford, Blacksburg, Appomattox, and Rustburg. The industry is characterized by extensive federal and state regulation, and the company faces competition from other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms.

The company's primary competitors include other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating in the Virginia localities where the company operates and surrounding areas. Many of these competitors have nationwide or regional operations and greater resources, including greater name recognition and financial resources, a wider geographic presence, more accessible branch locations, the ability to offer additional services, greater marketing resources, more favorable pricing for loans and deposits, and lower origination and operating costs. The company also faces competition from local community institutions and is subject to lower lending limits than its larger competitors. As of its most recent Community Reinvestment Act evaluation, the Bank received a rating of "Satisfactory."

The company generates revenue through three principal activities: general retail and commercial banking through Bank of the James, mortgage brokerage services through Bank of the James Mortgage (a division of the Bank), and investment advisory (wealth management) services through its wholly-owned subsidiary Pettyjohn, Wood & White, Inc. (PWW). The company also provides securities brokerage and other investment services through BOTJ Investment, a division of the Bank, and acts as an agent for insurance and annuity products through BOTJ Insurance, Inc., a wholly-owned subsidiary of the Bank. The company's operating results depend primarily upon the Bank's net interest income, which is determined by the difference between interest and dividend income on earning assets (primarily loans, investment securities, and other investments) and interest expense on interest-bearing liabilities (principally deposits and other borrowings). Deposits are a major source of funding, and the company offers checking accounts, savings accounts, time deposits, money market accounts, certificates of deposit, Individual Retirement Accounts, and Health Care Savings Accounts. The company's primary focus is on making loans to small and medium-sized businesses and consumers in its market areas.

The company's Community Banking segment provides general retail and commercial banking services through the Bank, including commercial business lending, real estate construction loans, commercial real estate mortgage loans, residential mortgage loans, and consumer loans. Commercial loans include both secured and unsecured loans for working capital, business expansion, and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. The Bank also originates fixed and floating-rate mortgage loans and real estate construction and acquisition loans. The Mortgage Division originates conforming and non-conforming home mortgages primarily in the Region 2000 area, operating using non-delegated correspondent relationships that allow the Bank to close loans in its name before an investor purchases the loan. The Mortgage Division originated 659 mortgage loans totaling approximately $199,563,000 ² during the year ended December 31, 2025, compared with 633 mortgage loans totaling $190,669,000 ³ in 2024. Loans for new home purchases comprised 80.66% ⁴ of the total volume in 2025, as compared to 81% ⁵ in 2024.

The Investment Advisory Services segment is conducted through PWW, a Lynchburg, Virginia-based investment advisor registered with the Securities and Exchange Commission. PWW generates revenue primarily through investment advisory fees based on the market value of assets under management. As of December 31, 2025, PWW had approximately $1,028,928,000 ⁶ in assets under management. PWW's investment advisory fees constituted approximately 11.0% ⁷ of the Company's total revenue in 2025. For the year ended December 31, 2025, PWW had fee income of $5,328,000 ⁸, representing growth of 10.4% ⁹ from $4,843,000 ¹⁰ in 2024. For the years ended December 31, 2025 and 2024, PWW accounted for approximately 22.5% ¹¹ and 21.5% ¹² of Financial's pre-tax net income, respectively. The Bank also provides brokerage and investment services through the Investment Division under an agreement with Osaic Institutions, Inc., and provides insurance and annuity products through BOTJ Insurance as an agent for national insurance companies, though the operating results of these activities have not materially impacted financial performance.

During the year ended December 31, 2025, the company retired approximately $10.05 million ¹³ in capital notes at the end of the second quarter of 2025, which eliminated interest expense on those borrowings. The company opened a full-service branch at 20795 Timberlake Road, Lynchburg, Virginia in 2025, and a full-service branch at 2935 Rockfish Valley Highway, Nellysford, Virginia in 2025. The company also opened a full-service branch at 19792 Main Street, Buchanan, Virginia in 2024. The company implemented updates to the quantitative CECL loss models for collectively evaluated loan segments in the second quarter of 2025, which revised certain maximum loss-rate parameters and incorporated additional post-COVID historical loss data. The company achieved meaningful reductions in data processing expenses through vendor contract renegotiations completed during 2025, with an amended contract with the company's core provider effective April 1, 2025. The company had outstanding capital commitments of $1,220,000 ¹⁴ related to Small Business Investment Company funds as of December 31, 2025.

For the year ended December 31, 2025, the company had net income of $9,022,000 ¹⁵, an increase of $1,078,000 ¹⁶ from net income of $7,944,000 ¹⁷ for the year ended December 31, 2024. Earnings per basic and diluted common share were $1.99 ¹⁸ for 2025, as compared to $1.75 ¹⁹ per basic and diluted common share for 2024. Net interest income increased to $32,807,000 ²⁰ for 2025 from $29,236,000 ²¹ for 2024. Noninterest income increased to $15,852,000 ²² for 2025 from $15,137,000 ²³ for 2024. Total assets as of December 31, 2025 were $1,039,024,000 ²⁴ compared to $979,244,000 ²⁵ at the end of 2024, an increase of $59,780,000 ²⁶ or 6.10% ²⁷. Net loans (excluding loans held for sale), net of unearned income and the allowance for credit losses, increased to $661,357,000 ²⁸ as of December 31, 2025 from $636,552,000 ²⁹ as of December 31, 2024. The net interest margin increased by 28 basis points to 3.39% ³⁰ for 2025, compared to 3.11% ³¹ for 2024. The return on average stockholders' equity was 12.68% ³² for 2025 compared to 12.70% ³³ for 2024. The return on average assets was 0.88% ³⁴ for 2025 compared to 0.80% ³⁵ for 2024.

The company's growth strategy includes continued geographic expansion into surrounding markets such as Charlottesville, Roanoke, and Harrisonburg, reflecting a strategic initiative to diversify geographic concentration, enhance growth opportunities, and mitigate economic risk inherent in the primary market. The company has expanded into Charlottesville (opening a full-service branch in 2015), Harrisonburg (opening a full-service branch in 2015), Appomattox (opening a permanent full-service branch in 2017), Roanoke (opening a permanent full-service branch in 2017), Blacksburg (opening a mortgage origination office in 2018), Lexington in 2019 with a full-service branch, Rustburg in 2019 with a full-service branch, Buchanan in 2024 with a full-service branch, and Nellysford in 2024 (operating a temporary branch replaced with a full-service branch in the third quarter 2025). The company may engage in branch expansion or seek to acquire other financial institutions in the future, though it has no present acquisition plans. The Mortgage Division's presence in the Wytheville market area continues to develop, and management expects that the Mortgage Division's reputation in its markets and offices and producers present an opportunity to continue to grow the Mortgage Division's market share and, in the longer term, revenue.

The company's growth also depends on increasing commercial and industrial loans, which have helped drive recent earnings. The company has increased and plans to continue to increase levels of commercial and industrial loans, though success in continuing to penetrate this market segment is uncertain. The company also expects PWW to continue enhancing operating results through investment advisory fee income, with assets under management growing from approximately $650 million at the time of acquisition on December 31, 2021 to approximately $1,028,928,000 ³⁶ as of December 31, 2025. The company anticipates that PWW will continue to contribute meaningfully to consolidated net income. The company also intends to introduce new products and services desired by the public and as permitted by regulatory authorities, and remains committed to leveraging new technologies to meet evolving customer needs, including telephone banking, internet banking, online bill pay, and mobile device applications.

The company's efficiency ratio improved to 77.17% ³⁷ in 2025 from 79.11% ³⁸ in 2024, as revenue growth of 9.7% ³⁹ outpaced expense growth of 7.0% ⁴⁰. The improvement reflects the substantial increase in net interest income driven by margin expansion and lower interest expense following the retirement of capital notes, together with disciplined expense management initiatives, including vendor renegotiations. Management anticipates that the amended contract with the company's core provider, effective April 1, 2025, will generate significant savings over the term of the contract as compared to the previous contract. The company achieved meaningful reductions in data processing expenses through vendor contract renegotiations completed during 2025. The company's net interest margin increased to 3.39% ⁴¹ in 2025 from 3.11% ⁴² in 2024, an improvement of 28 basis points. The average rate on interest-bearing deposits decreased from 1.92% ⁴³ in 2024 to 1.68% ⁴⁴ in 2025, a decline of 24 basis points.

The company had approximately 175 employees as of March 25, 2026, of which 162 are full-time and 13 are part-time. Of these, 8 full-time and 2 part-time employees are employed by PWW, and 149 full-time and 11 part-time employees are employed by the Bank. None of the company's employees are represented by any collective bargaining agreements. The company maintains employee benefit programs that include health insurance, a health savings account, a 401(k) plan, and an employee stock purchase plan. The company has invested in technology infrastructure, including endpoint detection and response (EDR) and extended detection and response (XDR) platforms aligned to the MITRE ATT&CK knowledge base for threat modeling, and utilizes a third-party online brand protection service to identify and facilitate takedown of malicious mobile applications, social media accounts, and websites attempting to impersonate the Bank.

The company does not have an active stock repurchase plan. During the quarter ended December 31, 2025, the company repurchased no shares of common stock. On January 27, 2026, the company declared a cash dividend for the fourth quarter of 2025 of $0.11 ⁴⁵ per common share, paid on March 6, 2026 to shareholders of record at the close of business on February 17, 2026. The company will evaluate factors including future earnings, financial condition, liquidity and capital requirements of both the Company and the Bank, applicable governmental regulations and policies, and other factors deemed relevant by its Board of Directors in determining whether to continue paying cash dividends in 2026. The company's ability to distribute cash dividends depends primarily on the ability of the Bank and PWW to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends it can pay. The company had outstanding capital commitments of $1,220,000 ⁴⁶ related to Small Business Investment Company funds as of December 31, 2025.

The company faces structural headwinds from the highly competitive banking and financial services industry, where many competitors have nationwide or regional operations and greater resources. Competition could result in a decrease in loans originated and could negatively affect the company's ability to grow and its results of operations. The company may need to raise additional capital in the future to support growth or to meet regulatory capital requirements, and its ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control. The company's profitability is vulnerable to interest rate fluctuations and changes in monetary policies, and changes in interest rates may cause significant changes in net interest income and net interest margin. Rising interest rates typically pressure net interest margin if deposit costs increase faster than loan yields, reduce the fair value of fixed-rate investment securities and loans, and may decrease loan demand and slow economic activity. Declining interest rates typically compress net interest margin as loan yields reprice downward faster than deposit costs.

The company's growth plans depend on factors beyond its control, and an unsuccessful attempt to achieve growth could have a material adverse effect on its business, financial condition, results of operations, and future prospects. Expansion involves risks including time and costs of evaluating new markets, hiring experienced local management and opening new offices, time lags between expansion activities and generation of sufficient assets and deposits to support costs, entrance into new markets where the company lacks experience, introduction of new products and services with which it has no prior experience, failure to culturally integrate an acquisition target or new branches, and failure to identify and retain experienced key management with local expertise and relationships in new markets. The company's success depends primarily on the general economic conditions of the primary markets in Virginia where it operates and where its loans are concentrated. As of December 2025, the Lynchburg MSA had an unemployment rate (not seasonally adjusted) of approximately 3.6% ⁴⁷, compared to a statewide average unemployment rate of approximately 3.5% ⁴⁸, reflecting a modest increase from approximately 3.3% ⁴⁹ at the end of 2024.

The company's profitability depends significantly on local economic conditions in the Lynchburg metropolitan statistical area (Region 2000), where its loans are concentrated, and as of December 2025 the Lynchburg MSA had an unemployment rate of approximately 3.6% ⁵⁰ compared to 3.3% ⁵¹ at the end of 2024. A substantial majority of loans have real estate as collateral, and a significant portion of the loan portfolio consists of real estate loans with balances in excess of $1,000,000 ⁵², with commercial real estate loans comprising a majority of the portfolio and carrying higher default risk than residential real estate or consumer loans. The allowance for credit losses as a percentage of total loans was 0.97% ⁵³ at December 31, 2025, and the allowance as a percentage of nonperforming loans was 379% ⁵⁴, but the allowance may not be adequate to cover actual losses. As of December 31, 2025, the company had unrealized losses, net of taxes, in its investment securities portfolio of $14,937,000 ⁵⁵, compared to $22,915,000 ⁵⁶ at December 31, 2024, and if future conditions impair liquidity or alter the company's intent or ability to hold these investments to maturity, losses could negatively impact net income and capital position. The company faces cybersecurity threats and has experienced cybersecurity incidents and other technology-related events in the past that resulted in costs and/or operational impacts, and the company incurred $518,000 ⁵⁷ in FDIC assessments in 2025 compared to $441,000 ⁵⁸ in 2024, with future increases in FDIC insurance premiums potentially negatively impacting profitability.

Management's message emphasizes that the company's operating results depend primarily upon the Bank's net interest income, and that the company prepares for multiple interest rate outcomes to safeguard margins against wide swings. For the year ended December 31, 2025, the company had net income of $9,022,000 ⁵⁹, an increase of $1,078,000 ⁶⁰ from net income of $7,944,000 ⁶¹ for the year ended December 31, 2024. Earnings per basic and diluted common share were $1.99 ⁶² for 2025, as compared to $1.75 ⁶³ per basic and diluted common share for 2024. Net interest income increased to $32,807,000 ⁶⁴ for 2025 from $29,236,000 ⁶⁵ for 2024. The net interest margin increased by 28 basis points to 3.39% ⁶⁶ for 2025, compared to 3.11% ⁶⁷ for 2024. The company's efficiency ratio improved to 77.17% ⁶⁸ in 2025 from 79.11% ⁶⁹ in 2024. Management's strategic priorities include disciplined expense management, as evidenced by successful vendor renegotiations that reduced data processing expenses, and continued focus on growing the Mortgage Division's market share and PWW's investment advisory fee income. Management also emphasizes maintaining credit quality standards while selectively pursuing attractive lending opportunities, and managing deposit pricing as competitive pressures moderate.