10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2008

BANK OF THE JAMES FINANCIAL GROUP, INC.

(Name of Registrant as Specified in Its Charter)

Virginia	000-50548	20-0500300
(State or other jurisdiction of incorporation or organization)	(Commission file number)	(I.R.S. Employer Identification No.)

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

(434) 846-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section13 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 2,810,255 shares of Common Stock, par value $2.14 per share, were outstanding at August 13, 2008.

Table of Contents

PART I – FINANCIAL INFORMATION		1
Item 1.	Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II – OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts)

	(unaudited) 6/30/2008			(audited) 12/31/2007
Assets
Cash and due from banks	$	10,715		$	4,314
Securities held-to-maturity (fair value of $6,028 in 2008 and $6,317 in 2007)		5,994			6,494
Securities available-for-sale, at fair value		32,222			25,733
Restricted stock, at cost		1,998			986
Loans, net of allowance for loan losses of $2,275 in 2008 and $2,146 in 2007		245,118			224,022
Premises and equipment, net		6,363			5,710
Software, net		387			292
Interest receivable		1,612			1,515
Other real estate owned		404			—
Deferred tax asset		800			443
Other assets		502			551
Total Assets	$	306,115		$	270,060
Liabilities and Stockholders’ Equity
Deposits
Noninterest bearing demand	$	34,990		$	34,973
NOW, money market and savings		79,412			56,995
Time		124,655			136,755
Total deposits		239,057			228,723
Federal funds purchased		6,601			5,587
Repurchase agreements		14,146			10,542
FHLB borrowings		21,000			—
Income taxes payable		—			3
Interest payable		405			405
Other liabilities		103			276
Total liabilities	$	281,312		$	245,536
Stockholders’ equity
Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,807,819 as of June 30, 2008 and 2,812,588 shares as of December 31, 2007		6,009			5,472
Additional paid-in-capital		19,464			15,995
Accumulated other comprehensive (loss) income		(699	)		(7	)
Retained earnings		29			3,064
Total stockholders’ equity	$	24,803		$	24,524
Total liabilities and stockholders’ equity	$	306,115		$	270,060

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

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

	For the Three Months Ended June 30,
	2008			2007
Interest Income
Loans	$	4,068		$	3,962
Securities
US Government and agency obligations		200			274
Mortgage backed securities		210			24
Municipals		12			8
Dividends		—			17
Other (Corporates)		128			1
Federal Funds sold		9			12
Total interest income	$	4,627		$	4,298
Interest Expense
Deposits
NOW, money market savings	$	349		$	352
Time Deposits		1,433			1,463
Federal Funds purchased		4			12
FHLB borrowings		136			—
Reverse repurchase agreements		76			72
Total interest expense		1,998			1,899
Net interest income		2,629			2,399
Provision for loan losses		130			94
Net interest income after provision for loan losses	$	2,499		$	2,305
Other operating income
Mortgage fee income	$	353		$	389
Service charges, fees, commissions		319			168
Other		117			141
Gain on sale of securities		12			—
Total other operating income	$	801		$	698
Other operating expenses
Salaries and employee benefits		1,288			1,204
Occupancy		180			176
Equipment		242			209
Supplies		95			77
Professional, data processing, and other outside expense		335			271
Marketing		110			87
Credit expense		65			62
Loss (gain) on sale of assets		(2	)		—
Other		199			161
Total other operating expenses	$	2,512		$	2,247
Income before income taxes		788			756
Income tax expense		264			258
Net Income	$	524		$	498
Income per common share – basic	$	0.19		$	0.18
Income per common share – diluted	$	0.18		$	0.17

See accompanying notes to these consolidated financial statements

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Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

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

	For the Six Months Ended June 30,
	2008		2007
Interest Income
Loans	$	8,225	$	7,737
Securities
US Government and agency obligations		417		551
Mortgage backed securities		303		48
Municipals		27		17
Dividends		—		23
Other (Corporates)		187		1
Federal Funds sold		18		14
Total interest income		9,177		8,391
Interest Expense
Deposits
NOW, money market savings	$	588	$	688
Time Deposits		3,012		2,783
Federal Funds purchased		49		83
FHLB borrowings		177		—
Reverse repurchase agreements		157		130
Total interest expense		3,983		3,684
Net interest income		5,194		4,707
Provision for loan losses		255		245
Net interest income after provision for loan losses	$	4,939	$	4,462
Other operating income
Mortgage fee income		673		708
Service charges, fees, commissions		573		459
Other		202		164
Gain on sale of securities		92		—
Total other operating income	$	1,540	$	1,331
Other operating expenses
Salaries and employee benefits		2,569		2,391
Occupancy		366		348
Equipment		469		413
Supplies		183		165
Professional, data processing, and other outside expense		666		526
Marketing		194		183
Credit expense		120		117
Loss (gain) on sale of assets		7		—
Other		377		290
Total other operating expenses	$	4,951	$	4,433
Income before income taxes		1,528		1,360
Income tax expense		500		464
Net Income	$	1,028	$	896
Income per common share – basic	$	0.37	$	0.32
Income per common share – diluted	$	0.35	$	0.30

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, except per share amounts) (unaudited)

	For the Six Months Ended June 30,
	2008			2007
Cash flows from operating activities
Net Income	$	1,028		$	896
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		361			323
Net amortization and accretion of premiums and discounts on securities		3			30
Gain on sale of available for sale securities		(55	)		—
Gain on call of available for sale securities		(37	)		—
Loss on sale of assets		7
Provision for loan losses		255			245
Stock compensation expense		3			6
(Increase) in interest receivable		(97	)		(59	)
(Increase) in other assets		(367	)		(444	)
(Decrease) in income taxes payable		(3	)		(129	)
Increase in interest payable		—			33
(Decrease) in other liabilities	$	(173	)	$	(27	)
Net cash provided by operating activities	$	925		$	874
Cash flows from investing activities
Proceeds from maturities and calls of securities held to maturity	$	500		$	1,000
Purchases of securities available for sale		(19,766	)		(1,937	)
Proceeds from maturities and calls of securities available for sale		6,331			1,199
Proceeds from sale of securities available for sale		5,985			499
Purchase of Federal Reserve Bank stock		(1	)		(10	)
Purchases of Federal Home Loan Bank stock		(1,011	)		(27	)
Origination of loans, net of principal collected		(21,351	)		(16,137	)
Purchases of premises and equipment		(1,108	)		(745	)
Proceeds from sale of other assets		4			—
Net cash used in investing activities	$	(30,417	)	$	(16,158	)
Cash flows from financing activities
Net increase in deposits	$	10,334		$	11,315
Net increase in federal funds purchased		1,014			—
Net increase in repurchase agreements		3,604			710
Net increase in FHLB borrowings		21,000			—
Acquisition of common stock		(59	)		—
Proceeds from exercise of stock options		—			259
Net cash provided by financing activities	$	35,893		$	12,284
Increase (decrease) in cash and cash equivalents		6,401			(3,000	)
Cash and cash equivalents at beginning of period	$	4,314		$	9,876
Cash and cash equivalents at end of period	$	10,715		$	6,876
Non cash transactions
Transfer of loans to foreclosed assets	$	404		$	426
Fair value adjustment for securities available for sale		(1,050	)		(117	)
Cash transactions
Cash paid for interest	$	3,983		$	3,651
Cash paid for taxes		553			587

See accompanying notes to these consolidated financial statements

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Note 1 – Basis of Presentation

The unaudited consolidated financial statements have been prepared by Bank of the James Financial Group, Inc. (“Financial” or 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 and for the three and six month periods ended June 30, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of Financial, accounting policies followed, and other related information are contained in Financial’s Annual Report on Form 10-K for the year ended December 31, 2007. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended December 31, 2007 included in Financial’s Annual Report on Form 10-K. Results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

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

Note 2 – Use of Estimates

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

Note 3 – Earnings Per Share

For the quarters ended June 30, 2008 and 2007 basic earnings per share has been computed based upon the weighted average common shares outstanding of 2,807,905 and 2,806,666, respectively. For the six months ended June 30, 2008 and 2007 basic earnings per share has been computed based upon the weighted average common shares outstanding of 2,808,878 and 2,802,467, respectively. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2008 as well as all prior stock dividends.

Currently, only the option shares granted to certain officers and other employees of Financial pursuant to the Amended and Restated Stock Option Plan of Financial are considered dilutive under the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following is a summary of the earnings per share calculation for the three and six months ended June 30, 2008 and 2007.

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	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Net income	$	524,000	$	498,000	$	1,028,000	$	896,000
Weighted average number of shares		2,807,905		2,808,666		2,808,878		2,802,467
Options affect of incremental shares		116,116		155,824		106,723		158,612
Weighted average diluted shares		2,924,021		2,964,490		2,915,601		2,961,079
Basic EPS (weighted average shares)	$	0.19	$	0.18	$	0.37	$	0.32
Diluted EPS (Including option shares)	$	0.18	$	0.17	$	0.35	$	0.30

Note 4 - Stock Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires 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 date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized by the Company for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant. The Company has not issued any restricted stock.

As a result of adopting SFAS 123R on January 1, 2006, the amount of stock-based compensation included within the non-interest expense category for the three and six months ended June 30, 2008 is $0 and $3,000, respectively which had no impact on basic and diluted earnings per share for the same period.

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Stock option plan activity for the six months ended June 30, 2008 is summarized below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Average Intrinsic Value
Options outstanding, January 1, 2008	327,991		$	8.58
Granted	—			n/a
Exercised	—			n/a
Forfeited	(9,076	)	$	11.02
Options outstanding, June 30, 2008	318,915		$	8.55	5.10	$	2,061,391
Options exercisable, June 30, 2008	318,915		$	8.55	5.10	$	2,061,391

There were no options exercised during the six months ended June 30, 2008. As of June 30, 2008 there was no unrecognized compensation expense related to non-vested option awards, as all expense associated with all current outstanding awards has been realized.

Note 5 – Stock Dividend

On May 15, 2007, the Board of Directors of the Company declared a 10% stock dividend. The stock dividend was paid on July 24, 2007 to shareholders of record June 19, 2007. Following the stock dividend, the number of outstanding shares increased by 229,790. The dividend required a reclassification of retained earnings effective May 15, 2007 in the amount of $4,009,000. Of this amount, $497,000 was reclassified as common stock and $3,512,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders’ equity. All per share amounts have been retroactively adjusted to reflect this dividend.

On May 20, 2008, the Board of Directors of the Company declared a 10% stock dividend. The stock dividend was paid on July 22, 2008 to shareholders of record June 17, 2008. Following the stock dividend, the number of outstanding shares increased by approximately 256,000 (final number subject to rounding). The dividend required a reclassification of retained earnings effective May 20, 2008 in the amount of $4,064,000. Of this amount, $546,000 was reclassified as common stock and $3,518,000 was reclassified as additional paid-in-capital. The reclassification did not change total stockholders’ equity. All per share amounts have been retroactively adjusted to reflect this dividend.

Note 6 – Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder’s fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the implementation to have a material impact on its consolidated financial statements.

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In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 requires the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company does not expect the implementation of SFAS 161 to have a material impact on its consolidated financial statements.

Note 7 - Fair Value Measurements

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

• 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.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1of 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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Loans held for sale

Loans held for sale are required to be measured in a lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the Company had no loans available for sale.

Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

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 SFAS No. 157.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results 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. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan” and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the dates on which they were made. Bank of the James Financial Group, Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); competition for our customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which we have no control); changes in the value of real estate securing loans made by the Bank; changes in interest rates; and material unforeseen changes in the liquidity, results of operations, or financial condition of our customers. Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.

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 the United States (GAAP). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss ratios as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

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

Overview

Financial is a bank holding company with its headquarters in Lynchburg, Virginia. Financial was incorporated at the direction of Bank of the James (the “Bank”) on October 3, 2003 to serve as a bank holding company of the Bank. Financial had no business until January 1, 2004 when it acquired the common stock of the Bank through a statutory share exchange on a one-for-one basis. In

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addition to the Bank, Financial wholly-owns BOTJ Investment Group, Inc. (“Investment Group”) through which we offer brokerage, fixed and variable annuity products, and related services to the public through a third party broker-dealer. These two businesses are our only subsidiaries and primary assets. Financial conducts its business through the following three business segments: community banking through the Bank, mortgage origination through the Mortgage Division of the Bank, and securities brokerage services through Investment Group.

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 in the Central Virginia, Region 2000 area, which encompasses the seven jurisdictions of the Town of Altavista, Amherst County, Appomattox County, the City of Bedford, Bedford County, Campbell County, and the City of Lynchburg. The Bank strives to provide its customers with products comparable to statewide regional banks located in its market area, while maintaining the prompt response time and level of service of a community bank. Management believes this operating strategy has particular appeal in the Bank’s market area.

The Bank was organized in part as a response to the loss of many of the Central Virginia, Region 2000 area’s local financial institutions through mergers with larger, non-local banks and bank holding companies. The organizers perceived that local customers who once relied on experienced personal attention were being forced to use 800 numbers, computerized menus, and persons in other localities who were not familiar with their needs.

The Bank opened for business on July 22, 1999 to fill this void left in the Region 2000 market. The Bank’s organizers recognized that an opportunity existed to create a banking institution designed exclusively for a market that expected personalized service. The idea was to build a financial institution staffed with experienced professionals who would place a high value on knowing their customers and serving their distinctive banking needs.

The Bank was capitalized by more than 2,400 shareholders that wanted a new local bank. These investors provided the initial customer base and are integral to the success of the Bank. Management believes that the key to the Bank’s success lies in providing Bank customers with personalized service while providing products and services that meet their banking needs.

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.com.

Financial declared a 10% stock dividend on May 15, 2007 which was paid on July 24, 2007. Financial declared a 10% stock dividend on May 20, 2008 which was paid on July 22, 2008 to shareholders of record on June 17, 2008.

Investment Group was incorporated under the laws of the Commonwealth of Virginia in 2006. Effective April 4, 2006, Investment Group began providing securities brokerage services to Bank customers and others. Investment Group provides the services through an agreement with Community Bankers’ Securities, LLC (“CB Securities”), a registered broker-dealer. Under this agreement, CB Securities will operate service centers in one or more branches of the Bank. As of the date hereof, Investment Group’s only center is located in the Church Street office. All centers will be staffed by a dual employee of Investment Group and CB Securities. Investment Group receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. As of the date hereof, Investment Group has been conducting business for approximately two years and its financial impact on the consolidated financials of the Company has been immaterial. In addition, Investment Group has purchased 4.96% of CBS Holdings, LLC for $10,000. CBS Holdings is owned by 11 financial institutions and currently has an option to purchase up to 10% of CB Securities.

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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 loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, including salaries and employee benefits, occupancy expense, data processing expenses, Federal Deposit Insurance Corporation premiums, expense (both direct and indirect) 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 the Region 2000 area, providing additional services to its customers, and controlling costs.

The Bank currently serves its customers through the following seven full service offices: the main office located at 828 Main Street in Lynchburg (opened October 2004) (the “Main Street Office”), a branch located at 615 Church Street in Lynchburg (opened July 1999), a branch located at 5204 Fort Avenue in Lynchburg (opened November 2000), a branch located on South Amherst Highway in Amherst County (the “Madison Heights Branch”) (opened June 2002), a branch located at 17000 Forest Road in Forest (the “Forest Branch”) (opened February 2005); a branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the “Boonsboro Branch”) (opened April 2006), a branch located at 164 South Main Street, Amherst, Virginia (the “Amherst Branch”) (opened January 2007). In addition, the Bank, through its mortgage division, originates residential mortgage loans through two offices—one located at the Forest Branch and the other located at 14662 Moneta Rd., Suite A in Moneta (opened July 2005).

The Bank continuously evaluates areas located within Region 2000 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 anticipates opening additional branches during the next two fiscal years. Although numerous factors could influence the Bank’s expansion plans, the following discussion provides a general overview of the additional branch locations that the Bank currently is considering.

• City of Bedford, Virginia. The Bank has purchased certain property located in the City of Bedford, Virginia, located off of Independence Boulevard. The Bank began constructing the improvements necessary to operate a bank branch location in March 2008. We anticipate completing construction and upfit in the early fourth quarter of 2008. Management has received approval from the Virginia Bureau of Financial Institutions to open this branch and anticipates opening the branch in the fourth quarter of 2008.

• Town of Altavista, Virginia. The Bank has purchased certain real property and improvements thereto located in the Town of Altavista, Virginia. Subject to regulatory approval, the Bank anticipates that it will begin improving this property for use as a permanent bank branch in the fourth quarter of 2008 with a goal of opening the branch by the end of the first quarter of 2009. The Bank is determining whether to renovate or replace the existing structure. The Bank is also evaluating whether to open a temporary location in Altavista, subject to regulatory approval. The Bank anticipates filing an application for approval with the Bureau of Financial Institutions during the third or fourth quarter of 2008.

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• Timberlake Road Area, Campbell County (Lynchburg), Virginia. The Bank has purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has determined that the existing structures are insufficient for use as a bank branch. The Bank does not anticipate requesting approval to open a branch at this location prior to late 2009.

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit these properties will be between $1,300,000 and $1,700,000 per location. Subject to terms acceptable to the Bank, the Bank may consider entering into one or more sale-leaseback arrangements for these and other branches.

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.

Except as set forth herein, the Bank does not expect to purchase any significant property or equipment in the upcoming 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:

	June 30, 2008 (in thousands)
Commitments to extend credit	$	45,498
Letters of Credit		2,931
Total	$	48,429

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 in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances that the Bank deems necessary.

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SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management’s discussion and analysis of the financial condition and results of operations of Financial as of June 30, 2008 and December 31, 2007 and for the three and six months ended June 30, 2008 and 2007. It should be read in conjunction with the financial statements included elsewhere herein and should be read in the context of the length of time for which the Bank has been operating.

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

Financial Condition Summary

June 30, 2008 as Compared to December 31, 2007

Total assets were $306,115,000 on June 30, 2008 compared with $270,060,000 at December 31, 2007. The increase in total assets is due in part to an increase in deposits resulting from an increase in rates (as a result of the competitive pressures of the market) that the Bank offers on its deposit products and the Bank’s reputation for service. In particular, new deposits at the recently opened Boonsboro Branch and Amherst Branch as well as the continued growth of our Madison Heights Branch and Main Street Office contributed to this increase in deposits.

Total deposits grew from $228,723,000 for the year ended December 31, 2007 to $239,057,000 on June 30, 2008, an increase of 4.52%. In addition, the Bank’s effort to increase non-FDIC insured sweep accounts (repurchase agreements) resulted in an increased balance in these accounts to $14,146,000 on June 30, 2008 from $10,542,000 on December 31, 2007.

To complement deposits in funding asset growth and due to the attractive rates on these funds, the Bank funded $21,000,000 of earning asset growth with short to medium term advances from the Federal Home Loan Bank of Atlanta (FHLBA).

Loans, net of unearned income and allowance, increased to $245,118,000 on June 30, 2008 from $224,022,000 on December 31, 2007, an increase of 9.42%. Total loans increased to $247,393,000 on June 30, 2008 from $226,168,000 on December 31, 2007. 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):

	June 30, 2008				December 31, 2007
	Amount		Percentage		Amount		Percentage
Commercial	$	47,038	19.01	%	$	43,877	19.40	%
Real estate-construction		42,188	17.05	%		36,296	16.05	%
Real estate-residential		121,138	48.97	%		114,278	50.53	%
Consumer		35,793	14.47	%		31,717	14.02	%
Other		1,236	0.50	%		—	—
Total loans	$	247,393	100.00	%	$	226,168	100.00	%

Non-accrual loans increased to $2,316,000 on June 30, 2008 from $1,246,000 on December 31, 2007. Management has provided for the anticipated losses on these loans in the loan loss reserve and does not anticipate that they will have a material impact on the financial condition of the Bank. We also classify other real estate owned (OREO) as a non-performing asset. OREO represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. On December 31, 2007, the Bank had no OREO property. As of June 30, 2008, the Bank was carrying four OREO properties on its books at a value of $404,000. Since the end of the second quarter, the Bank has sold one of these properties for $146,000 with no loss to the Bank. The Bank currently is trying to sell the remaining three OREO properties. The Bank anticipates that the gain or loss on the sale of these properties, if any, will not have a material impact on the Bank’s financial condition.

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The following tables set forth information regarding impaired and non-accrual loans as of June 30, 2008 and December 31, 2007:

	Impaired & Non-Accrual Loans (dollars in thousands)
	June 30, 2008		December 31, 2007
Impaired loans without a valuation allowance	$	7,022	$	10,355
Impaired loans with a valuation allowance		7,750		4,503
Total impaired loans	$	14,772	$	14,858
Valuation allowance related to impaired loans	$	1,500	$	1,389
Total non-accrual loans	$	2,316	$	1,246
Total loans past due ninety days or more and still accruing	$	—	$	—
	Average Investment in Impaired Loans (dollars in thousands) Period Ended
	June 30, 2008		December 31, 2007
Average investment in impaired loans	$	14,815	$	13,891
Interest income recognized on impaired loans	$	429	$	988
Interest income recognized on a cash basis on impaired loans	$	429	$	988

No non-accrual loans were excluded from impaired loan disclosure under SFAS No. 114 at June 30, 2008 and December 31, 2007. If interest on these loans had been accrued, such income would have approximated $122,000 and $88,000, on June 30, 2008 and December 31, 2007, respectively. Loan payments received on non-accrual loans are applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is deducted from the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit losses charged against earnings. These loans were included in the non-performing loan totals listed above.

Cash and cash equivalents increased to $10,715,000 on June 30, 2008 from $4,314,000 on December 31, 2007. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase is due in part to routine fluctuations in deposits, including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents and the Bank does not consider this change to be material.

Securities held-to-maturity decreased to $5,994,000 on June 30, 2008 from $6,494,000 on December 31, 2007, which resulted from the call of securities prior to maturity. Securities available-for-sale increased to $32,222,000 on June 30, 2008 from $25,733,000 on December 31, 2007. The increase from December 31, 2007 in securities available-for-sale was primarily due to the investment of surplus funds in longer term, higher yielding securities.

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The following table summarizes the Bank’s holdings for both securities held-to-maturity and securities available-for-sale as of June 30, 2008 and December 31, 2007 (amounts in thousands):

			June 30, 2008
	Amortized Costs		Gross Unrealized					Fair Value
			Gains		(Losses)
Held to Maturity
US Gov’t & Agency obligations	$	5,994	$	41	$	(7	)	$	6,028
Available for Sale
US Gov’t & Agency obligations		8,995		26		(69	)		8,952
Mortgage-backed securities		18,988		10		(592	)		18,406
Municipals		1,057		—		(27	)		1,030
Corporates		4,242		—		(408	)		3,834
	$	33,282	$	36	$	(1,096	)	$	32,222
			December 31, 2007
	Amortized Costs		Gross Unrealized					Fair Value
			Gains		(Losses)
Held to Maturity
US Gov’t & Agency obligations	$	6,494	$	32	$	(3	)	$	6,523
Available for Sale
US Gov’t & Agency obligations	$	14,954	$	—	$	—		$	15,083
Mortgage-backed securities		4,764		19		(49	)		4,734
Municipals		2,547		1		(25	)		2,523
Corporates		3,478		—		(85	)		3,393
	$	25,743	$	149	$	(159	)	$	25,733

The following table shows the gross unrealized losses and fair value of the Bank’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the date indicated (amounts in thousands):

	Less than 12 months					More than 12 months					Total
June 30, 2008	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Description of securities
U.S. agency obligations	$	4,992	$	(76	)	$	—	$	—		$	4,992	$	(76	)
Mortgage-backed securities		16,163		(564	)		864		(28	)		17,027		(592	)
Municipals		717		(22	)		340		(5	)		1,057		(27	)
Other		487		(108	)		3,755		(300	)		4,242		(408	)
Total temporarily impaired securities	$	22,359	$	(770	)	$	4,959	$	(333	)	$	27,318	$	(1,103	)

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	Less than 12 months					More than 12 months					Total
December 31, 2007	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Description of securities
U.S. agency obligations	$	—	$	—		$	1,992	$	(3	)	$	1,992	$	(3	)
Mortgage-backed securities		1,001		(18	)		1,569		(31	)		2,570		(49	)
Municipals		1,684		(24	)		497		(1	)		2,181		(25	)
Other		3,393		(85	)		—		—			3,393		(85	)
Total temporarily impaired securities	$	6,078	$	(127	)	$	4,058	$	(35	)	$	10,136	$	(162	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and may do so more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Financial to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2008, the Company does not consider the unrealized losses as other-than-temporary losses due to the nature of the securities involved. The Bank currently owns 22 securities that are being evaluated for other than temporary impairment. Thirteen of these securities are S&P rated AAA, four are S&P rated AA, and five are S&P rated A. Of these securities fifteen are obligations of government sponsored entities, three are municipal bank-qualified issues, and four are issued by publicly traded United States corporations. For these reasons, management believes the default risk to be minimal. As management has the ability to hold securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.

At June 30, 2008, Financial had liquid assets of approximately $42,937,000 in the form of cash and available-for-sale investments. Management believes that liquid assets were adequate at June 30, 2008. Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at the Bank. In addition, the Bank has the ability to purchase federal funds on the open market and borrow from the Federal Reserve Bank’s discount window, if necessary.

Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material negative impact on Financial’s short-term or long-term liquidity.

At June 30, 2008, the Bank had a leverage ratio of 8.49%, a Tier 1 risk-based capital ratio of 10.21% and a total risk-based capital ratio of 11.14%. As of June 30, 2008 and December 31, 2007 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 June 30, 2008 and December 31, 2007:

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Analysis of Capital (in 000’s)	June 30, 2008		December 31, 2007
Tier 1 Capital:
Common stock	$	3,743	$	3,743
Surplus		13,313		13,311
Retained earnings		7,935		6,981
Total Tier 1 capital	$	24,991	$	24,035
Tier 2 Capital:
Allowance for loan losses		2,275		2,145
Total Tier 2 Capital:		2,275		2,145
Total risk-based capital	$	27,266	$	26,180
Risk weighted assets	$	244,802	$	219,180
Average total assets	$	294,938	$	268,187

	Actual				Regulatory Benchmarks
Capital Ratios:	June 30, 2008		December 31, 2007		For Capital Adequacy Purposes		For Well Capitalized Purposes
Tier 1 capital to average total assets ratio (leverage ratio)	8.49	%	8.96	%	4.00	%	5.00	%
Tier 1 risk based capital ratio	10.21	%	10.97	%	4.00	%	6.00	%
Total risk-based capital ratio	11.14	%	11.94	%	8.00	%	10.00	%

The above tables set forth the capital position and analysis for the Bank only. The capital ratios for the Company on a consolidated basis are comparable to the capital ratios of the Bank.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2008 and 2007

Earnings Summary

Net income for the three and six months ended June 30, 2008 was $524,000 and $1,028,000 respectively, compared to a net income of $498,000 and $896,000 for the same periods in 2007, an increase of 5.22% and 14.73%, respectively. Net income increased in large part due to an increase in non-interest income and an increase in total earning assets.

Basic earnings per common share for the three and six months ended June 30, 2008 were $0.19 and $0.37, respectively, compared with $0.18 and $0.32 for the same periods in 2007. Fully diluted earnings per common share for the three and six months ended June 30, 2008 were $0.18 and $0.35 compared with $0.17 and $0.30 for the same periods in 2007. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2007 and the 10% stock dividend to be paid in July 2008 as well as all prior stock dividends.

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These operating results represent an annualized return on stockholders’ equity of 8.47% and 8.38% for the three and six months ended June 30, 2008, respectively, compared with 8.83% and 8.09% for the same periods in 2007. The annualized return on average assets for the three and six months ended June 30, 2008 was 0.71% and 0.73%, respectively, compared with 0.83% and 0.76% for the same periods in 2007.

Interest Income, Interest Expense, and Net Interest Income

Interest income increased to $4,627,000 and $9,177,000 for the three and six months ended June 30, 2008 from $4,298,000 and $8,391,000 for the same periods in 2007, an increase of 7.65% and 9.37% respectively. These increases were due to an increase in interest earning assets, including loans and investment securities.

Interest expense increased to $1,998,000 and $3,983,000 for the three and six months ended June 30, 2008 from $1,899,000 and $3,684,000 for the same periods in 2007, an increase of 5.21% and 8.12%, respectively. These increases in interest expense were primarily due to an increase in the aggregate balance in interest bearing deposit accounts, including the recently-introduced “2010 Savings Account” that will pay customers a minimum annual percentage yield of 3.00% through February 2010. The increase was partially offset by a decrease in rates paid on all other deposit accounts, including new and maturing certificates of deposit.

The fundamental source of the Bank’s revenue is net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits and other borrowings. Net interest income for the three and six months ended June 30, 2008 was $2,629,000 and $5,194,000, respectively compared with $2,399,000 and $4,707,000 for the same periods in 2007. The net interest margin decreased to 3.77% and 3.88% for the three and six months ended June 30, 2008, respectively, from 4.21% and 4.22% in the same periods a year ago. The growth in net interest income for the three and six months ended June 30, 2008 as compared with the comparable three and six months in 2007 was due to the increase in average interest-earning assets, which was the result of growth in the loan portfolio funded by the growth in deposits. The Bank increased the rates that it pays on deposit accounts in response to competition and this contributed to the decrease in the net interest margin.

Financial’s net interest margin analysis and average balance sheets are shown in Schedule I on page 21.

Non-Interest Income

Non-interest income, which is comprised primarily of fees and charges on transactional deposit accounts, mortgage loan origination fees, commissions on sales of investments and the Bank’s ownership interest in a title insurance agency, increased to $801,000 and $1,540,000 for the three and six month periods ended June 30, 2008, from $698,000 and $1,331,000 for the comparable periods in 2007. These 14.76% and 15.70% increases, respectively, were due in large part to increased in commissions earned by Investment Group.

The Bank, through Bank of the James Mortgage, a Division of Bank of the James (the “Mortgage Division”) originates both conforming and non-conforming consumer residential mortgage loans in the Region 2000 area. As part of the Bank’s overall risk management strategy, all of the loans originated and closed by the Mortgage Division are presold to major national mortgage banking or financial institutions. The Mortgage Division assumes no credit or interest rate risk on these mortgages. In July, 2005, the

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Mortgage Division opened its second mortgage origination office. This office is located in Moneta and was opened to serve the Smith Mountain Lake market. The Bank anticipates that this office will contribute additional non-interest income during 2008.

We anticipate that Investment Group and the Mortgage Division will continue to contribute additional non-interest income in the remainder of 2008.

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2008 increased to $2,512,000 and $4,951,000 from $2,247,000 and $4,433,000 for the comparable periods in 2007. These 11.79% and 11.69% increases in non-interest expense from the prior comparable periods can be attributed to increased occupancy expenses, along with an increase in personnel expense. Total personnel expense increased to $1,288,000 and $2,569,000 for the three and six month periods ended June 30, 2008, from $1,204,000 and $2,391,000 for the comparable periods in 2007. Compensation for some employees of the Mortgage Division and Investment Group is commission-based and therefore subject to fluctuation. The Bank also had increases in depreciation expense, data processing fees, and other operating expenses, all of which are related to the growth of the Bank.

Allowance for Loan Losses

The provision for loan losses is charged to earnings to bring the total allowance to a level deemed appropriate by management and is based upon many factors, including calculations of specific impairment of certain loans, general economic conditions, actual and expected credit losses, loan performance measures, historical trends and specific conditions of the individual borrower. Based on the application of the loan loss calculation, the Bank provided $130,000 and $255,000 to the allowance for loan loss for the three and six months ended June 30, 2008 compared to provisions of $94,000 and $245,000 for the comparable periods in 2007. Management believes that the current allowance for loan loss of $2,275,000 (or 0.92% of total loans) at June 30, 2008 is adequate.

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

	Three months ended (in thousands)						Six months ended (in thousands)
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
Balance, beginning of period	$	2,244		$	2,179		$	2,146		$	2,091
Provision for loan losses		130			94			255			245
Loans charged off		(112	)		(107	)		(149	)		(175	)
Recoveries of loans charged off		13			10			23			15
Balance, end of period	$	2,275		$	2,176		$	2,275		$	2,176

Income Taxes

For the three and six months ended June 30, 2008, Financial had an income tax expense of $264,000 and $500,000, respectively. Based on its 2007 income tax liability, Financial made an income tax payment of $553,000 during the quarter ended June 30, 2008.

20

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Three Months Ended June 30, 2008 and 2007

	2008							2007
	Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid		Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid
ASSETS
Loans, including fees	$	238,770		$	4,068	6.83	%	$	201,737		$	3,962	7.88	%
Federal funds sold		1,690			9	2.14	%		889			12	5.41	%
Securities		37,237			505	5.45	%		25,005			307	4.92	%
Federal agency equities		1,866			45	9.67	%		780			17	8.74	%
CBB equity		56			—	—			56			—	—
Total earning assets		279,619			4,627	6.64	%		228,467			4,298	7.55	%
Allowance for loan losses		(2,260	)						(2,197	)
Non-earning assets		17,579							14,838
Total assets	$	294,938						$	241,108
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing	$	39,601		$	152	1.54	%	$	42,816		$	296	2.77	%
Savings		32,606			197	2.42	%		13,032			55	1.69	%
Time deposits		129,873			1,433	4.43	%		120,278			1,463	4.88	%
Total interest bearing deposits		202,080			1,782	3.54	%		176,126			1,814	4.13	%
Other borrowed funds
Fed funds purchased		714			4	2.25	%		893			13	5.84	%
Repurchase agreements		12,790			76	2.38	%		9,225			72	3.13	%
Other borrowings		19,325			136	2.82	%		—			—	—
Total interest-bearing liabilities		234,909			1,998	3.41	%		186,244			1,899	4.09	%
Non-interest bearing deposits		34,680							31,905
Other liabilities		664							500
Total liabilities		270,253							218,649
Stockholders’ equity		24,685							22,459
Total liabilities and Stockholders equity	$	294,938						$	241,108
Net interest earnings				$	2,629						$	2,399
Net interest margin						3.77	%						4.21	%
Interest spread						3.23	%						3.46	%

21

Net Interest Margin Analysis

Average Balance Sheets

For the Six Months Ended June 30, 2008 and 2007

	2008							2007
	Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid		Average Balance Sheet			Interest Income/ Expense		Average Rates Earned/Paid
ASSETS
Loans, including fees	$	234,061		$	8,225	7.09	%	$	198,415		$	7,737	7.86	%
Federal funds sold		1,424			18	2.55	%		494			14	5.71	%
Securities		32,756			889	5.47	%		25,297			617	4.92	%
Federal agency equities		1,539			45	5.90	%		762			23	6.09	%
CBB equity		56			—	—			56			—	—
Total earning assets		269,836			9,177	6.86	%		225,024			8,391	7.52	%
Allowance for loan losses		(2,226	)						(2,157	)
Non-earning assets		15,894							14,571
Total assets	$	283,504						$	237,438
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Demand interest bearing	$	41,889		$	350	1.68	%	$	41,905		$	572	2.75	%
Savings		22,315			238	2.15	%		13,738			115	1.69	%
Time deposits		132,400			3,012	4.59	%		116,198			2,784	4.83	%
Total interest bearing deposits		196,604			3,600	3.69	%		171,841			3,471	4.07	%
Other borrowed funds
Fed funds purchased		2,409			49	4.08	%		2,826			83	5.92	%
Repurchase agreements		12,065			157	2.61	%		8,546			130	3.07	%
Other borrowings		13,274			177	2.67	%		—			—	—
Total interest-bearing liabilities		224,352			3,983	3.56	%		183,213			3,684	4.05	%
Non-interest bearing deposits		33,983							32,233
Other liabilities		702							621
Total liabilities		259,037							216,067
Stockholders’ equity		24,467							21,371
Total liabilities and Stockholders equity	$	283,504						$	237,438
Net interest earnings				$	5,194						$	4,707
Net interest margin						3.88	%						4.22	%
Interest spread						3.30	%						3.46	%

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

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) 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 June 30, 2008, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) 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, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on March 26, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases

On October 1, 2007 the Board of Directors of Financial authorized a stock repurchase program which allows for the repurchase of up to 27,500 (split adjusted) shares of its common stock. The shares reported in the table as shares that may be repurchased under the plan represent shares eligible through the term of the plan. The repurchases are to be made from time to time in the open market as conditions allow and will be structured to comply with SEC Rule 10b-18. Management reports monthly to the Board of Directors on the status of the repurchase program. The Board of Directors has reserved the right to suspend, terminate, modify or cancel this repurchase program at any time for any reason. The following table lists shares repurchased during the quarter ended June 30, 2008 and the maximum amount available to repurchase under the repurchase plan.

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Period	Total Number of Shares Purchased	Average Price Paid Per Share ($)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
Month # 1 April 1through April 30, 2008	210	11.36	6,207	21,293
Month # 2 May 1 through May 31, 2008	198	14.27	6,417	21,083
Month # 3 June 1 through June 30, 2008	—	—	—	21,083
Total	407	12.78	6,616	20,884

All share totals reflect the 10% stock dividend declared on May 20, 2008 and paid on July 22, 2008 to shareholders of record on June 17, 2008.

Item 3. Defaults Upon Senior Securities

Not applicable

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

(a) The Bank held its annual meeting of shareholders on May 20, 2008 at 4:00 p.m. in Lynchburg, Virginia.

(b) At the annual meeting, the shareholders elected the following directors:

Robert R. Chapman III

Donna Schewel Clark

Augustus A. Petticolas, Jr.

Richard R. Zechini

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

Lewis C. Addision

William C. Bryant III

James F. Daly

Donald M. Giles

Watt R. Foster, Jr.

Thomas W. Pettyjohn, Jr.

J. Todd Scruggs

Kenneth S. White

(c) In addition to the election of the Directors at the annual meeting, the shareholders voted on the following matter: ratify the selection by the Company of Yount, Hyde & Barbour, P.C., independent public accountants, to audit the financial statements of the Company for the fiscal year ending on December 31, 2008 (“Proposal Two”).

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

Proposal One—Election of Directors

Name	Number of Votes Cast For	Number of Votes Against	Number of Abstentions	Number of Broker Non-Votes
Robert R. Chapman III	1,742,520	—	3,850	—
Donna Schewel Clark	1,741,112	—	5,258	—
Augustus A. Petticolas, Jr.	1,740,479	—	5,891	—
Richard R. Zechini	1,736,350	—	10,020	—

Proposal Two—Ratification of Auditors

Number of Votes Cast For	Number of Votes Against	Number of Abstentions	Number of Broker Non-Votes
1,691,550	51,970	2,850	—

(d) Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following are filed as Exhibits to this Form 10-Q:

Exhibit No.	Description of Exhibit
31.1	Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2008
31.2	Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13 2008
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 August 13, 2008

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SIGNATURES

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

	BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: August 13, 2008	By	/S/ Robert R. Chapman III
		Robert R. Chapman III, President
		(Principal Executive Officer)
Date: August 13, 2008	By	/S/ J. Todd Scruggs
		J. Todd Scruggs, Secretary and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

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Index of Exhibits

Exhibit No.	Description of Exhibit
31.1	Certification of Robert R. Chapman III Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2008
31.2	Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2008
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 August 13, 2008

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EX-31.1

Exhibit 31.1

Certification—Principal Executive Officer

I, Robert R. Chapman, III, President of Bank of the James Financial Group, Inc. certify that:

(1) I have reviewed this Form 10-Q of Bank of the James Financial Group, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

(4) The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

(5) The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: August 13, 2008	By	/S/ Robert R. Chapman III
		Robert R. Chapman III, President
		(Principal Executive Officer)

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EX-31.2

Exhibit 31.2

Certification—Principal Financial Officer and Principal Accounting Officer

I, J. Todd Scruggs, Secretary and Treasurer of Bank of the James Financial Group, Inc., certify that:

(1) I have reviewed this Form 10-Q of Bank of the James Financial Group, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

(4) The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

(5) The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: August 13, 2008	By	/S/ J. Todd Scruggs
		J. Todd Scruggs, Secretary and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Bank of the James Financial Group, Inc.

	BANK OF THE JAMES FINANCIAL GROUP, INC.
Date: August 13, 2008	By	/S/ Robert R. Chapman III
		Robert R. Chapman III, President
		(Principal Executive Officer)
Date: August 13, 2008	By	/S/ J. Todd Scruggs
		J. Todd Scruggs, Secretary and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

30