##### Table of Contents





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 March 31, 2009





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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ̈  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









---

##### Table of Contents

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: 2,812,751 shares of Common Stock, par value $2.14 per share, were outstanding at
May 12, 2009.



---

##### Table of Contents

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                            |  | 24
|                                                                                              | 
|Item 4T. Controls and Procedures                                                              |  | 24
|                                                                                              | 
|PART II  OTHER INFORMATION                                                                   |  | 24
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 24
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 24
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 24
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 24
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 24
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 24
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 25
|                                                                                              | 
|SIGNATURES                                                                                    |  | 26



---

##### Table of Contents

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)   |         |   | (audited)        |  
|                                                                                                                                        |  | March 31,2009 |         |   | December 31,2008 |  
|Assets                                                                                                                                  |  |               |         |   |                  |   |         |  
|Cash and due from banks                                                                                                                 |  | $             | 11,531  |   |                  | $ | 10,584  |  
|Federal funds sold                                                                                                                      |  |               | 15,862  |   |                  |   | 5,241   |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total cash and cash equivalents                                                                                                         |  |               | 27,393  |   |                  |   | 15,825  |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|                                                                                                                                        |  |              
|Securities held-to-maturity (fair value of $4,008 in 2008 and $6,039 in 2008)                                                           |  |               | 3,994   |   |                  |   | 5,994   |  
|Securities available-for-sale, at fair value                                                                                            |  |               | 37,848  |   |                  |   | 16,136  |  
|Restricted stock, at cost                                                                                                               |  |               | 2,165   |   |                  |   | 2,059   |  
|Loans, net of allowance for loan losses of $3,004 in 2009 and $2,859 in 2008                                                            |  |               | 287,900 |   |                  |   | 274,890 |  
|Premises and equipment, net                                                                                                             |  |               | 7,615   |   |                  |   | 7,290   |  
|Software, net                                                                                                                           |  |               | 321     |   |                  |   | 382     |  
|Interest receivable                                                                                                                     |  |               | 1,898   |   |                  |   | 1,624   |  
|Other real estate owned                                                                                                                 |  |               | 1,940   |   |                  |   | 82      |  
|Income taxes receivable                                                                                                                 |  |               | 1,078   |   |                  |   | 1,171   |  
|Deferred tax asset                                                                                                                      |  |               | 1,307   |   |                  |   | 966     |  
|Other assets                                                                                                                            |  |               | 2,102   |   |                  |   | 2,186   |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                            |  | $             | 375,561 |   |                  | $ | 328,605 |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|                                                                                                                                        |  |              
|Liabilities and Stockholders Equity                                                                                                    |  |               |         |   |                  |   |         |  
|                                                                                                                                        |  |              
|Deposits                                                                                                                                |  |               |         |   |                  |   |         |  
|Noninterest bearing demand                                                                                                              |  |               | 38,196  |   |                  |   | 35,778  |  
|NOW, money market and savings                                                                                                           |  |               | 174,337 |   |                  |   | 127,341 |  
|Time                                                                                                                                    |  |               | 97,730  |   |                  |   | 104,992 |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total deposits                                                                                                                          |  |               | 310,263 |   |                  |   | 268,111 |  
|                                                                                                                                        |  |              
|Repurchase agreements                                                                                                                   |  |               | 13,193  |   |                  |   | 14,339  |  
|FHLB borrowings                                                                                                                         |  |               | 21,000  |   |                  |   | 21,000  |  
|Capital notes                                                                                                                           |  |               | 6,180   |   |                  |   |        |  
|Interest payable                                                                                                                        |  |               | 299     |   |                  |   | 302     |  
|Other liabilities                                                                                                                       |  |               | 457     |   |                  |   | 218     |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                       |  | $             | 351,392 |   |                  | $ | 303,970 |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Stockholders equity                                                                                                                    |  |               |         |   |                  |   |         |  
|Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 2,810,255 as of March 31, 2009 and December 31,
2008 |  |               | 6,014   |   |                  |   | 6,014   |  
|Additional paid-in-capital                                                                                                              |  |               | 19,475  |   |                  |   | 19,473  |  
|Accumulated other comprehensive (loss)                                                                                                  |  |               | (738    | ) |                  |   | (76     | )
|Retained earnings (deficit)                                                                                                             |  |               | (582    | ) |                  |   | (776    | )
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                              |  | $             | 24,169  |   |                  | $ | 24,635  |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  
|                                                                                                                                        |  |              
|Total liabilities and stockholders equity                                                                                              |  | $             | 375,561 |   |                  | $ | 328,605 |  
|                                                                                                                                        |  |               |         |   |                  |   |         |  

See accompanying notes to these consolidated financial statements



1



---

##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operation

(dollar amounts in thousands,
except per share amounts)



|                                                         |  |                                     |           |      |   |          
|-------------------------------------------------------- |  | ----------------------------------- | --------- | ---- | - | ---------
|                                                         |  | For the Three MonthsEnded
March 31,
|                                                         |  | 2009                                |           | 2008
|Interest Income                                          |  |                                     |           |      |   |          
|Loans                                                    |  | $                                   | 4,081     |      | $ | 4,157    
|Securities                                               |  |                                     |           |      |   |          
|US Government and agency obligations                     |  |                                     | 308       |      |   | 217      
|Mortgage backed securities                               |  |                                     | 40        |      |   | 93       
|Municipals                                               |  |                                     | 10        |      |   | 15       
|Corporates                                               |  |                                     | 56        |      |   | 59       
|Federal Funds sold                                       |  |                                     | 6         |      |   | 9        
|                                                         |  |                                     |           |      |   |          
|Total interest income                                    |  |                                     | 4,501     |      |   | 4,550    
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Interest Expense                                         |  |                                     |           |      |   |          
|Deposits                                                 |  |                                     |           |      |   |          
|NOW, money market savings                                |  |                                     | 907       |      |   | 239      
|Time Deposits                                            |  |                                     | 935       |      |   | 1,579    
|Federal Funds purchased                                  |  |                                     |          |      |   | 45       
|FHLB borrowings                                          |  |                                     | 147       |      |   | 41       
|Reverse repurchase agreements                            |  |                                     | 59        |      |   | 81       
|                                                         |  |                                     |           |      |   |          
|Total interest expense                                   |  |                                     | 2,048     |      |   | 1,985    
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Net interest income                                      |  |                                     | 2,453     |      |   | 2,565    
|                                                         |  |                                    
|Provision for loan losses                                |  |                                     | 322       |      |   | 125      
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Net interest income after provision for loan losses      |  |                                     | 2,131     |      |   | 2,440    
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Other operating income                                   |  |                                     |           |      |   |          
|Mortgage fee income                                      |  |                                     | 327       |      |   | 320      
|Service charges, fees, commissions                       |  |                                     | 361       |      |   | 254      
|Other                                                    |  |                                     | 81        |      |   | 85       
|Gain on sale of securities                               |  |                                     | 116       |      |   | 80       
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Total other operating income                             |  |                                     | 885       |      |   | 739      
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Other operating expenses                                 |  |                                     |           |      |   |          
|Salaries and employee benefits                           |  |                                     | 1,439     |      |   | 1,281    
|Occupancy                                                |  |                                     | 212       |      |   | 186      
|Equipment                                                |  |                                     | 271       |      |   | 227      
|Supplies                                                 |  |                                     | 99        |      |   | 88       
|Professional, data processing, and other outside expense |  |                                     | 336       |      |   | 331      
|Marketing                                                |  |                                     | 80        |      |   | 84       
|Credit expense                                           |  |                                     | 81        |      |   | 55       
|Loss on sale of assets                                   |  |                                     |          |      |   | 9        
|Other                                                    |  |                                     | 210       |      |   | 178      
|                                                         |  |                                     |           |      |   |          
|Total other operating expenses                           |  |                                     | 2,728     |      |   | 2,439    
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Income before income taxes                               |  |                                     | 288       |      |   | 740      
|                                                         |  |                                    
|Income tax expense                                       |  |                                     | 94        |      |   | 236      
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Net Income                                               |  | $                                   | 194       |      | $ | 504      
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Weighted average shares outstanding, basic               |  |                                     | 2,810,255 |      |   | 2,809,848
|                                                         |  |                                     |           |      |   |          
|Weighted average shares outstanding, diluted             |  |                                     | 2,858,176 |      |   | 2,908,404
|                                                         |  |                                     |           |      |   |          
|                                                         |  |                                    
|Income per common sharebasic                            |  | $                                   | 0.07      |      | $ | 0.18     
|                                                         |  |                                     |           |      |   |          
|Income per common sharediluted                          |  | $                                   | 0.07      |      | $ | 0.17     
|                                                         |  |                                     |           |      |   |          

See accompanying notes to these consolidated financial statements



2



---

##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three months ended
March 31, 2009 and 2008

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



|                                                                                           |  |           |         |   |      |   |        |  
|------------------------------------------------------------------------------------------ |  | --------- | ------- | - | ---- | - | ------ | -
|                                                                                           |  | March 31, |        
|                                                                                           |  | 2009      |         |   | 2008 |  
|Cash flows from operating activities                                                       |  |           |         |   |      |   |        |  
|Net Income                                                                                 |  | $         | 194     |   |      | $ | 504    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Depreciation                                                                               |  |           | 225     |   |      |   | 174    |  
|Net amortization and accretion of premiums and discounts on securities                     |  |           | 47      |   |      |   | 1      |  
|Gain on sale of available for sale securities                                              |  |           | (116    | ) |      |   | (80    | )
|Loss on sale of assets                                                                     |  |           |        |   |      |   | 9      |  
|Provision for loan losses                                                                  |  |           | 322     |   |      |   | 125    |  
|Stock compensation expense                                                                 |  |           | 2       |   |      |   | 3      |  
|(Increase) decrease in interest receivable                                                 |  |           | (274    | ) |      |   | 38     |  
|(Increase) decrease in other assets                                                        |  |           | (1,774  | ) |      |   | (208   | )
|(Increase) decrease in income taxes receivable                                             |  |           | 93      |   |      |   |       |  
|Increase (decrease) in income taxes payable                                                |  |           |        |   |      |   | 236    |  
|Increase (decrease) in interest payable                                                    |  |           | (3      | ) |      |   | 24     |  
|Increase (decrease) in other liabilities                                                   |  |           | 239     |   |      |   | 160    |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Net cash provided by (used in) operating activities                                        |  | $         | (1,044  | ) |      | $ | 986    |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Cash flows from investing activities                                                       |  |           |         |   |      |   |        |  
|Proceeds from maturities and calls of securities held to maturity                          |  | $         | 2,000   |   |      | $ | 500    |  
|Purchases of securities available for sale                                                 |  |           | (31,515 | ) |      |   | (4,273 | )
|Proceeds from maturities and calls of securities available for sale                        |  |           | 1,000   |   |      |   | 4,256  |  
|Proceeds from sale of securities available for sale                                        |  |           | 7,868   |   |      |   | 5,485  |  
|Purchases of Federal Home Loan Bank stock                                                  |  |           | (106    | ) |      |   | (517   | )
|Origination of loans, net of principal collected                                           |  |           | (13,332 | ) |      |   | (9,056 | )
|Purchases of premises and equipment                                                        |  |           | (489    | ) |      |   | (414   | )
|Proceeds from sale of other assets                                                         |  |           |        |   |      |   | 1      |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Net cash (used in) investing activities                                                    |  | $         | (34,574 | ) |      | $ | (4,018 | )
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Cash flows from financing activities                                                       |  |           |         |   |      |   |        |  
|Net increase in deposits                                                                   |  | $         | 42,152  |   |      | $ | 282    |  
|Net (decrease) in federal funds purchased                                                  |  |           |        |   |      |   | (5,283 | )
|Net increase (decrease) in repurchase agreements                                           |  |           | (1,146  | ) |      |   | 1,370  |  
|Net increase in Federal Home Loan Bank advances                                            |  |           |        |   |      |   | 10,000 |  
|Acquisition of common stock                                                                |  |           |        |   |      |   | (56    | )
|Proceeds from sale of senior capital notes                                                 |  |           | 6,180   |   |      |   |       |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Net cash provided by financing activities                                                  |  | $         | 47,186  |   |      | $ | 6,313  |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Increase in cash and cash equivalents                                                      |  |           | 11,568  |   |      |   | 3,281  |  
|                                                                                           |  |          
|Cash and cash equivalents at beginning of period                                           |  |           | 15,825  |   |      |   | 4,314  |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Cash and cash equivalents at end of period                                                 |  | $         | 27,393  |   |      | $ | 7,595  |  
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Non cash transactions                                                                      |  |           |         |   |      |   |        |  
|Transfer of loans to foreclosed assets                                                     |  | $         | 1,858   |   |      | $ | 146    |  
|Fair value adjustment for available-for-sale securities                                    |  |           | (1,002  | ) |      |   | (89    | )
|                                                                                           |  |           |         |   |      |   |        |  
|                                                                                           |  |          
|Cash transactions                                                                          |  |           |         |   |      |   |        |  
|Cash paid for interest                                                                     |  | $         | 2,051   |   |      | $ | 1,961  |  
|Cash paid for taxes                                                                        |  |           |        |   |      |   | 262    |  
|                                                                                           |  |           |         |   |      |   |        |  

See accompanying notes to these consolidated financial statements



3



---

##### Table of Contents

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 month periods ended March 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America. Additional information concerning the organization and business of
Financial, accounting policies followed, and other related information is contained in Financials Annual Report on Form 10-K for the year ended December 31, 2008. These financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended December 31, 2008 included in Financials Annual Report on Form 10-K. Results for the three month period ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009.

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 losses (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 March 31, 2009 and 2008, basic earnings per share has been computed based upon the weighted average common shares outstanding of 2,810,255 and 2,809,848, 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 months ended March 31, 2009 and 2008.



4



---

##### Table of Contents

|                                      |  |                             |           |      |   |          
|------------------------------------- |  | --------------------------- | --------- | ---- | - | ---------
|                                      |  | Three months endedMarch 31,
|                                      |  | 2009                        |           | 2008
|Net income                            |  | $                           | 194,000   |      | $ | 504,000  
|                                      |  |                            
|Weight average number of shares       |  |                             | 2,810,255 |      |   | 2,809,848
|Options affect of incremental shares  |  |                             | 47,921    |      |   | 98,557   
|                                      |  |                             |           |      |   |          
|                                      |  |                            
|Weighted average diluted shares       |  |                             | 2,858,176 |      |   | 2,908,404
|                                      |  |                             |           |      |   |          
|                                      |  |                            
|Basic EPS (weighted avg shares)       |  | $                           | 0.07      |      | $ | 0.18     
|                                      |  |                             |           |      |   |          
|                                      |  |                            
|Diluted EPS (including option shares) |  | $                           | 0.07      |      | $ | 0.17     
|                                      |  |                             |           |      |   |          

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 months ended March 31, 2009 is $2,000, which had no impact on basic and diluted earnings per share for the same period.

Stock option plan activity for the three months ended March 31, 2009 is summarized below:



|                                     |  |         |   |  |                              |       |                                                    |      |                       |   |        
|------------------------------------ |  | ------- | - |  | ---------------------------- | ----- | -------------------------------------------------- | ---- | --------------------- | - | -------
|                                     |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (in years) |      | AverageIntrinsicValue
|Options outstanding, January 1, 2009 |  | 318,021 |   |  | $                            | 8.61  |                                                    |      |                       |   |        
|Granted                              |  |        |   |  |                              |      |                                                    |      |                       |   |        
|Exercised                            |  |        |   |  |                              |      |                                                    |      |                       |   |        
|Forfeited                            |  | (2,820  | ) |  | $                            | 12.31 |                                                    |      |                       |   |        
|                                     |  |         |   |  |                              |       |                                                    |      |                       |   |        
|Options outstanding, March 31, 2009  |  | 315,201 |   |  |                              | 8.58  |                                                    | 4.38 |                       | $ | 354,077
|                                     |  |         |   |  |                              |       |                                                    |      |                       |   |        
|Options exercisable, March 31, 2009  |  | 313,601 |   |  | $                            | 8.55  |                                                    | 4.36 |                       | $ | 354,077
|                                     |  |         |   |  |                              |       |                                                    |      |                       |   |        



5



---

##### Table of Contents

As of March 31, 2009 there was unrecognized compensation expense related to non-vested option awards in the amount
of $6,000.

Note 5  Stock 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. 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 FASB issued Statement of Financial Accounting
Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard significantly changed the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an
entitys first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies. FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.



6



---

##### Table of Contents

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the
asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and
shall be applied prospectively. Earlier adoption is permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 amends
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial
statements. In addition, the FSP amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending
after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2
and FAS 124-2 amend other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not
amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after June 15, 2009, with earlier adoption
permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB
Series entitled Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. SAB 111 maintains the SEC Staffs previous views related to equity securities and amends Topic 5.M. to exclude debt securities
from its scope. The Company does not expect the implementation of SAB 111 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 follows:



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



7



---

##### Table of Contents

| |  |  | 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 1 of the valuation hierarchy. Level 1 securities would
include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or
discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there
is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Companys securities are considered to be Level 2 securities.

The following table summarizes the Companys financial assets that were measured at fair value on a nonrecurring basis during the period.



|                              |  |                            |                                                            |                                  |                                           |   |                                        |   |        |  |   |  
|----------------------------- |  | -------------------------- | ---------------------------------------------------------- | -------------------------------- | ----------------------------------------- | - | -------------------------------------- | - | ------ |  | - | -
|                              |  | Balance as ofMarch 31,2009 |                                                            | Carrying Value at March 31, 2009
|Description                   |  |                            | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |                                  | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3)
|Available-for-sale securities |  | $                          | 37,848                                                     |                                  | $                                         |  |                                        | $ | 37,848 |  | $ | 

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
March 31, 2009, the Company had no loans held 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.



8



---

##### Table of Contents

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.

The following table summarizes the Companys OREO measured at fair value on a
nonrecurring basis during the period.



|                        |  |                            |                                                            |                                  |                                           |   |                                        |   |       |  |   |    
|----------------------- |  | -------------------------- | ---------------------------------------------------------- | -------------------------------- | ----------------------------------------- | - | -------------------------------------- | - | ----- |  | - | ---
|                        |  | Balance as ofMarch 31,2009 |                                                            | Carrying Value at March 31, 2009
|Description             |  |                            | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |                                  | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3)
|Other real estate owned |  | $                          | 1,940                                                      |                                  | $                                         |  |                                        | $ | 1,754 |  | $ | 186



9



---

##### Table of Contents

|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



10



---

##### Table of Contents

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. The Bank also wholly-owns BOTJ Insurance, Inc. (BOTJ Insurance) through which we act as an agent for insurance and annuity products. The Bank (and
BOTJ Insurance) and the Investment Group are our only subsidiaries and primary assets. Financial conducts its business through the following lines: community banking through the Bank, insurance agency services through the BOTJ Insurance, 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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 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. In April 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 three years and its financial impact on the consolidated financials of the Company has been minimal. In addition, Investment Group has purchased 4.96% of CBS
Holdings, LLC for $10,000. CBS Holdings is owned by approximately 11 financial institutions.

BOTJ Insurance was incorporated under the
laws of the Commonwealth of Virginia in 2008. In September 2008, BOTJ Insurance began offering its services to the public from space in the Main Street Branch. Currently BOTJ Insurance is a stand-alone agency with no employees.

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 in complying with the Sarbanes-Oxley Act of 2002, miscellaneous other expenses, franchise taxes, and income taxes.



11



---

##### Table of Contents

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 services its banking customers through nine branch
locations in the Region 2000 area, including two branches that we opened in 2008:



| |  |  | On October 23, 2008, the Bank opened a branch bank location located at 1405 Ole Dominion Boulevard in the City of Bedford, Virginia, located off of
Independence Boulevard (the Bedford Branch).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 17, 2008, the Bank opened a temporary branch at 815 Main St. in the Town of Altavista, Virginia. This branch does not have either an ATM or a drive
through and therefore is not a full service branch. The Bank purchased real property located at 1110 Main Street in Altavista and intends to open a full service branch at that location as early as the second quarter of 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to these two recently-opened branches, the Bank also 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 (the Church Street Branch) (opened July 1999),
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | A branch located at 5204 Fort Avenue in Lynchburg (the Fort Hill Branch) (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), and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | 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).

Investment Group operates primarily out of its office located
at the Church Street Branch.

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 Bank intends to open a location on property that it previously purchased at the
intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank has determined that the existing structures on the Timberlake site 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 this property will be between $1,300,000 and $1,700,000.



12



---

##### Table of Contents

On September 10, 2008, the Bank has entered into a lease of certain real property located at 1152
Hendricks Store Road, Moneta, Virginia. Presently, the Bank does not conduct business at this location but is considering using the property for future expansion.

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.

Subject to terms acceptable to the Bank, the Bank may consider entering into sale-leaseback arrangements for one or more of its branches.

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:



|                             |  |                              |       
|---------------------------- |  | ---------------------------- | ------
|                             |  | March 31, 2009(in thousands)
|Commitments to extend credit |  | $                            | 43,550
|Letters of Credit            |  |                              | 3,453 
|                             |  |                              |       
|                             | 
|Total                        |  | $                            | 47,003
|                             |  |                              |       

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.



13



---

##### Table of Contents

SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents managements discussion and analysis of the financial condition of Financial as of March 31, 2009 and
December 31, 2008 and the results of operations of Financial for the three months ended March 31, 2009 and 2008. This discussion 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

March 31, 2009 as Compared to December 31, 2008

Total assets were $375,561,000 on March 31, 2009 compared with $328,605,000 at December 31, 2008, an increase of 14.29%. The increase in total assets is due in part to an increase in loans, which were funded
by increased deposits and existing Federal Home Loan Bank borrowings.

Total deposits grew from $268,111,000 for the year ended
December 31, 2008 to $310,263,000 on March 31, 2009, an increase of 15.72%, driven in large part by increased deposits at the Amherst Branch, Boonsboro Branch, and Forest Branch. The balance of non-FDIC insured sweep accounts (repurchase
agreements) decreased to $13,193,000 on March 31, 2009 from $14,339,000 on December 31, 2008 in large part because of a decrease in interest rates paid on these accounts.

To complement deposits in funding asset growth and due to the attractive rates on these funds, the Bank has funded past asset growth with short to medium
term advances from the Federal Home Loan Bank of Atlanta (FHLBA). As of March 31, 2009 and December 31, 2008, the principal balance of FHLBA borrowings was $21,000,000. On April 15, 2009, $1,000,000 of this amount matured and was
repaid to FHLBA.

Loans, net of unearned income and allowance, increased to $287,900,000 on March 31, 2009 from $274,890,000 on
December 31, 2008, an increase of 4.73%. Total loans increased to $290,904,000 on March 31, 2009 from $277,749,000 on December 31, 2008. 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):



|                         |  |                |         |            |                   |   |        |                |            |  |        |        |  |            |         |  |        |  
|------------------------ |  | -------------- | ------- | ---------- | ----------------- | - | ------ | -------------- | ---------- |  | ------ | ------ |  | ---------- | ------- |  | ------ | -
|                         |  | March 31, 2009 |         |            | December 31, 2008 |   |        | March 31, 2008 |           
|                         |  | Amount         |         | Percentage |                   |   | Amount |                | Percentage |  |        | Amount |  | Percentage |        
|Commercial               |  | $              | 56,339  |            | 19.37             | % |        | $              | 52,842     |  | 19.03  | %      |  | $          | 47,014  |  | 19.99  | %
|Real estate construction |  |                | 41,379  |            | 14.22             | % |        |                | 43,507     |  | 15.66  | %      |  |            | 39,929  |  | 16.98  | %
|Real estate mortgage     |  |                | 144,423 |            | 49.65             | % |        |                | 136,850    |  | 49.27  | %      |  |            | 114,654 |  | 48.75  | %
|Consumer                 |  |                | 45,462  |            | 15.63             | % |        |                | 43,220     |  | 15.56  | %      |  |            | 32,339  |  | 13.75  | %
|Other                    |  |                | 3,301   |            | 1.13              | % |        |                | 1,330      |  | 0.48   | %      |  |            | 1,261   |  | 0.54   | %
|                         |  |                |         |            |                   |   |        |                |            |  |        |        |  |            |         |  |        |  
|Total loans              |  | $              | 290,904 |            | 100.00            | % |        | $              | 277,749    |  | 100.00 | %      |  | $          | 235,197 |  | 100.00 | %
|                         |  |                |         |            |                   |   |        |                |            |  |        |        |  |            |         |  |        |  

Total nonperforming assets, which consist of non-accrual loans and other real estate owned
(OREO) increased to $4,792,000 on March 31, 2009 from $3,940,000 on December 31, 2008. Non-accrual loans decreased to $2,852,000 on March 31, 2009 from $3,859,000 on December 31, 2008. 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. 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, 2008, the Bank was carrying one OREO property on its books at a value of $82,000. As of March 31, 2009, the Bank was carrying OREO properties on its books
at a value of $1,940,000. $1,609,000 of the OREO balance is due to the purchase of a partially-developed commercial property, which the Bank purchased at foreclosure. Since March 31, 2009, the bank has entered into a



14



---

##### Table of Contents

contract for one of the residential properties and does not anticipate that it will incur a loss on the sale. The Bank currently is marketing these
properties and anticipates that any gain or loss on the sale will not be material.

The following tables set forth information regarding
impaired and non-accrual loans as of March 31, 2009 and December 31, 2008:



|                                                             |  |                                      |        |                   |   |       
|------------------------------------------------------------ |  | ------------------------------------ | ------ | ----------------- | - | ------
|                                                             |  | Impaired & Non-Accrual Loans        
|                                                             |  | (dollars in thousands)              
|                                                             |  | March 31, 2009                       |        | December 31, 2008
|Impaired loans without a valuation allowance                 |  | $                                    | 9,357  |                   | $ | 8,006 
|Impaired loans with a valuation allowance                    |  |                                      | 10,074 |                   |   | 10,375
|                                                             |  |                                      |        |                   |   |       
|Total impaired loans                                         |  | $                                    | 19,431 |                   | $ | 18,381
|                                                             |  |                                      |        |                   |   |       
|Valuation allowance related to impaired loans                |  | $                                    | 1,519  |                   | $ | 1,441 
|Total non-accrual loans                                      |  | $                                    | 2,852  |                   | $ | 3,859 
|Total loans past due ninety days or more and still accruing  |  | $                                    |       |                   | $ |      
|                                                             | 
|                                                             |  | Average Investment in Impaired Loans
|                                                             |  | (dollars in thousands)              
|                                                             |  | Period Ended                        
|                                                             |  | March 31, 2009                       |        | December 31, 2008
|Average investment in impaired loans                         |  | $                                    | 18,906 |                   | $ | 15,703
|                                                             |  |                                      |        |                   |   |       
|Interest income recognized on impaired loans                 |  | $                                    | 146    |                   | $ | 860   
|                                                             |  |                                      |        |                   |   |       
|Interest income recognized on a cash basis on impaired loans |  | $                                    | 231    |                   | $ | 786   
|                                                             |  |                                      |        |                   |   |       



15



---

##### Table of Contents

No non-accrual loans were excluded from impaired loan disclosure under SFAS No. 114 at
March 31, 2009 and December 31, 2008. If interest on these loans had been accrued, such income would have approximated $377,000 and $242,000, through March 31, 2009 and through December 31, 2008, respectively. Loan payments
received on non-accrual loans are first applied to principal. When a loan is placed on non-accrual status there are several negative implications. First, all interest accrued but unpaid at the time of the classification is reversed and deducted from
the interest income totals for the Bank. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Third, there may be actual losses that necessitate additional provisions for credit
losses charged against earnings. These loans were included in the non-performing loan totals listed above.

Cash and cash equivalents
increased to $27,393,000 on March 31, 2009 from $15,825,000 on December 31, 2008. 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 the proceeds from the private placement discussed below, 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 $3,994,000 on March 31, 2009 from $5,994,000 on December 31, 2008, which resulted from the call of one security prior to maturity. Securities available-for-sale increased to $37,848,000 on March 31, 2009
from $16,136,000 on December 31, 2008. During the three months ended March 31, 2009 the Bank has received proceeds from maturities and/or calls of securities-available-for sale totaling $1,000,000 and has received proceeds from sale of
securities available-for sale totaling $7,868,000. The Bank purchased $31,515,000 in securities available-for sale during the same period. The increase from December 31, 2008 in securities available-for-sale was primarily due to the investment
of surplus funds, primarily from the increase in deposits, in longer term, higher yielding securities.



16



---

##### Table of Contents

The following table summarizes the Banks holdings for both securities held-to-maturity and
securities available-for-sale as of March 31, 2009 and December 31, 2008 (amounts in thousands):



|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|----------------------------- |  | ----------------- | ------ | ---------------- | --------- | -------- |  | - | ------ | - |  | - | ------
|                              |  | March 31, 2009    |        |                  | FairValue
|                              |  | AmortizedCosts    |        | Gross Unrealized |           |         
|                              |  | Gains             |        | (Losses)         |           |         
|Held to Maturity              |  | $                 | 3,994  |                  | $         | 16       |  | $ | (2     | ) |  | $ | 4,008 
|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|US Govt & Agency obligations |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|Available-for sale            |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|US Govt & Agency obligations |  |                   | 32,938 |                  |           | 72       |  |   | (280   | ) |  |   | 32,730
|Mortgage-backed securities    |  |                   | 301    |                  |           |         |  |   | (11    | ) |  |   | 290   
|Municipals                    |  |                   | 1,736  |                  |           |         |  |   | (36    | ) |  |   | 1,700 
|Other                         |  |                   | 3,991  |                  |           |         |  |   | (863   | ) |  |   | 3,128 
|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|                              |  | $                 | 38,966 |                  | $         | 72       |  | $ | (1,190 | ) |  | $ | 37,848
|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|                              |  |                  
|                              |  | December 31, 2008 |        |                  | FairValue
|                              |  | Costs             |        | Gains            |           | (Losses) |  |  
|Held to Maturity              |  | $                 | 5,994  |                  | $         | 45       |  | $ |       |   |  | $ | 6,039 
|US Govt & Agency obligations |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|Available-for sale            |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|US Govt & Agency obligations |  |                   | 6,994  |                  |           | 243      |  |   |       |   |  |   | 7,237 
|Mortgage-backed securities    |  |                   | 5,057  |                  |           | 27       |  |   | (54    | ) |  |   | 5,030 
|Municipals                    |  |                   | 718    |                  |           | 2        |  |   | (26    | ) |  |   | 694   
|Other                         |  |                   | 3,483  |                  |           | 25       |  |   | (333   | ) |  |   | 3,175 
|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       
|                              |  | $                 | 16,252 |                  | $         | 297      |  | $ | (413   | ) |  | $ | 16,136
|                              |  |                   |        |                  |           |          |  |   |        |   |  |   |       

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 |                   
|March 31, 2009                        |  | FairValue           |        | Unrealized(Losses) |                     |      | FairValue |       | Unrealized(Losses) |       |  | FairValue |      | Unrealized(Losses) | 
|Description of securities             |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|U.S. agency obligations               |  | $                   | 26,610 |                    | $                   | (282 | )         |       | $                  |      |  | $         |     |                    |  | $ | 26,610 |  | $ | (282   | )
|Mortgage-backed securities            |  |                     | 16     |                    |                     |     |           |       |                    | 285   |  |           | (11  | )                  |  |   | 301    |  |   | (11    | )
|Municipals                            |  |                     | 478    |                    |                     | (7   | )         |       |                    | 239   |  |           | (29  | )                  |  |   | 717    |  |   | (36    | )
|Other                                 |  |                     | 507    |                    |                     | (6   | )         |       |                    | 3,484 |  |           | (857 | )                  |  |   | 3,991  |  |   | (863   | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|Total temporarily impaired securities |  | $                   | 27,611 |                    | $                   | (295 | )         |       | $                  | 4,008 |  | $         | (897 | )                  |  | $ | 31,619 |  | $ | (1,192 | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|                                      |  |                     |       
|                                      |  | Less than 12 months |        |                    | More than 12 months |      |           | Total |                   
|December 31, 2008                     |  | FairValue           |        | Unrealized(Losses) |                     |      | FairValue |       | Unrealized(Losses) |       |  | FairValue |      | Unrealized(Losses) | 
|Description of securities             |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|Mortgage-backed securities            |  | $                   | 2,681  |                    | $                   | (42  | )         |       | $                  | 298   |  | $         | (12  | )                  |  | $ | 2,979  |  | $ | (54    | )
|Corporates                            |  |                     |       |                    |                     |     |           |       |                    | 1,690 |  |           | (333 | )                  |  |   | 1,690  |  |   | (333   | )
|Municipals                            |  |                     |       |                    |                     |     |           |       |                    | 214   |  |           | (26  | )                  |  |   | 214    |  |   | (26    | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  
|Total temporarily impaired securities |  | $                   | 2,681  |                    | $                   | (42  | )         |       | $                  | 2,202 |  | $         | (371 | )                  |  | $ | 4,883  |  | $ | (413   | )
|                                      |  |                     |        |                    |                     |      |           |       |                    |       |  |           |      |                    |  |   |        |  |   |        |  



17



---

##### Table of Contents

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 March 31, 2009, 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 26 securities that are being evaluated for other than temporary impairment. Nineteen of these securities are S&P rated AAA, one is S&P rated AA, and six are S&P rated A. Of these securities nineteen are
obligations of government sponsored entities, two are municipal bank-qualified issues, and five are issued by publicly traded United States corporations. The securities issued by publicly traded corporations are classified as Other in
the tables set forth above.

Based on the analysis performed by management as mandated by the Banks investment policy, management
believes the default risk to be minimal. Because the Bank has the ability to hold securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines currently are deemed to be other-than-temporary.

At March 31, 2009, Financial had liquid assets of approximately $65,241,000 in the form of cash and available-for-sale investments. Management
believes that liquid assets were adequate at March 31, 2009. 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.

In connection with a
private placement of unregistered debt securities, Financial issued capital notes in the amount $7,000,000 (the Notes). Financial issued $6,180,000 of the Notes in the quarter ended March 31, 2009 and the remaining $820,000 of the
Notes was issued in April 2009. The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. The first interest payment on the Notes is due on July 1, 2009. No principal payments are due until the Notes
mature on April 1, 2012 (the Maturity Date). On the Maturity Date the principal and all accrued but unpaid interest on the Notes will be due and payable.

On March 30, 2009, Financial contributed $5,000,000 from the proceeds of the Notes to the Bank as additional equity capital. Financial has retained the balance of the proceeds, $2,000,000, at the holding company
level. Management intends to use the funds held at the holding company level for the purposes of servicing the interest payments due on the Notes and general corporate purposes. If necessary to finance additional growth, Financial may contribute
additional funds to the Bank as additional equity capital.

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.



18



---

##### Table of Contents

At March 31, 2009, the Bank had a leverage ratio of 8.31%, a Tier 1 risk-based capital ratio of
10.12% and a total risk-based capital ratio of 11.15%. As of March 31, 2009 and December 31, 2008 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 March 31, 2009 and December 31, 2008:



|                               |  |               |         |                  |   |        
|------------------------------ |  | ------------- | ------- | ---------------- | - | -------
|                               |  | March 31,2009 |         | December 31,2008
|Analysis of Capital (in 000s) |  |               |         |                  |   |        
|Tier 1 Capital:                |  |               |         |                  |   |        
|Common stock                   |  | $             | 3,743   |                  | $ | 3,743  
|Surplus                        |  |               | 18,319  |                  |   | 13,317 
|Retained earnings              |  |               | 7,332   |                  |   | 7,195  
|                               |  |               |         |                  |   |        
|Total Tier 1 capital           |  | $             | 29,394  |                  | $ | 24,255 
|                               |  |               |         |                  |   |        
|                               |  |              
|Tier 2 Capital:                |  |               |         |                  |   |        
|Allowance for loan losses      |  |               | 3,004   |                  |   | 2,859  
|                               |  |               |         |                  |   |        
|Total Tier 2 Capital:          |  |               | 3,004   |                  |   | 2,859  
|                               |  |               |         |                  |   |        
|Total risk-based capital       |  | $             | 32,398  |                  | $ | 27,114 
|                               |  |               |         |                  |   |        
|                               |  |              
|Risk weighted assets           |  | $             | 290,449 |                  | $ | 270,451
|                               |  |              
|Average total assets           |  | $             | 353,844 |                  | $ | 324,386



|                                                              |  |               |   |  |                       |   |  |                             |   |  |                             |  
|------------------------------------------------------------- |  | ------------- | - |  | --------------------- | - |  | --------------------------- | - |  | --------------------------- | -
|                                                              |  | Actual        |   |  | Regulatory Benchmarks |  
|                                                              |  | March 31,2009 |   |  | December 31,2008      |   |  | For CapitalAdequacyPurposes |   |  | For WellCapitalizedPurposes |  
|Capital Ratios:                                               |  |               |   |  |                       |   |  |                             |   |  |                             |  
|Tier 1 capital to average total assets ratio (leverage ratio) |  | 8.31          | % |  | 7.48                  | % |  | 4.00                        | % |  | 5.00                        | %
|Tier 1 risk based capital ratio                               |  | 10.12         | % |  | 8.97                  | % |  | 4.00                        | % |  | 6.00                        | %
|Total risk-based capital ratio                                |  | 11.15         | % |  | 10.03                 | % |  | 8.00                        | % |  | 10.00                       | %

The above tables set forth the capital position and analysis for the Bank only. Because total
assets on a consolidated basis are less than $500,000,000, Financial is not subject to the consolidated capital requirements imposed by the Bank Holding Company Act. Consequently, Financial does not calculate its financial ratios on a consolidated
basis. If calculated, the capital ratios for the Company on a consolidated basis would no longer be comparable to the capital ratios of the Bank because the proceeds of the private placement do not qualify as equity capital on a consolidated basis.

Results of Operations

Comparison of the Three Months Ended March 31, 2009 and 2008

Earnings Summary

Net income for the three months ended March 31, 2009 was $194,000 compared to a net income of $504,000 for the comparable period in 2008. Basic
earnings per common share for the three months ended March 31, 2009 were $0.07 compared with $0.18 of or the same period in 2008. Fully diluted earnings per common share for the three months ended March 31, 2009 were $0.07 compared with
$0.17 for the same period in 2008. 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.

The decline in net income for the three months ended March 31, 2009 as compared to the same period in 2009 resulted primarily from the following: i)
a decrease in the net interest margin; ii) an increase in loan loss provision during the quarter; and iii) the ongoing costs incurred in operating two branches were opened in the fourth quarter of 2008. Each of these factors is discussed in more
detail below.



19



---

##### Table of Contents

These operating results represent an annualized return on stockholders equity of 3.16% for the
three months ended March 31, 2009, compared with an annualized return of 8.28% in the same period in 2008. The Company had an annualized return on average assets for the three months ended March 31, 2009 of 0.22% compared with an
annualized return of 0.75% for the same period in 2008.

Interest Income, Interest Expense, and Net Interest Income

Interest income decreased to $4,501,000 for the three months ended March 31, 2009 from $4,550,000 for the same period in 2008, a decrease of 1.08%.
Our interest income decreased despite an increase in interest earning assets because of a decrease in the rate on total average earning assets from 7.04% for the quarter ended March 31, 2008 to 5.51% for the quarter ended March 31, 2009.
Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2009 and may continue to negatively impact our interest income.

Despite a decrease in interest rates, interest expense increased to $2,048,000 from $1,985,000 for the three months ended March 31, 2009 from the
same period in 2008, an increase of 3.17%. The increase for the three months ended March 31, 2009 was primarily attributable to a significant increase in the balance of interest bearing liabilities (discussed under Financial Condition
Summary above), including the 2010 Savings Account that will pay customers a minimum annual percentage yield of 3.00% through February 2010.

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 months ended March 31, 2009 was
$2,453,000 compared with $2,565,000 for the same period in 2008. The net interest margin decreased to 3.00% for the three months ended March 31, 2009 from 3.97% in the same period a year ago. The decrease in net interest income for the three
months ended March 31, 2009 as compared with the comparable three months in 2008 was due to the increase in interest-bearing liabilities.

Financials net interest margin analysis and average balance sheets are shown in Schedule I on page 23.

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 $769,000 (exclusive of $116,000 on the gain on sale of securities) for the three months ended March 31, 2009
from $659,000 (exclusive of $80,000 on the gain on sale of securities) for the comparable period in 2008. This increase for the three months ended March 31, 2009 as compared to the same period last year was due primarily to an increase in
commissions earned by Investment Group as well as an increase in the amount and volume of mortgages originated by the Mortgage Division.

The Bank, through 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 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 the Moneta office will contribute minimal non-interest income during 2009.



20



---

##### Table of Contents

Management anticipates that residential mortgage rates will remain near the current historic lows for the
remainder of 2009. Management expects that low rates coupled with the Mortgage Divisions reputation in Region 2000 will allow us to continue to grow revenue at the Mortgage Division.

We anticipate that Investment Group and the Mortgage Division will continue to contribute additional non-interest income in the remainder of 2009.

In September, 2008, the Company began operating BOTJ Insurance, Inc. (BOTJ Insurance), a wholly-owned subsidiary of the Bank.
Management does not expect BOTJ Insurance to have a material impact on non-interest income in the foreseeable future.

Non-Interest
Expense

Non-interest expense for the three months ended March 31, 2009 increased to $2,728,000 from $2,439,000 for the comparable
period in 2008. This 11.85% increase in non-interest expense from the comparable period in 2008 can be attributed to increased occupancy expenses, along with an increase in personnel expense related to the opening of our two newest branches in
Altavista and Bedford. Total personnel expense increased to $1,439,000 for the three month period ended March 31, 2009 from $1,281,000 for the comparable period in 2008. 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 $322,000 to the allowance for loan loss for
the three months ended March 31, 2009 compared to provision of $125,000 for the comparable period in 2008. Management believes that the current allowance for loan loss of $3,004,000 (or 1.03% of total loans) at March 31, 2009 is adequate.

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



|                                |  |                                           |       |   |      |   |       |  
|------------------------------- |  | ----------------------------------------- | ----- | - | ---- | - | ----- | -
|                                |  | Three months endedMarch 31,(in thousands) |      
|                                |  | 2009                                      |       |   | 2008 |  
|Balance, beginning of period    |  | $                                         | 2,859 |   |      | $ | 2,146 |  
|Provision for loan losses       |  |                                           | 322   |   |      |   | 125   |  
|Loans charged off               |  |                                           | (191  | ) |      |   | (37   | )
|Recoveries of loans charged off |  |                                           | 14    |   |      |   | 10    |  
|                                |  |                                           |       |   |      |   |       |  
|                                |  |                                          
|Balance, end of period          |  | $                                         | 3,004 |   |      | $ | 2,244 |  
|                                |  |                                           |       |   |      |   |       |  



21



---

##### Table of Contents

Income Taxes

For the three months ended March 31, 2009, Financial had an income tax expense of $94,000. Based on its 2008 income tax liability, Financial made no income tax payment during the quarter ended March 31,
2009.



22



---

##### Table of Contents

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2009 and 2008



|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|----------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ----------------------- |  | ---- | ------------------- |  | - | ---------------------- | - | ----------------------- | - | ----- |  | ---- | -
|                                          |  | 2009                |         |   | 2008                   |  
|                                          |  | AverageBalanceSheet |         |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  |      | AverageBalanceSheet |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|ASSETS                                    |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Loans, including fees                     |  | $                   | 283,148 |   |                        | $ | 4,081                   |  | 5.85 | %                   |  | $ | 229,351                |   |                         | $ | 4,158 |  | 7.29 | %
|Federal funds sold                        |  |                     | 11,003  |   |                        |   | 6                       |  | 0.22 | %                   |  |   | 1,157                  |   |                         |   | 9     |  | 3.13 | %
|Securities                                |  |                     | 35,316  |   |                        |   | 414                     |  | 4.75 | %                   |  |   | 28,274                 |   |                         |   | 383   |  | 5.45 | %
|Federal agency equities                   |  |                     | 1,945   |   |                        |   |                        |  | 0.00 | %                   |  |   | 1,211                  |   |                         |   |      |  | 0.00 | %
|CBB equity                                |  |                     | 116     |   |                        |   |                        |  |     |                     |  |   | 56                     |   |                         |   |      |  |     |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Total earning assets                      |  |                     | 331,528 |   |                        |   | 4,501                   |  | 5.51 | %                   |  |   | 260,049                |   |                         |   | 4,550 |  | 7.04 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Allowance for loan losses                 |  |                     | (2,905  | ) |                        |   |                         |  |      |                     |  |   | (2,191                 | ) |                         |   |       |  |      |  
|Non-earning assets                        |  |                     | 25,221  |   |                        |   |                         |  |      |                     |  |   | 14,224                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Total assets                              |  | $                   | 353,844 |   |                        |   |                         |  |      |                     |  | $ | 272,082                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Deposits                                  |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Demand interest bearing                   |  | $                   | 45,885  |   |                        | $ | 129                     |  | 1.14 | %                   |  | $ | 44,218                 |   |                         | $ | 198   |  | 1.80 | %
|Savings                                   |  |                     | 110,793 |   |                        |   | 779                     |  | 2.85 | %                   |  |   | 12,024                 |   |                         |   | 41    |  | 1.37 | %
|Time deposits                             |  |                     | 102,728 |   |                        |   | 934                     |  | 3.69 | %                   |  |   | 134,928                |   |                         |   | 1,579 |  | 4.71 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Total interest bearing deposits           |  |                     | 259,406 |   |                        |   | 1,842                   |  | 2.88 | %                   |  |   | 191,170                |   |                         |   | 1,818 |  | 3.82 | %
|                                          |  |                     |         |   |                        |  
|Other borrowed funds                      |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|Fed funds purchased                       |  |                     |        |   |                        |   |                        |  |     |                     |  |   | 4,118                  |   |                         |   | 45    |  | 4.40 | %
|Repurchase agreements                     |  |                     | 13,337  |   |                        |   | 59                      |  | 1.82 | %                   |  |   | 11,339                 |   |                         |   | 72    |  | 2.55 | %
|Other borrowings                          |  |                     | 21,000  |   |                        |   | 147                     |  | 2.84 | %                   |  |   | 7,223                  |   |                         |   | 50    |  | 2.78 | %
|                                          |  |                     |         |   |                        |  
|Total interest-bearing liabilities        |  |                     | 293,743 |   |                        |   | 2,048                   |  | 2.83 | %                   |  |   | 213,850                |   |                         |   | 1,985 |  | 3.73 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Non-interest bearing deposits             |  |                     | 35,894  |   |                        |   |                         |  |      |                     |  |   | 33,244                 |   |                         |   |       |  |      |  
|Other liabilities                         |  |                     | (150    | ) |                        |   |                         |  |      |                     |  |   | 739                    |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Total liabilities                         |  |                     | 329,486 |   |                        |   |                         |  |      |                     |  |   | 247,832                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Stockholders equity                      |  |                     | 24,358  |   |                        |   |                         |  |      |                     |  |   | 24,250                 |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Total liabilities and Stockholders equity |  | $                   | 353,844 |   |                        |   |                         |  |      |                     |  | $ | 272,082                |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Net interest earnings                     |  |                     |         |   |                        | $ | 2,453                   |  |      |                     |  |   |                        |   |                         | $ | 2,565 |  |      |  
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Net interest margin                       |  |                     |         |   |                        |   |                         |  | 3.00 | %                   |  |   |                        |   |                         |   |       |  | 3.97 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  
|                                          |  |                     |         |   |                        |  
|Interest spread                           |  |                     |         |   |                        |   |                         |  | 2.68 | %                   |  |   |                        |   |                         |   |       |  | 3.30 | %
|                                          |  |                     |         |   |                        |   |                         |  |      |                     |  |   |                        |   |                         |   |       |  |      |  



23



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Not applicable.



|Item 4T. | 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 March 31, 2009, 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, 2008, as filed with the SEC on March 26, 2009.



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

Not applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable



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

Not applicable.



|Item 5. | Other Information
|------- | -----------------

Not applicable.



24



---

##### Table of Contents

|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 May 13, 2009                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009                            
|            | 
|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 May 13, 2009



25



---

##### Table of Contents

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: May 13, 2009 |  | By                                      |  | /S/ Robert R. Chapman III                                     
|                   |  |                                         |  | Robert R. Chapman III, President                              
|                   |  |                                         |  | (Principal Executive Officer)                                 
|                   |  |                                        
|Date: May 13, 2009 |  | By                                      |  | /S/ J. Todd Scruggs                                           
|                   |  |                                         |  | J. Todd Scruggs, Secretary and Treasurer                      
|                   |  |                                         |  | (Principal Financial Officer and Principal Accounting Officer)



26



---

##### Table of Contents

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 May 13, 2009                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13, 2009                            
|            | 
|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 May 13, 2009



27