##### 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, 2011





BANK OF THE JAMES FINANCIAL GROUP, INC.

(Exact 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 Data 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

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: 3,323,743 shares of Common Stock, par value $2.14 per share, were outstanding at May 13, 2011.









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##### 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 |  |  | 29 | 
|                               |  |          |   
|                               |  | Item 3.  |    | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 4.  |    | Controls and Procedures                                                               |  |  | 42 | 
|                               | 
|PART II  OTHER INFORMATION    |  |          | 42 |                                                                                      
|                               |  |          |   
|                               |  | Item 1.  |    | Legal Proceedings                                                                     |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 1A. |    | Risk Factors                                                                          |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 2.  |    | Unregistered Sales of Equity Securities and Use of Proceeds                           |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 3.  |    | Defaults Upon Senior Securities                                                       |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 4.  |    | [Removed and Reserved]                                                                |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 5.  |    | Other Information                                                                     |  |  | 42 | 
|                               |  |          |   
|                               |  | Item 6.  |    | Exhibits                                                                              |  |  | 43 | 
|                               | 
|SIGNATURES                     |  |          | 44 |                                                                                      



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##### 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)3/31/2011 |         |   | (audited)12/31/2010 |  
|Assets                                                                                                                                  |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Cash and due from banks                                                                                                                 |  | $                    | 10,949  |   |                     | $ | 11,665  |  
|Federal funds sold                                                                                                                      |  |                      | 12,964  |   |                     |   | 7,094   |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Total cash and cash equivalents                                                                                                         |  |                      | 23,913  |   |                     |   | 18,759  |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Securities held-to-maturity (fair value of $13,545 in 2011 and $14,601 in 2010)                                                         |  |                      | 13,241  |   |                     |   | 14,297  |  
|Securities available-for-sale, at fair value                                                                                            |  |                      | 44,047  |   |                     |   | 38,586  |  
|Restricted stock, at cost                                                                                                               |  |                      | 2,181   |   |                     |   | 2,180   |  
|Loans, net of allowance for loan losses of $5,318 in 2011 and $5,467 in 2010                                                            |  |                      | 322,966 |   |                     |   | 320,715 |  
|Premises and equipment, net                                                                                                             |  |                      | 8,869   |   |                     |   | 8,791   |  
|Software, net                                                                                                                           |  |                      | 115     |   |                     |   | 89      |  
|Interest receivable                                                                                                                     |  |                      | 1,623   |   |                     |   | 1,469   |  
|Cash value - bank owned life insurance                                                                                                  |  |                      | 5,415   |   |                     |   | 5,360   |  
|Other real estate owned                                                                                                                 |  |                      | 3,931   |   |                     |   | 3,440   |  
|Income taxes receivable                                                                                                                 |  |                      | 109     |   |                     |   | 304     |  
|Deferred tax asset                                                                                                                      |  |                      | 1,723   |   |                     |   | 1,899   |  
|Other assets                                                                                                                            |  |                      | 2,770   |   |                     |   | 3,039   |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Total assets                                                                                                                            |  | $                    | 430,903 |   |                     | $ | 418,928 |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Liabilities and Stockholders Equity                                                                                                    |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Deposits                                                                                                                                |  |                      |         |   |                     |   |         |  
|Noninterest bearing demand                                                                                                              |  | $                    | 49,482  |   |                     | $ | 44,272  |  
|NOW, money market and savings                                                                                                           |  |                      | 249,010 |   |                     |   | 241,176 |  
|Time                                                                                                                                    |  |                      | 80,715  |   |                     |   | 82,942  |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Total deposits                                                                                                                          |  | $                    | 379,207 |   |                     | $ | 368,390 |  
|                                                                                                                                        |  |                     
|Repurchase agreements                                                                                                                   |  |                      | 7,651   |   |                     |   | 7,330   |  
|FHLB borrowings                                                                                                                         |  |                      | 10,000  |   |                     |   | 10,000  |  
|Capital notes                                                                                                                           |  |                      | 7,000   |   |                     |   | 7,000   |  
|Interest payable                                                                                                                        |  |                      | 120     |   |                     |   | 121     |  
|Other liabilities                                                                                                                       |  |                      | 654     |   |                     |   | 592     |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Total liabilities                                                                                                                       |  | $                    | 404,632 |   |                     | $ | 393,433 |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Stockholders equity                                                                                                                    |  |                      |         |   |                     |   |         |  
|Common stock $2.14 par value; authorized 10,000,000 shares; issued and outstanding 3,323,743 as of March 31, 2011 and
December 31, 2010 |  |                      | 7,113   |   |                     |   | 7,113   |  
|Additional paid-in-capital                                                                                                              |  |                      | 22,742  |   |                     |   | 22,742  |  
|Accumulated other comprehensive (loss)                                                                                                  |  |                      | (350    | ) |                     |   | (692    | )
|Retained earnings                                                                                                                       |  |                      | (3,234  | ) |                     |   | (3,668  | )
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|Total stockholders equity                                                                                                              |  | $                    | 26,271  |   |                     | $ | 25,495  |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  
|                                                                                                                                        |  |                     
|Total liabilities and stockholders equity                                                                                              |  | $                    | 430,903 |   |                     | $ | 418,928 |  
|                                                                                                                                        |  |                      |         |   |                     |   |         |  



See
accompanying notes to these consolidated financial statements

1



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

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



|                                                                     |  |                                      |           |  |      |   |           |  
|-------------------------------------------------------------------- |  | ------------------------------------ | --------- |  | ---- | - | --------- | -
|                                                                     |  | For the Three 
MonthsEnded March 31, |          
|                                                                     |  | 2011                                 |           |  | 2010 |  
|Interest Income                                                      |  |                                      |           |  |      |   |           |  
|Loans                                                                |  | $                                    | 4,473     |  |      | $ | 4,844     |  
|Securities                                                           |  |                                      |           |  |      |   |           |  
|US Government and agency obligations                                 |  |                                      | 238       |  |      |   | 415       |  
|Mortgage backed securities                                           |  |                                      | 116       |  |      |   | 2         |  
|Municipals                                                           |  |                                      | 88        |  |      |   | 52        |  
|Dividends                                                            |  |                                      | 3         |  |      |   | 1         |  
|Other (Corporates)                                                   |  |                                      | 19        |  |      |   | 47        |  
|Federal Funds sold                                                   |  |                                      | 5         |  |      |   | 7         |  
|                                                                     |  |                                      |           |  |      |   |           |  
|Total interest income                                                |  |                                      | 4,942     |  |      |   | 5,368     |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Interest Expense                                                     |  |                                      |           |  |      |   |           |  
|Deposits                                                             |  |                                      |           |  |      |   |           |  
|NOW, money market savings                                            |  |                                      | 612       |  |      |   | 1,224     |  
|Time Deposits                                                        |  |                                      | 429       |  |      |   | 617       |  
|FHLB borrowings                                                      |  |                                      | 73        |  |      |   | 100       |  
|Reverse repurchase agreements                                        |  |                                      | 16        |  |      |   | 33        |  
|Capital notes 6% due 4/1/2012                                        |  |                                      | 105       |  |      |   | 105       |  
|                                                                     |  |                                      |           |  |      |   |           |  
|Total interest expense                                               |  |                                      | 1,235     |  |      |   | 2,079     |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Net interest income                                                  |  |                                      | 3,707     |  |      |   | 3,289     |  
|                                                                     |  |                                     
|Provision for loan losses                                            |  |                                      | 579       |  |      |   | 387       |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Net interest income after provision for loan losses                  |  |                                      | 3,128     |  |      |   | 2,902     |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Other operating income                                               |  |                                      |           |  |      |   |           |  
|Mortgage fee income                                                  |  |                                      | 286       |  |      |   | 291       |  
|Service charges, fees and commissions                                |  |                                      | 283       |  |      |   | 352       |  
|Increase in cash value of life insurance                             |  |                                      | 55        |  |      |   | 60        |  
|Other                                                                |  |                                      | 17        |  |      |   | 22        |  
|Gain on sale of available-for-sale securities                        |  |                                      | 31        |  |      |   | 75        |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Total other operating income                                         |  |                                      | 672       |  |      |   | 800       |  
|                                                                     |  |                                     
|Other operating expenses                                             |  |                                      |           |  |      |   |           |  
|Salaries and employee benefits                                       |  |                                      | 1,427     |  |      |   | 1,649     |  
|Occupancy                                                            |  |                                      | 276       |  |      |   | 245       |  
|Equipment                                                            |  |                                      | 261       |  |      |   | 260       |  
|Supplies                                                             |  |                                      | 89        |  |      |   | 101       |  
|Professional, data processing, and other outside expense             |  |                                      | 473       |  |      |   | 380       |  
|Marketing                                                            |  |                                      | 79        |  |      |   | 67        |  
|                                                                     |  |                                     
|Credit expense                                                       |  |                                      | 72        |  |      |   | 66        |  
|Loss (gain) on sale and/or writedown of OREO and other OREO expenses |  |                                      | 92        |  |      |   | (5        | )
|FDIC insurance expense                                               |  |                                      | 229       |  |      |   | 192       |  
|Other                                                                |  |                                      | 172       |  |      |   | 203       |  
|                                                                     |  |                                      |           |  |      |   |           |  
|Total other operating expenses                                       |  |                                      | 3,170     |  |      |   | 3,158     |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Income before income taxes                                           |  |                                      | 630       |  |      |   | 544       |  
|                                                                     |  |                                     
|Income tax expense                                                   |  |                                      | 195       |  |      |   | 178       |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Net Income                                                           |  | $                                    | 435       |  |      | $ | 366       |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Weighted average shares outstanding  basic                          |  |                                      | 3,323,743 |  |      |   | 3,289,867 |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Weighted average shares outstanding diluted                         |  |                                      | 3,336,860 |  |      |   | 3,321.363 |  
|                                                                     |  |                                      |           |  |      |   |           |  
|                                                                     |  |                                     
|Income per common share - basic and diluted                          |  | $                                    | 0.13      |  |      | $ | 0.11      |  
|                                                                     |  |                                      |           |  |      |   |           |  



See
accompanying notes to these consolidated financial statements

2



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2011 and 2010

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



|                                                                                 |  |           |        |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | --------- | ------ | - | ---- | - | ------- | -
|                                                                                 |  | March 31, |       
|                                                                                 |  | 2011      |        |   | 2010 |  
|Cash flows from operating activities                                             |  |           |        |   |      |   |         |  
|Net Income                                                                       |  | $         | 435    |   |      | $ | 366     |  
|                                                                                 |  |          
|Adjustments to reconcile net income to net cash provided by operating activities |  |           |        |   |      |   |         |  
|Depreciation                                                                     |  | $         | 189    |   |      | $ | 204     |  
|Net amortization and accretion of premiums and discounts on securities           |  |           | 160    |   |      |   | 150     |  
|(Gain) on sale of available-for-sale securities                                  |  |           | (31    | ) |      |   | (75     | )
|Provision for loan losses                                                        |  |           | 579    |   |      |   | 387     |  
|(Gain) loss on sale of other real estate owned                                   |  |           | 56     |   |      |   | (5      | )
|(Increase) in cash value of life insurance                                       |  |           | (55    | ) |      |   | (60     | )
|Stock compensation expense                                                       |  |           |       |   |      |   | 2       |  
|(Increase) decrease in interest receivable                                       |  |           | (154   | ) |      |   | 345     |  
|(Increase) decrease in other assets                                              |  |           | 262    |   |      |   | 93      |  
|Decrease in income taxes receivable                                              |  |           | 195    |   |      |   | 589     |  
|(Decrease) in interest payable                                                   |  |           | (1     | ) |      |   | (36     | )
|Increase in other liabilities                                                    |  | $         | 62     |   |      | $ | 369     |  
|                                                                                 |  |           |        |   |      |   |         |  
|Net cash provided by operating activities                                        |  | $         | 1,697  |   |      | $ | 2,329   |  
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Cash flows from investing activities                                             |  |           |        |   |      |   |         |  
|Purchases of securities held-to-maturity                                         |  | $         | (1,000 | ) |      | $ |        |  
|Proceeds from maturities and calls of securities held-to-maturity                |  |           | 2,000  |   |      |   |        |  
|Purchases of securities available-for-sale                                       |  |           | (8,324 | ) |      |   | (5,714  | )
|Proceeds from maturities, calls and paydowns of securities available-for-sale    |  |           | 719    |   |      |   | 4,194   |  
|Proceeds from sale of securities available-for-sale                              |  |           | 2,589  |   |      |   | 18,648  |  
|Purchase of Federal Reserve Bank stock                                           |  |           | (1     | ) |      |   | (30     | )
|Proceeds from sale of other real estate owned                                    |  |           | 329    |   |      |   |        |  
|Origination of loans, net of principal collected                                 |  |           | (3,700 | ) |      |   | (4,783  | )
|Purchases of premises and equipment                                              |  |           | (293   | ) |      |   | (58     | )
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Net cash (used in) provided by investing activities                              |  | $         | (7,681 | ) |      | $ | 12,257  |  
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Cash flows from financing activities                                             |  |           |        |   |      |   |         |  
|Net increase (decrease) in deposits                                              |  | $         | 10,817 |   |      | $ | (17,203 | )
|Net increase (decrease) in repurchase agreements                                 |  |           | 321    |   |      |   | (1,768  | )
|Net (decrease) in Federal Home Loan Bank advances                                |  |           |       |   |      |   | (10,000 | )
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Net cash provided by (used in) financing activities                              |  | $         | 11,138 |   |      | $ | (28,971 | )
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Increase (decrease) in cash and cash equivalents                                 |  |           | 5,154  |   |      |   | (14,385 | )
|                                                                                 |  |          
|Cash and cash equivalents at beginning of period                                 |  | $         | 18,759 |   |      | $ | 31,305  |  
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Cash and cash equivalents at end of period                                       |  | $         | 23,913 |   |      | $ | 16,920  |  
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Non cash transactions                                                            |  |           |        |   |      |   |         |  
|Transfer of loans to foreclosed assets                                           |  | $         | 870    |   |      | $ | 115     |  
|Fair value adjustment for securities                                             |  |           | 518    |   |      |   | 628     |  
|                                                                                 |  |           |        |   |      |   |         |  
|                                                                                 |  |          
|Cash transactions                                                                |  |           |        |   |      |   |         |  
|Cash paid for interest                                                           |  | $         | 1,236  |   |      | $ | 2,115   |  
|Cash paid for taxes                                                              |  |           |       |   |      |   |        |  
|                                                                                 |  |           |        |   |      |   |         |  



See
accompanying notes to these consolidated financial statements

3



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##### Table of Contents

Bank of the James Financial Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income

(dollars in thousands) (unaudited)



|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ----------------------- | --------- |  | ------------ | - | ----- | -------------------------- |  | - | --------------------------- |  |  | ------------------------------------------- | ------ | - | ----- | - | ---- | - |  | - | ------ | -
|                                                                                                |  | TotalShares
Outstanding |           |  | Common Stock |   |       | Additional Paid-in Capital |  |   | Retained Earnings (Deficit) |  |  | Accumulated Other Comprehensive
Gain (Loss) |        |   | Total |  
|                                                                                                |  |                         |           |  |              |  
|Balance at December 31, 2009                                                                    |  |                         | 2,990,788 |  |              | $ | 6,400 |                            |  | $ | 20,765                      |  |  | $                                           | (2,938 | ) |       | $ | (502 | ) |  | $ | 23,725 |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|Net Income                                                                                      |  |                         |          |  |              |   |      |                            |  |   |                            |  |  |                                             | 1,820  |   |       |   |     |   |  |   | 1,820  |  
|                                                                                                |  |                         |           |  |              |  
|Changes in unrealized gains on securities available for sale net of deferred taxes of $24       |  |                         |          |  |              |   |      |                            |  |   |                            |  |  |                                             |       |   |       |   | 47   |   |  |   | 47     |  
|                                                                                                |  |                         |           |  |              |  
|Reclassification adjustment for gains included in net income, net of income tax expense of $121 |  |                         |          |  |              |   |      |                            |  |   |                            |  |  |                                             |       |   |       |   | (237 | ) |  |   | (237   | )
|                                                                                                |  |                         |           |  |              |  
|Comprehensive Income                                                                            |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   | 1,630  |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|10% Stock dividend                                                                              |  |                         | 298,942   |  |              |   | 640   |                            |  |   | 1,910                       |  |  |                                             | (2,550 | ) |       |   |     |   |  |   |       |  
|                                                                                                |  |                         |           |  |              |  
|Exercise of stock options                                                                       |  |                         | 34,013    |  |              |   | 73    |                            |  |   | 65                          |  |  |                                             |       |   |       |   |     |   |  |   | 138    |  
|                                                                                                |  |                         |           |  |              |  
|Stock compensation expense                                                                      |  |                         |          |  |              |   |      |                            |  |   | 2                           |  |  |                                             |       |   |       |   |     |   |  |   | 2      |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|Balance at December 31, 2010                                                                    |  |                         | 3,323,743 |  |              | $ | 7,113 |                            |  | $ | 22,742                      |  |  | $                                           | (3,668 | ) |       | $ | (692 | ) |  | $ | 25,495 |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|Net Income                                                                                      |  |                         |          |  |              |   |      |                            |  |   |                            |  |  |                                             | 434    |   |       |   |     |   |  |   | 434    |  
|                                                                                                |  |                         |           |  |              |  
|Changes in unrealized gains on securities available for sale net of deferred taxes of $187      |  |                         |          |  |              |   |      |                            |  |   |                            |  |  |                                             |       |   |       |   | 362  |   |  |   | 362    |  
|                                                                                                |  |                         |           |  |              |  
|Reclassification adjustment for gains included in net income, net of income tax expense of $11  |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   | (20  | ) |  |   | (20    | )
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|Comprehensive Income                                                                            |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   | 777    |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  
|                                                                                                |  |                         |           |  |              |  
|Balance at March 31, 2011                                                                       |  |                         | 3,323,743 |  |              | $ | 7,113 |                            |  | $ | 22,742                      |  |  | $                                           | (3,234 | ) |       | $ | (350 | ) |  | $ | 26,271 |  
|                                                                                                |  |                         |           |  |              |   |       |                            |  |   |                             |  |  |                                             |        |   |       |   |      |   |  |   |        |  



See
accompanying notes to these consolidated financial statements

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##### Table of Contents

Notes to Consolidated Financial Statements

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 months ended March 31, 2011
and 2010 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, 2010. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended
December 31, 2010 included in Financials Annual Report on Form 10-K. Results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31,
2011.

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 loan 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.



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##### Table of Contents

Note 3  Earnings Per Share

All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2010, the 5% stock dividend paid by Financial in July 2009, 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 1999 Financial (the 1999 Plan) are considered dilutive. The following is a summary of the earnings per share calculation for the three months ended March 31, 2011 and 2010.



|                                      |  |                             |           |  |      |   |           | 
|------------------------------------- |  | --------------------------- | --------- |  | ---- | - | --------- | 
|                                      |  | Three months endedMarch 31, |          
|                                      |  | 2011                        |           |  | 2010 |  
|                                      |  |                            
|Net income                            |  | $                           | 435,000   |  |      | $ | 366,000   | 
|                                      |  |                            
|Weighted average number of shares     |  |                             | 3,323,743 |  |      |   | 3,289,867 | 
|Options affect of incremental shares  |  |                             | 13,117    |  |      |   | 31,496    | 
|                                      |  |                             |           |  |      |   |           | 
|                                      |  |                            
|Weighted average diluted shares       |  |                             | 3,336,860 |  |      |   | 3,321,363 | 
|                                      |  |                             |           |  |      |   |           | 
|                                      |  |                            
|Basic EPS (weighted avg shares)       |  | $                           | 0.13      |  |      | $ | 0.11      | 
|                                      |  |                             |           |  |      |   |           | 
|                                      |  |                            
|Diluted EPS (Including Option Shares) |  | $                           | 0.13      |  |      | $ | 0.11      | 
|                                      |  |                             |           |  |      |   |           | 

For the three months March 31, 2011 there were 207,305 option shares that had an exercise price higher than the market
price on March 31, 2011. These shares were not included in calculating the diluted earnings per share during this period because their effect was anti-dilutive. For the three months March 31, 2010 there were 211,303 option shares that had
an exercise price higher than the market price on March 31, 2010. These shares were not included in calculating the diluted earnings per share during this period because their effect was anti-dilutive.

Note 4  Stock Based Compensation

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



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##### Table of Contents

Note 4  Stock Based Compensation (continued)



Stock option plan activity for the three months ended March 31, 2011 is summarized below:



|                                     |  |        |         |   |                              |   |       |                                                   |  |  |                       |  |  |   |        | 
|------------------------------------ |  | ------ | ------- | - | ---------------------------- | - | ----- | ------------------------------------------------- |  |  | --------------------- |  |  | - | ------ | 
|                                     |  | Shares |         |   | WeightedAverageExercisePrice |   |       | WeightedAverageRemainingContractualLife (inyears) |  |  | AverageIntrinsicValue | 
|                                     |  |        |         |  
|Options outstanding, January 1, 2011 |  |        | 284,906 |   |                              | $ | 8.42  |                                                   |  |  |                       |  |  |   |        | 
|Exercised                            |  |        |        |   |                              |   |       |                                                   |  |  |                       |  |  |   |        | 
|Forfeited                            |  |        | (3,373  | ) |                              | $ | 13.88 |                                                   |  |  |                       |  |  |   |        | 
|                                     |  |        |         |   |                              |   |       |                                                   |  |  |                       |  |  |   |        | 
|Options outstanding, March 31, 2011  |  |        | 281,533 |   |                              | $ | 8.35  |                                                   |  |  | 3.20                  |  |  | $ | 50,705 | 
|                                     |  |        |         |   |                              |   |       |                                                   |  |  |                       |  |  |   |        | 
|Options exercisable, March 31, 2011  |  |        | 281,533 |   |                              | $ | 8.35  |                                                   |  |  | 3.20                  |  |  | $ | 50,705 | 
|                                     |  |        |         |   |                              |   |       |                                                   |  |  |                       |  |  |   |        | 

Intrinsic value is calculated by subtracting exercise price of option shares from the market price of underlying shares and
multiplying that amount by the number of options outstanding. No intrinsic value exists where the exercise price is less than the market price on a given date.

As of March 31, 2011 all compensation expense related to the foregoing stock option plan has been recognized. The Companys ability to grant additional options shares under the 1999 Plan has
expired.

Note 5  Stock Dividend

On May 18, 2010, the Board of Directors of the Company declared a 10% stock dividend. The stock dividend was paid on July 23, 2010 to shareholders of record as of June 21, 2010. Following
the stock dividend, the number of outstanding shares increased by approximately 299,000. The dividend required a reclassification of retained earnings effective May 18, 2010 in the amount of $2,550,000. Of this amount, $640,000 was reclassified
as common stock and $1,910,000 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  Fair Value Measurements

Determination of Fair Value

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

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the



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Note 6  Fair Value Measurements (continued)



measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the
use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and
requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

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



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



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



| |  |  | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------

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.



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Note 6  Fair Value Measurements (continued)



The following table summarizes the Companys financial assets that were measured at fair value on a
recurring basis during the period (in thousands):



|                                    |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|----------------------------------- |  | ----------------------------- | ------ |  | ---------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | - | 
|                                    |  |                               |        |  | Carrying Value at March 31, 2011                           |  
|Description                         |  | Balance as ofMarch 
31,2011   |        |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|US agency obligations               |  | $                             | 14,628 |  |                                                            | $ |  |                                           |  | $ | 14,628                                 |  |  | $ |  | 
|Mortgage-backed securities          |  |                               | 20,587 |  |                                                            |   |  |                                           |  |   | 20,587                                 |  |  |   |  | 
|Municipals                          |  |                               | 7,812  |  |                                                            |   |  |                                           |  |   | 7,812                                  |  |  |   |  | 
|Corporates                          |  |                               | 1,020  |  |                                                            |   |  |                                           |  |   | 1,020                                  |  |  |   |  | 
|                                    |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|                                    |  |                               |        | 
|Total available-for-sale securities |  | $                             | 44,047 |  |                                                            | $ |  |                                           |  | $ | 44,047                                 |  |  | $ |  | 
|                                    |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|                                    |  |                              
|                                    |  |                               |        |  | Carrying Value at December 31, 2010                        |  
|Description                         |  | Balance as ofDecember 31,2010 |        |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|US agency obligations               |  | $                             | 14,341 |  |                                                            | $ |  |                                           |  | $ | 14,341                                 |  |  | $ |  | 
|Mortgage-backed securities          |  |                               | 17,762 |  |                                                            |   |  |                                           |  |   | 17,762                                 |  |  |   |  | 
|Municipals                          |  |                               | 5,465  |  |                                                            |   |  |                                           |  |   | 5,465                                  |  |  |   |  | 
|Corporates                          |  |                               | 1,018  |  |                                                            |   |  |                                           |  |   | 1,018                                  |  |  |   |  | 
|                                    |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 
|                                    |  |                               |        | 
|Total available-for-sale securities |  | $                             | 38,586 |  |                                                            | $ |  |                                           |  | $ | 38,586                                 |  |  | $ |  | 
|                                    |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |   | 

Loans held for sale

Loans held for sale are required to be measured in a lower of cost or fair value. Under ASC 820, 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, 2011, the Company had no loans held for sale.

Impaired loans

ASC 820 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.



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Note 6  Fair Value Measurements (continued)



Loans are designated as impaired when, in the judgment of management based on current information and
events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the
fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority
of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market
data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over one year old, then the fair value is considered Level 3. The value of business equipment is based
upon an outside appraisal if deemed significant, or the net book value on the applicable business financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables
collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

Other Real Estate Owned

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

Real estate acquired through foreclosure is transferred to other real estate owned (OREO). The measurement of loss associated with OREO is based on the fair value of the collateral compared to
the unpaid loan balance and anticipated costs to sell the property. The value of OREO collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank
using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate is over one year old, then the fair value is considered Level 3. Any fair value
adjustments are recorded in the period incurred and expensed against current earnings.

The following table summarizes the Companys
impaired loans and OREO measured at fair value on a nonrecurring basis during the period (in thousands).



|                        |  |                             |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |       | 
|----------------------- |  | --------------------------- | ------ |  | ---------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | ----- | 
|                        |  |                             |        |  | Carrying Value at March 31, 2011                           |  
|Description             |  | Balance as ofMarch 31, 2011 |        |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Impaired loans          |  | $                           | 10,043 |  |                                                            | $ |  |                                           |  | $ | 4,349                                  |  |  | $ | 5,694 | 
|                        |  |                             |        | 
|Other real estate owned |  | $                           | 3,931  |  |                                                            | $ |  |                                           |  | $ | 3,931                                  |  |  | $ |      | 



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Note 6  Fair Value Measurements (continued)



|                        |  |                               |        |  |                                                            |   |   |                                           |  |   |                                        |  |  |   |       | 
|----------------------- |  | ----------------------------- | ------ |  | ---------------------------------------------------------- | - | - | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | ----- | 
|                        |  |                               |        |  | Carrying Value at December 31, 2010                        |  
|Description             |  | Balance as
ofDecember 31,2010 |        |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Impaired loans          |  | $                             | 11,188 |  |                                                            | $ |  |                                           |  | $ | 3,205                                  |  |  | $ | 7,983 | 
|                        |  |                               |        | 
|Other real estate owned |  | $                             | 3,440  |  |                                                            | $ |  |                                           |  | $ | 3,440                                  |  |  | $ |      | 

Financial Instruments

Cash, cash equivalents and Federal Funds sold

The carrying amounts of cash and short-term instruments approximate fair values.

Securities

Fair values of securities, excluding Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Bankers Bank stock are
based on quoted market prices.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed rate loans are based on quoted market
prices of similar loans adjusted for differences in loan characteristics. Fair values for other loans such as commercial real estate and commercial and industrial loans are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Bank Owned Life Insurance (BOLI)

The
carrying amount approximates fair value.

Deposits

Fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using discounted cash flow analyses that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.

FHLB borrowings

The fair value of FHLB borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements.

Short-term borrowings

The
carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate fair value.



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Note 6  Fair Value Measurements (continued)



Capital notes

Fair values of capital notes are based on market prices for debt securities having similar maturity and interest rate characteristics.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

Off-balance sheet credit-related instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and
the counterparties credit standing. Fair value of off-balance sheet credit-related instruments were deemed to be immaterial at March 31, 2011 and December 31, 2010 and therefore are not included in the table below.

The estimated fair values, and related carrying or notional amounts, of Financials financial instruments are as follows (in thousands):



|                        |  |                 |         |  |                        |   |         |                 |  |   |                        |  |  |   |         | 
|----------------------- |  | --------------- | ------- |  | ---------------------- | - | ------- | --------------- |  | - | ---------------------- |  |  | - | ------- | 
|                        |  | March 31, 2011  |         |  | December 31, 2010      |  
|                        |  | CarryingAmounts |         |  | ApproximateFair Values |   |         | CarryingAmounts |  |   | ApproximateFair Values | 
|Financial assets        |  |                 |         |  |                        |   |         |                 |  |   |                        |  |  |   |         | 
|Cash and due from banks |  | $               | 10,949  |  |                        | $ | 10,949  |                 |  | $ | 11,665                 |  |  | $ | 11,665  | 
|Federal funds sold      |  |                 | 12,964  |  |                        |   | 12,964  |                 |  |   | 7,094                  |  |  |   | 7,094   | 
|Securities              |  |                 |         |  |                        |   |         |                 |  |   |                        |  |  |   |         | 
|Available-for-sale      |  |                 | 44,047  |  |                        |   | 44,047  |                 |  |   | 38,586                 |  |  |   | 38,586  | 
|Held-to-maturity        |  |                 | 13,241  |  |                        |   | 13,545  |                 |  |   | 14,297                 |  |  |   | 14,601  | 
|Loans, net              |  |                 | 322,966 |  |                        |   | 325,388 |                 |  |   | 320,715                |  |  |   | 323,120 | 
|Interest receivable     |  |                 | 1,623   |  |                        |   | 1,623   |                 |  |   | 1,469                  |  |  |   | 1,469   | 
|BOLI                    |  |                 | 5,415   |  |                        |   | 5,415   |                 |  |   | 5,360                  |  |  |   | 5,360   | 
|                        |  |                 |         | 
|Financial liabilities   |  |                 |         |  |                        |   |         |                 |  |   |                        |  |  |   |         | 
|Deposits                |  | $               | 379,207 |  |                        | $ | 380,989 |                 |  | $ | 368,390                |  |  | $ | 370,123 | 
|FHLB borrowings         |  |                 | 10,000  |  |                        |   | 10,518  |                 |  |   | 10,000                 |  |  |   | 10,518  | 
|Repurchase agreements   |  |                 | 7,651   |  |                        |   | 7,651   |                 |  |   | 7,330                  |  |  |   | 7,330   | 
|Capital notes           |  |                 | 7,000   |  |                        |   | 6,981   |                 |  |   | 7,000                  |  |  |   | 6,981   | 
|Interest payable        |  |                 | 120     |  |                        |   | 120     |                 |  |   | 121                    |  |  |   | 121     | 

Fair value estimates are made at a
specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Banks entire holdings
of a particular financial instrument. Because no market exists for a significant portion of the Banks financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-balance-sheet and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities



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Note 6  Fair Value Measurements (continued)



that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment; a significant liability
that is not considered a financial liability is accrued post-retirement benefits. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not
been considered in the estimates.

Financial assumes interest rate risk (the risk that general interest rate levels will change) as a result
of its normal operations. As a result, the fair values of Financials financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match
maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate
environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.

Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and
deposits and by investing in securities with terms that mitigate the Banks overall interest rate risk.

Note 7  Capital Notes

Financial has issued capital notes in the amount $7,000,000 (the Notes). The Notes bear interest at the rate of 6% per
year with interest payable quarterly in arrears. The first quarterly interest payment on the Notes was paid on July 1, 2009. No principal payments are due until the Notes mature on April 1, 2012. On the maturity date the principal and all
accrued but unpaid interest on the Notes will be due and payable

Note 8  Investments

The following tables summarize the Banks holdings for both securities held-to-maturity and securities available-for-sale as of March 31, 2011
and December 31, 2010 (amounts in thousands):



|                           |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 
|-------------------------- |  | -------------- | ------ |  | ------------------------------ | -------- | --- | ---------- |  | - | ---- | - |  | - | ------ | 
|                           |  | AmortizedCosts |        |  | March 31, 2011Gross
Unrealized |          |     | Fair Value | 
|                           |  |                |       
|                           |  |                | Gains  |  |                                | (Losses) |     |           
|Held-to-Maturity           |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 
|US agency obligations      |  | $              | 13,241 |  |                                | $        | 304 |            |  | $ |     |   |  | $ | 13,545 | 
|                           |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 
|                           |  |                |        | 
|Available-for-Sale         |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 
|US agency obligations      |  | $              | 14,727 |  |                                | $        | 183 |            |  | $ | (282 | ) |  | $ | 14,628 | 
|Mortgage-backed securities |  |                | 20,839 |  |                                |          | 4   |            |  |   | (256 | ) |  |   | 20,587 | 
|Municipals                 |  |                | 7,979  |  |                                |          | 75  |            |  |   | (242 | ) |  |   | 7,812  | 
|Other                      |  |                | 1,033  |  |                                |          |    |            |  |   | (13  | ) |  |   | 1,020  | 
|                           |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 
|                           |  | $              | 44,578 |  |                                | $        | 262 |            |  | $ | (793 | ) |  | $ | 44,047 | 
|                           |  |                |        |  |                                |          |     |            |  |   |      |   |  |   |        | 



13



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##### Table of Contents

Note 8  Investments (continued)



|                           |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 
|-------------------------- |  | -------------- | ------ |  | --------------------------------- | -------- | --- | ---------- |  | - | ------ | - |  | - | ------ | 
|                           |  | AmortizedCosts |        |  | December 31, 2010Gross
Unrealized |          |     | Fair Value | 
|                           |  |                |       
|                           |  |                | Gains  |  |                                   | (Losses) |     |           
|Held-to-Maturity           |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 
|US agency obligations      |  | $              | 14,297 |  |                                   | $        | 304 |            |  | $ |       |   |  | $ | 14,601 | 
|                           |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 
|                           |  |                |        | 
|Available-for-Sale         |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 
|US agency obligations      |  | $              | 14,758 |  |                                   | $        | 24  |            |  | $ | (441   | ) |  | $ | 14,341 | 
|Mortgage-backed securities |  |                | 18,057 |  |                                   |          | 1   |            |  |   | (296   | ) |  |   | 17,762 | 
|Municipals                 |  |                | 5,787  |  |                                   |          | 15  |            |  |   | (337   | ) |  |   | 5,465  | 
|Other                      |  |                | 1,033  |  |                                   |          |    |            |  |   | (15    | ) |  |   | 1,018  | 
|                           |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 
|                           |  | $              | 39,635 |  |                                   | $        | 40  |            |  | $ | (1,089 | ) |  | $ | 38,586 | 
|                           |  |                |        |  |                                   |          |     |            |  |   |        |   |  |   |        | 

The following tables show the gross unrealized losses and fair value of the Banks investments with unrealized losses
that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010 (amounts
in thousands):



|                           |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|-------------------------- |  | ------------------- | ------ |  | ------------------- | - | ----- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------ |  |  | - | ----- | 
|                           |  | Less than 12 months |        |  | More than 12 months |   |       | Total     | 
|March 31, 2011             |  | FairValue           |        |  | UnrealizedLosses    |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|Description of securities  |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|U.S. agency obligations    |  | $                   | 8,873  |  |                     | $ | 282   |           |  | $ |                 |  |  | $         |    |  |                  | $ | 8,873  |  |  | $ | 282   | 
|Mortgage-backed securities |  |                     |       |  |                     |   |      |           |  |   | 18,590           |  |  |           | 256 |  |                  |   | 18,590 |  |  |   | 256   | 
|Municipals                 |  |                     | 3,015  |  |                     |   | 233   |           |  |   | 614              |  |  |           | 9   |  |                  |   | 3,629  |  |  |   | 242   | 
|Corporates                 |  |                     |       |  |                     |   |      |           |  |   | 1,033            |  |  |           | 13  |  |                  |   | 1033   |  |  |   | 13    | 
|                           |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|Total                      |  | $                   | 11,888 |  |                     | $ | 515   |           |  | $ | 20,237           |  |  | $         | 278 |  |                  | $ | 32,125 |  |  | $ | 793   | 
|                           |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|                           |  |                     |       
|                           |  | Less than 12 months |        |  | More than 12 months |   |       | Total     | 
|December 31, 2010          |  | FairValue           |        |  | UnrealizedLosses    |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|Description of securities  |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|U.S. agency obligations    |  | $                   | 11,808 |  |                     | $ | 441   |           |  | $ |                 |  |  | $         |    |  |                  | $ | 11,808 |  |  | $ | 441   | 
|Mortgage-backed securities |  |                     | 16,740 |  |                     |   | 296   |           |  |   |                 |  |  |           |    |  |                  |   | 16,740 |  |  |   | 296   | 
|Municipals                 |  |                     | 3,178  |  |                     |   | 303   |           |  |   | 590              |  |  |           | 34  |  |                  |   | 3,768  |  |  |   | 337   | 
|Corporates                 |  |                     |       |  |                     |   |      |           |  |   | 1,018            |  |  |           | 15  |  |                  |   | 1,018  |  |  |   | 15    | 
|                           |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|Total                      |  | $                   | 31,726 |  |                     | $ | 1,040 |           |  | $ | 1,608            |  |  | $         | 49  |  |                  | $ | 33,334 |  |  | $ | 1,089 | 
|                           |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 

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, (3) the intent of Financial, if any, to sell the security; (4) whether Financial more likely than not will be required to sell the security before recovering its cost; and (5) whether Financial does not expect to recover
the securitys entire amortized cost basis (even if Financial does not intend to sell the security).



14



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##### Table of Contents

Note 8  Investments (continued)



At March 31, 2011, the Company did not consider the unrealized losses as other-than-temporary
losses due to the nature of the securities involved. As of March 31, 2011, the Bank owned 24 securities that were being evaluated for other than temporary impairment. 17 of these securities were S&P rated AAA, 6 were S&P rated AA, and 1
was S&P rated A. As of March 31, 2011,16 of these securities were obligations of government sponsored entities, 7 were municipal bank-qualified issues, and 1 was issued by a publicly traded United States corporation. The securities issued
by publicly traded corporations are classified as Corporates 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 expects to recover the entire amortized cost basis, no declines currently are deemed to be other-than-temporary.

Note 9  Loans and allowance for loan losses

Management has an established methodology used to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the
allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Within these segments, the Bank has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes. The
classifications set forth below do not correspond directly to the classifications set forth in the call report (Form FFIEC 041). Management has determined that the classifications set forth below are more appropriate for use in identifying and
managing risk in the loan portfolio.



|               |  |                        |  |  |  |                                          
|-------------- |  | ---------------------- |  |  |  | -----------------------------------------
|Loan Segments: |  | Loan Classes:         
|               |  |                        | 
|               |  | Commercial             |  |  |  | Commercial and industrial loans          
|               |  |                        | 
|               |  | Commercial real estate |  |  |  | Commercial mortgages  owner occupied    
|               |  |                        |  |  |  | Commercial mortgages  non-owner occupied
|               |  |                        |  |  |  | Commercial construction                  
|               |  |                        | 
|               |  | Consumer               |  |  |  | Consumer unsecured                       
|               |  |                        |  |  |  | Consumer secured                         
|               |  |                        | 
|               |  | Residential            |  |  |  | Residential mortgages                    
|               |  |                        |  |  |  | Residential consumer construction        



15



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Note 9  Loans and allowance for loan losses (continued)



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



|                               |  |               |         |  |                  |   |         | 
|------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                               |  | As of:        |        
|                               |  | March 31,2011 |         |  | December 31,2010 |  
|                               |  |              
|Commercial                     |  | $             | 65,735  |  |                  | $ | 62,786  | 
|Commercial real estate         |  |               | 148,376 |  |                  |   | 143,428 | 
|Consumer                       |  |               | 67,879  |  |                  |   | 68,289  | 
|Residential                    |  |               | 46,294  |  |                  |   | 51,679  | 
|                               |  |               |         |  |                  |   |         | 
|                               |  |              
|Total loans                    |  |               | 328,284 |  |                  |   | 326,182 | 
|                               |  |              
|Less allowance for loan losses |  |               | 5,318   |  |                  |   | 5,467   | 
|                               |  |               |         |  |                  |   |         | 
|                               |  |              
|Net loans                      |  | $             | 322,966 |  |                  | $ | 320,715 | 
|                               |  |               |         |  |                  |   |         | 

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

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



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

We segregate loans into the above categories the
criteria for special mention, substandard, doubtful and loss from non-classified, or pass rated, loans. We review the characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as
follows:



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



16



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Note 9  Loans and allowance for loan losses (continued)



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



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



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



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



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Note 9  Loans and allowance for loan losses (continued)



Financing Receivables on Non-Accrual Status

(dollars in thousands)



|                                        |  |                |       |  |                   |   |       | 
|--------------------------------------- |  | -------------- | ----- |  | ----------------- | - | ----- | 
|                                        |  | As of          |      
|                                        |  | March 31, 2011 |       |  | December 31, 2010 |  
|Commercial                              |  | $              | 509   |  |                   | $ | 756   | 
|Commercial Real Estate:                 |  |                |       |  |                   |   |       | 
|Commercial Mortgages-Owner Occupied     |  |                | 574   |  |                   |   | 1,157 | 
|Commercial Mortgages-Non-Owner Occupied |  |                | 2,709 |  |                   |   | 2,504 | 
|Commercial Construction                 |  |                | 207   |  |                   |   | 923   | 
|Consumer                                |  |                |       |  |                   |   |       | 
|Consumer Unsecured                      |  |                |      |  |                   |   | 83    | 
|Consumer Secured                        |  |                | 1,559 |  |                   |   | 1,153 | 
|Residential:                            |  |                |       |  |                   |   |       | 
|Residential Mortgages                   |  |                | 1,362 |  |                   |   | 1,725 | 
|Residential Consumer Construction       |  |                | 65    |  |                   |   | 65    | 
|                                        |  |                |       |  |                   |   |       | 
|                                        |  |               
|Totals                                  |  | $              | 6,985 |  |                   | $ | 8,366 | 
|                                        |  |                |       |  |                   |   |       | 

We also classify other real estate owned (OREO) as a nonperforming asset. OREO, which is accounted for in
the other assets section of the Consolidated Balance Sheets, represents real property owned by the Bank either through purchase at foreclosure or received from the borrower through a deed in lieu of foreclosure. OREO increased to
$3,931,000 on March 31, 2011 from $3,440,000 on December 31, 2010. The following table represents the changes in OREO balance during the three months ended March 31, 2011.

OREO Changes

(Dollars in Thousands)



|                                             |  |                                  |       |  
|-------------------------------------------- |  | -------------------------------- | ----- | -
|                                             |  | Three months endedMarch 31, 2011 |      
|Balance at the beginning of the year (gross) |  | $                                | 3,440 |  
|Transfers from loans                         |  |                                  | 870   |  
|Transfer from premises and equipment         |  |                                  |      |  
|Capitalized costs                            |  |                                  | 6     |  
|Charge-Offs                                  |  |                                  |      |  
|Sales proceeds                               |  |                                  | (329  | )
|Gain (loss) on disposition                   |  |                                  | (56   | )
|                                             |  |                                  |       |  
|Balance at the end of the period (gross)     |  | $                                | 3,931 |  
|                                             |  |                                  |       |  
|Less valuation allowance                     |  |                                  |      |  
|Balance at the end of the period (net)       |  | $                                | 3,931 |  
|                                             |  |                                  |       |  



18



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Note 9  Loans and allowance for loan losses (continued)



|                                       |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|-------------------------------------- |  | ----------------------------------------------------------------------------- | ------ |  | ------------------------ | - | ------ | ----------------- |  | - | --------------------------- |  |  | -------------------------- | ------ |  |  | - | --- | -
|                                       |  | Impaired Loans(dollars in
thousands)For the Three Months Ended March 31, 2011 |       
|2011                                   |  | Recorded Investment                                                           |        |  | Unpaid Principal Balance |   |        | Related Allowance |  |   | Average Recorded Investment |  |  | Interest Income Recognized |       
|With No Related Allowance Recorded:    |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial                             |  | $                                                                             | 9,209  |  |                          | $ | 9,252  |                   |  | $ |                            |  |  | $                          | 11,904 |  |  | $ | 126 |  
|Commercial Real Estate                 |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial Mortgages-Owner Occupied    |  |                                                                               | 3,150  |  |                          |   | 3,179  |                   |  |   |                            |  |  |                            | 2,927  |  |  |   | 52  |  
|Commercial Mortgage Non-Owner Occupied |  |                                                                               | 6,209  |  |                          |   | 6,771  |                   |  |   |                            |  |  |                            | 6,082  |  |  |   | 62  |  
|Commercial Construction                |  |                                                                               | 1,424  |  |                          |   | 1,424  |                   |  |   |                            |  |  |                            | 1,144  |  |  |   | 19  |  
|Consumer                               |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Consumer Unsecured                     |  |                                                                               |       |  |                          |   |       |                   |  |   |                            |  |  |                            |       |  |  |   |    |  
|Consumer Secured                       |  |                                                                               | 978    |  |                          |   | 1,289  |                   |  |   |                            |  |  |                            | 672    |  |  |   |    |  
|Residential                            |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Residential Mortgages                  |  |                                                                               | 343    |  |                          |   | 566    |                   |  |   |                            |  |  |                            | 373    |  |  |   | (5  | )
|Residential Consumer Construction      |  |                                                                               | 65     |  |                          |   | 69     |                   |  |   |                            |  |  |                            | 65     |  |  |   |    |  
|                                       |  |                                                                               |        |  |                         
|With An Allowance Recorded:            |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial                             |  | $                                                                             | 1,256  |  |                          | $ | 1,292  |                   |  | $ | 268                         |  |  | $                          | 1,314  |  |  | $ | 15  |  
|Commercial Real Estate                 |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial Mortgages-Owner Occupied    |  |                                                                               | 4,363  |  |                          |   | 4,382  |                   |  |   | 777                         |  |  |                            | 4,739  |  |  |   | 57  |  
|Commercial Mortgage Non-Owner Occupied |  |                                                                               | 1,555  |  |                          |   | 1,580  |                   |  |   | 165                         |  |  |                            | 1,340  |  |  |   | 4   |  
|Commercial Construction                |  |                                                                               | 2,575  |  |                          |   | 2,826  |                   |  |   | 408                         |  |  |                            | 2,892  |  |  |   | 16  |  
|Consumer                               |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Consumer Unsecured                     |  |                                                                               |       |  |                          |   |       |                   |  |   |                            |  |  |                            | 286    |  |  |   |    |  
|Consumer Secured                       |  |                                                                               | 427    |  |                          |   | 429    |                   |  |   | 165                         |  |  |                            | 442    |  |  |   | 3   |  
|Residential                            |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Residential Mortgages                  |  |                                                                               | 1,922  |  |                          |   | 2,076  |                   |  |   | 272                         |  |  |                            | 1,847  |  |  |   | 32  |  
|Residential Consumer Construction      |  |                                                                               |       |  |                          |   |       |                   |  |   |                            |  |  |                            |       |  |  |   |    |  
|                                       |  |                                                                               |        |  |                         
|Totals:                                |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial                             |  | $                                                                             | 10,465 |  |                          | $ | 10,544 |                   |  | $ | 268                         |  |  | $                          | 13,218 |  |  | $ | 141 |  
|Commercial Real Estate                 |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Commercial Mortgages-Owner Occupied    |  |                                                                               | 7,513  |  |                          |   | 7,561  |                   |  |   | 777                         |  |  |                            | 7,666  |  |  |   | 109 |  
|Commercial Mortgage Non-Owner Occupied |  |                                                                               | 7,764  |  |                          |   | 8,351  |                   |  |   | 165                         |  |  |                            | 7,422  |  |  |   | 66  |  
|Commercial Construction                |  |                                                                               | 3,999  |  |                          |   | 4,250  |                   |  |   | 408                         |  |  |                            | 4,036  |  |  |   | 35  |  
|Consumer                               |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Consumer Unsecured                     |  |                                                                               |       |  |                          |   |       |                   |  |   |                            |  |  |                            | 286    |  |  |   |    |  
|Consumer Secured                       |  |                                                                               | 1,405  |  |                          |   | 1,718  |                   |  |   | 165                         |  |  |                            | 1,114  |  |  |   | 3   |  
|Residential                            |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|Residential Mortgages                  |  |                                                                               | 2,265  |  |                          |   | 2,642  |                   |  |   | 272                         |  |  |                            | 2,220  |  |  |   | 27  |  
|Residential Consumer Construction      |  |                                                                               | 65     |  |                          |   | 69     |                   |  |   |                            |  |  |                            | 65     |  |  |   |    |  
|                                       |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  
|                                       |  | $                                                                             | 33,476 |  |                          | $ | 35,135 |                   |  | $ | 2,055                       |  |  | $                          | 36,027 |  |  | $ | 381 |  
|                                       |  |                                                                               |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |     |  



19



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##### Table of Contents

Note 9  Loans and allowance for loan losses (continued)



|                                       |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|-------------------------------------- |  | ------------------------------------- | ------ |  | ------------------------ | - | ------ | ----------------- |  | - | --------------------------- |  |  | -------------------------- | ------ |  |  | - | ----- | 
|                                       |  | Impaired Loans (dollars in thousands) |       
|                                       |  | For the Year Ended December 31, 2010  |       
|2010                                   |  | Recorded Investment                   |        |  | Unpaid Principal Balance |   |        | Related Allowance |  |   | Average Recorded Investment |  |  | Interest Income Recognized |       
|With No Related Allowance Recorded:    |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial                             |  | $                                     | 14,598 |  |                          | $ | 14,787 |                   |  | $ |                            |  |  | $                          | 14,794 |  |  | $ | 687   | 
|Commercial Real Estate                 |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial Mortgages-Owner Occupied    |  |                                       | 2,703  |  |                          |   | 2,729  |                   |  |   |                            |  |  |                            | 2,740  |  |  |   | 177   | 
|Commercial Mortgage Non-Owner Occupied |  |                                       | 5,955  |  |                          |   | 6,569  |                   |  |   |                            |  |  |                            | 6,035  |  |  |   | 171   | 
|Commercial Construction                |  |                                       | 864    |  |                          |   | 864    |                   |  |   |                            |  |  |                            | 876    |  |  |   | 45    | 
|Consumer                               |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Consumer Unsecured                     |  |                                       |       |  |                          |   |       |                   |  |   |                            |  |  |                            |       |  |  |   |      | 
|Consumer Secured                       |  |                                       | 366    |  |                          |   | 660    |                   |  |   |                            |  |  |                            | 371    |  |  |   | 13    | 
|Residential                            |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Residential Mortgages                  |  |                                       | 403    |  |                          |   | 613    |                   |  |   |                            |  |  |                            | 406    |  |  |   | 8     | 
|Residential Consumer Construction      |  |                                       | 65     |  |                          |   | 68     |                   |  |   |                            |  |  |                            | 66     |  |  |   | 1     | 
|                                       |  |                                       |        |  |                         
|With An Allowance Recorded:            |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial                             |  | $                                     | 1,371  |  |                          | $ | 1,371  |                   |  | $ | 195                         |  |  | $                          | 1,388  |  |  | $ | 82    | 
|Commercial Real Estate                 |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial Mortgages-Owner Occupied    |  |                                       | 5,114  |  |                          |   | 5,144  |                   |  |   | 1,218                       |  |  |                            | 5,184  |  |  |   | 177   | 
|Commercial Mortgage Non-Owner Occupied |  |                                       | 1,125  |  |                          |   | 1,132  |                   |  |   | 53                          |  |  |                            | 1,141  |  |  |   | 21    | 
|Commercial Construction                |  |                                       | 3,208  |  |                          |   | 3,355  |                   |  |   | 437                         |  |  |                            | 3,252  |  |  |   | 103   | 
|Consumer                               |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Consumer Unsecured                     |  |                                       | 572    |  |                          |   | 589    |                   |  |   | 75                          |  |  |                            | 578    |  |  |   | 15    | 
|Consumer Secured                       |  |                                       | 456    |  |                          |   | 456    |                   |  |   | 195                         |  |  |                            | 461    |  |  |   | 25    | 
|Residential                            |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Residential Mortgages                  |  |                                       | 1,772  |  |                          |   | 1,923  |                   |  |   | 257                         |  |  |                            | 1,794  |  |  |   | 124   | 
|Residential Consumer Construction      |  |                                       |       |  |                          |   |       |                   |  |   |                            |  |  |                            |       |  |  |   |      | 
|                                       |  |                                       |        |  |                         
|Totals:                                |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial                             |  | $                                     | 15,969 |  |                          | $ | 16,158 |                   |  | $ | 195                         |  |  | $                          | 16,182 |  |  | $ | 769   | 
|Commercial Real Estate                 |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Commercial Mortgages-Owner Occupied    |  |                                       | 7,817  |  |                          |   | 7,873  |                   |  |   | 1,218                       |  |  |                            | 7,924  |  |  |   | 354   | 
|Commercial Mortgage Non-Owner Occupied |  |                                       | 7,080  |  |                          |   | 7,701  |                   |  |   | 53                          |  |  |                            | 7,176  |  |  |   | 192   | 
|Commercial Construction                |  |                                       | 4,072  |  |                          |   | 4,219  |                   |  |   | 437                         |  |  |                            | 4,128  |  |  |   | 148   | 
|Consumer                               |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Consumer Unsecured                     |  |                                       | 572    |  |                          |   | 589    |                   |  |   | 75                          |  |  |                            | 578    |  |  |   | 15    | 
|Consumer Secured                       |  |                                       | 822    |  |                          |   | 1,116  |                   |  |   | 195                         |  |  |                            | 832    |  |  |   | 38    | 
|Residential                            |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|Residential Mortgages                  |  |                                       | 2,175  |  |                          |   | 2,536  |                   |  |   | 257                         |  |  |                            | 2,200  |  |  |   | 132   | 
|Residential Consumer Construction      |  |                                       | 65     |  |                          |   | 68     |                   |  |   |                            |  |  |                            | 66     |  |  |   | 1     | 
|                                       |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 
|                                       |  | $                                     | 38,572 |  |                          | $ | 40,260 |                   |  | $ | 2,430                       |  |  | $                          | 39,086 |  |  | $ | 1,649 | 
|                                       |  |                                       |        |  |                          |   |        |                   |  |   |                             |  |  |                            |        |  |  |   |       | 



20



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##### Table of Contents

Note 9  Loans and allowance for loan losses (continued)



|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | ------ | - | --------------------- | - | ------- | -------- |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                      |  | Allowance for Credit Losses and Recorded Investment in Financing Receivables
(dollars in thousands) |       
|                                                      |  | For the Three Months Ended March 31, 2011                                                           |       
|2011                                                  |  | Commercial                                                                                          |        |   | CommercialReal Estate |   |         | Consumer |  |   | Residential |   |  | Total |       
|                                                      |  |                                                                                                     |        |   |                      
|Allowance for Credit Losses:                          |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|Beginning Balance                                     |  | $                                                                                                   | 473    |   |                       | $ | 2,897   |          |  | $ | 1,207       |   |  | $     | 890    |   |  | $ | 5,467   |  
|Charge-offs                                           |  |                                                                                                     | (164   | ) |                       |   | (313    | )        |  |   | (136        | ) |  |       | (126   | ) |  |   | (739    | )
|Recoveries                                            |  |                                                                                                     | 3      |   |                       |   |        |          |  |   | 7           |   |  |       | 1      |   |  |   | 11      |  
|Provision                                             |  |                                                                                                     | 458    |   |                       |   | (75     | )        |  |   | 98          |   |  |       | 98     |   |  |   | 579     |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|Ending Balance                                        |  |                                                                                                     | 770    |   |                       |   | 2,509   |          |  |   | 1,176       |   |  |       | 863    |   |  |   | 5,318   |  
|                                                      |  |                                                                                                     |        |   |                      
|Ending Balance: Individually evaluated for impairment |  | $                                                                                                   | 268    |   |                       | $ | 1,350   |          |  | $ | 165         |   |  | $     | 272    |   |  | $ | 2,055   |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Ending Balance: Collectively evaluated for impairment |  |                                                                                                     | 502    |   |                       |   | 1,159   |          |  |   | 1,011       |   |  |       | 591    |   |  |   | 3,263   |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Totals:                                               |  | $                                                                                                   | 770    |   |                       | $ | 2,509   |          |  | $ | 1,176       |   |  | $     | 863    |   |  | $ | 5,318   |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Financing Receivables:                                |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Ending Balance: Individually evaluated for impairment |  |                                                                                                     | 10,465 |   |                       |   | 19,276  |          |  |   | 1,405       |   |  |       | 2,330  |   |  |   | 33,476  |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Ending Balance: Collectively evaluated for impairment |  |                                                                                                     | 55,270 |   |                       |   | 129,100 |          |  |   | 66,473      |   |  |       | 43,964 |   |  |   | 294,807 |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  
|                                                      |  |                                                                                                     |        |   |                      
|Totals:                                               |  | $                                                                                                   | 65,735 |   |                       | $ | 148,376 |          |  | $ | 67,879      |   |  | $     | 46,294 |   |  | $ | 328,284 |  
|                                                      |  |                                                                                                     |        |   |                       |   |         |          |  |   |             |   |  |       |        |   |  |   |         |  



21



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Note 9  Loans and allowance for loan losses (continued)



|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | ------ |  | --------------------- | - | ------- | -------- |  | - | ----------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                                      |  | Allowance for Credit Losses and Recorded Investment in Financing 
Receivables(dollars in thousands) |       
|                                                      |  | For the Years Ended December 31, 2010                                                               |       
|2010                                                  |  | Commercial                                                                                          |        |  | CommercialReal Estate |   |         | Consumer |  |   | Residential |  |  | Total |       
|                                                      |  |                                                                                                     |        |  |                      
|Allowance for Credit Losses:                          |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Ending Balance: Individually evaluated for impairment |  | $                                                                                                   | 195    |  |                       | $ | 1,708   |          |  | $ | 270         |  |  | $     | 257    |  |  | $ | 2,430   | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Ending Balance: Collectively evaluated for impairment |  |                                                                                                     | 278    |  |                       |   | 1,189   |          |  |   | 937         |  |  |       | 633    |  |  |   | 3,037   | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Totals:                                               |  | $                                                                                                   | 473    |  |                       | $ | 2,897   |          |  | $ | 1,207       |  |  | $     | 890    |  |  | $ | 5,467   | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Financing Receivables:                                |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Ending Balance: Individually evaluated for impairment |  |                                                                                                     | 15,969 |  |                       |   | 18,969  |          |  |   | 1,394       |  |  |       | 2,240  |  |  |   | 38,572  | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Ending Balance: Collectively evaluated for impairment |  |                                                                                                     | 46,817 |  |                       |   | 124,459 |          |  |   | 66,895      |  |  |       | 49,439 |  |  |   | 287,610 | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 
|                                                      |  |                                                                                                     |        |  |                      
|Totals:                                               |  | $                                                                                                   | 62,786 |  |                       | $ | 143,428 |          |  | $ | 68,289      |  |  | $     | 51,679 |  |  | $ | 326,182 | 
|                                                      |  |                                                                                                     |        |  |                       |   |         |          |  |   |             |  |  |       |        |  |  |   |         | 



|                                        |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|--------------------------------------- |  | ------------------------------------------------------------------------------------------ | ----- |  | ------------------- | - | --- | -------------------- |  | - | -------------- |  |  | ------- | ------ |  | --------------------------- | - | ------- | --------------------------------------- |  | - | ------- |  |  | - | - | 
|                                        |  | Age Analysis of Past Due Financing Receivables as of March 31, 2011
(dollars in thousands) |      
|2011                                    |  | 30-59 Days
Past Due                                                                        |       |  | 60-89 Days
Past Due |   |     | Greater than 90 Days |  |   | Total Past
Due |  |  | Current |        |  | Total Financing Receivables |   |         | RecordedInvestment
> 90 Days & Accruing | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Commercial                              |  | $                                                                                          | 442   |  |                     | $ |    |                      |  | $ | 493            |  |  | $       | 935    |  |                             | $ | 64,800  |                                         |  | $ | 65,735  |  |  | $ |  | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Commercial Real Estate:                 |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|Commercial Mortgages-Owner Occupied     |  |                                                                                            | 2,317 |  |                     |   |    |                      |  |   | 362            |  |  |         | 2,679  |  |                             |   | 64,309  |                                         |  |   | 66,988  |  |  |   |  | 
|Commercial Mortgages-Non-Owner Occupied |  |                                                                                            | 625   |  |                     |   |    |                      |  |   | 2,708          |  |  |         | 3,333  |  |                             |   | 67,291  |                                         |  |   | 70,624  |  |  |   |  | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Commercial Construction                 |  |                                                                                            |      |  |                     |   | 482 |                      |  |   | 207            |  |  |         | 689    |  |                             |   | 10,075  |                                         |  |   | 10,764  |  |  |   |  | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Consumer:                               |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Consumer Unsecured                      |  |                                                                                            | 3     |  |                     |   |    |                      |  |   |               |  |  |         | 3      |  |                             |   | 2,728   |                                         |  |   | 2,731   |  |  |   |  | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Consumer Secured                        |  |                                                                                            | 1,226 |  |                     |   | 62  |                      |  |   | 1,147          |  |  |         | 2,435  |  |                             |   | 62,713  |                                         |  |   | 65,148  |  |  |   |  | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Residential:                            |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Residential Mortgages                   |  |                                                                                            | 1,841 |  |                     |   |    |                      |  |   | 516            |  |  |         | 2,357  |  |                             |   | 38,468  |                                         |  |   | 40,825  |  |  |   |  | 
|Residential Consumer Construction       |  |                                                                                            | 81    |  |                     |   |    |                      |  |   | 65             |  |  |         | 146    |  |                             |   | 5,323   |                                         |  |   | 5,464   |  |  |   |  | 
|                                        |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                            |       |  |                     |   |    
|Total                                   |  | $                                                                                          | 6,535 |  |                     | $ | 544 |                      |  | $ | 5,498          |  |  | $       | 12,577 |  |                             | $ | 315,707 |                                         |  | $ | 328,284 |  |  | $ |  | 
|                                        |  |                                                                                            |       |  |                     |   |     |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 



22



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Note 9  Loans and allowance for loan losses (continued)



|                                        |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|--------------------------------------- |  | --------------------------------------------------------------------------------------- | ----- |  | ------------------- | - | ----- | -------------------- |  | - | -------------- |  |  | ------- | ------ |  | --------------------------- | - | ------- | --------------------------------------- |  | - | ------- |  |  | - | - | 
|                                        |  | Age Analysis of Past Due Financing Receivables
December 31, 2010 (dollars in thousands) |      
|2010                                    |  | 30-59 Days
Past Due                                                                     |       |  | 60-89 Days
Past Due |   |       | Greater than 90 Days |  |   | Total Past
Due |  |  | Current |        |  | Total Financing Receivables |   |         | RecordedInvestment
> 90 Days & Accruing | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Commercial                              |  | $                                                                                       | 726   |  |                     | $ | 180   |                      |  | $ | 576            |  |  | $       | 1,482  |  |                             | $ | 61,304  |                                         |  | $ | 62,786  |  |  | $ |  | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Commercial Real Estate:                 |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|Commercial Mortgages-Owner Occupied     |  |                                                                                         | 1,390 |  |                     |   | 299   |                      |  |   | 553            |  |  |         | 2,242  |  |                             |   | 62,120  |                                         |  |   | 64,362  |  |  |   |  | 
|Commercial Mortgages-Non-Owner Occupied |  |                                                                                         | 1,169 |  |                     |   | 253   |                      |  |   | 2,503          |  |  |         | 3,925  |  |                             |   | 62,619  |                                         |  |   | 66,544  |  |  |   |  | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Commercial Construction                 |  |                                                                                         |      |  |                     |   |      |                      |  |   | 923            |  |  |         | 923    |  |                             |   | 11,599  |                                         |  |   | 12,522  |  |  |   |  | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Consumer:                               |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Consumer Unsecured                      |  |                                                                                         | 8     |  |                     |   |      |                      |  |   | 83             |  |  |         | 91     |  |                             |   | 2,824   |                                         |  |   | 2,915   |  |  |   |  | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Consumer Secured                        |  |                                                                                         | 564   |  |                     |   | 230   |                      |  |   | 731            |  |  |         | 1,525  |  |                             |   | 63,849  |                                         |  |   | 65,374  |  |  |   |  | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Residential:                            |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Residential Mortgages                   |  |                                                                                         | 1,072 |  |                     |   | 68    |                      |  |   | 793            |  |  |         | 1,933  |  |                             |   | 39,834  |                                         |  |   | 41,767  |  |  |   |  | 
|Residential Consumer Construction       |  |                                                                                         |      |  |                     |   |      |                      |  |   | 65             |  |  |         | 65     |  |                             |   | 9,847   |                                         |  |   | 9,912   |  |  |   |  | 
|                                        |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 
|                                        |  |                                                                                         |       |  |                     |   |      
|Total                                   |  | $                                                                                       | 4,929 |  |                     | $ | 1,030 |                      |  | $ | 6,227          |  |  | $       | 12,186 |  |                             | $ | 313,996 |                                         |  | $ | 326,182 |  |  | $ |  | 
|                                        |  |                                                                                         |       |  |                     |   |       |                      |  |   |                |  |  |         |        |  |                             |   |         |                                         |  |   |         |  |  |   |   | 



|                                        |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|--------------------------------------- |  | --------------------------------------------------------------------------- | ------- |  | ------- | - | ------ | -------------- |  | - | ----------- |  |  | -------- | ------ |  | ------ | - | --- |  |  | - | ------- | 
|                                        |  | Credit Quality Information - by Class
March 31, 2011
(dollars in thousands) |        
|                                        |  | Pass                                                                        |         |  | Monitor |   |        | SpecialMention |  |   | Substandard |  |  | Doubtful |        |  | Totals |  
|Commercial                              |  | $                                                                           | 45,470  |  |         | $ | 3,437  |                |  | $ | 10,037      |  |  | $        | 6,649  |  |        | $ | 142 |  |  | $ | 65,735  | 
|                                        |  |                                                                             |         |  |         |  
|Commercial Real Estate:                 |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Commercial Mortgages-Owner Occupied     |  |                                                                             | 53,679  |  |         |   | 5,843  |                |  |   | 1,074       |  |  |          | 6,244  |  |        |   | 148 |  |  |   | 66,988  | 
|Commercial Mortgages-Non-Owner Occupied |  |                                                                             | 55,005  |  |         |   | 2,869  |                |  |   | 6,425       |  |  |          | 6,325  |  |        |   |    |  |  |   | 70,624  | 
|Commercial Construction                 |  |                                                                             | 6,749   |  |         |   | 533    |                |  |   | 1,369       |  |  |          | 2,113  |  |        |   |    |  |  |   | 10,764  | 
|                                        |  |                                                                             |         |  |         |  
|Consumer                                |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Consumer Unsecured                      |  |                                                                             | 2,701   |  |         |   |       |                |  |   |            |  |  |          | 30     |  |        |   |    |  |  |   | 2,731   | 
|Consumer Secured                        |  |                                                                             | 62,161  |  |         |   | 470    |                |  |   | 523         |  |  |          | 1,994  |  |        |   |    |  |  |   | 65,148  | 
|                                        |  |                                                                             |         |  |         |  
|Residential:                            |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Residential Mortgages                   |  |                                                                             | 37,625  |  |         |   | 76     |                |  |   | 260         |  |  |          | 2,863  |  |        |   |    |  |  |   | 40,824  | 
|Residential Consumer Construction       |  |                                                                             | 5,405   |  |         |   |       |                |  |   |            |  |  |          | 65     |  |        |   |    |  |  |   | 5,470   | 
|                                        |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|                                        |  |                                                                             |         |  |         |  
|Totals                                  |  | $                                                                           | 268,795 |  |         | $ | 13,228 |                |  | $ | 19,688      |  |  | $        | 26,283 |  |        | $ | 290 |  |  | $ | 328,284 | 
|                                        |  |                                                                             |         |  |         |   |        |                |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 



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##### Table of Contents

Note 9  Loans and allowance for loan losses (continued)



|                                        |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|--------------------------------------- |  | ------------------------------------------------------------------------------ | ------- |  | ------- | - | ------ | --------------- |  | - | ----------- |  |  | -------- | ------ |  | ------ | - | --- |  |  | - | ------- | 
|                                        |  | Credit Quality Information - by Class
December 31, 2010 (dollars in thousands) |        
|                                        |  | Pass                                                                           |         |  | Monitor |   |        | Special Mention |  |   | Substandard |  |  | Doubtful |        |  | Totals |  
|Commercial                              |  | $                                                                              | 41,328  |  |         | $ | 2,732  |                 |  | $ | 9,471       |  |  | $        | 9,075  |  |        | $ | 180 |  |  | $ | 62,786  | 
|                                        |  |                                                                                |         |  |         |  
|Commercial Real Estate:                 |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Commercial Mortgages-Owner Occupied     |  |                                                                                | 50,485  |  |         |   | 5,535  |                 |  |   | 1,378       |  |  |          | 6,814  |  |        |   | 150 |  |  |   | 64,362  | 
|Commercial Mortgages-Non-Owner Occupied |  |                                                                                | 52,004  |  |         |   | 2,337  |                 |  |   | 6,354       |  |  |          | 5,849  |  |        |   |    |  |  |   | 66,544  | 
|Commercial Construction                 |  |                                                                                | 7,571   |  |         |   | 855    |                 |  |   | 1,446       |  |  |          | 2,650  |  |        |   |    |  |  |   | 12,522  | 
|                                        |  |                                                                                |         |  |         |  
|Consumer                                |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Consumer Unsecured                      |  |                                                                                | 2,805   |  |         |   |       |                 |  |   | 1           |  |  |          | 34     |  |        |   | 75  |  |  |   | 2,915   | 
|Consumer Secured                        |  |                                                                                | 63,225  |  |         |   | 475    |                 |  |   | 349         |  |  |          | 1,325  |  |        |   |    |  |  |   | 65,374  | 
|                                        |  |                                                                                |         |  |         |  
|Residential:                            |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|Residential Mortgages                   |  |                                                                                | 38,504  |  |         |   | 77     |                 |  |   |            |  |  |          | 3,014  |  |        |   | 172 |  |  |   | 41,767  | 
|Residential Consumer Construction       |  |                                                                                | 9,475   |  |         |   |       |                 |  |   | 372         |  |  |          | 65     |  |        |   |    |  |  |   | 9,912   | 
|                                        |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 
|                                        |  |                                                                                |         |  |         |  
|Totals                                  |  | $                                                                              | 265,397 |  |         | $ | 12,011 |                 |  | $ | 19,371      |  |  | $        | 28,826 |  |        | $ | 577 |  |  | $ | 326,182 | 
|                                        |  |                                                                                |         |  |         |   |        |                 |  |   |             |  |  |          |        |  |        |   |     |  |  |   |         | 

Note 10  Subsequent Events

In preparing these financial statements, Financial has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Note 11  Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim
and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of
information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such
as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.



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##### Table of Contents

Note 11  Recent Accounting Pronouncements (continued)



In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information
for Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been
as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year
had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for 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, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU
modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have
a material impact on the Companys consolidated financial statements.

The Securities Exchange Commission (SEC) has issued Final Rule
No. 33-9002, Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule.
Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers
are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series.
This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASBs Codification. The principal changes involve revision or removal of accounting guidance
references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditors evaluation
of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the
beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be
impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact
that ASU 2011-02 will have on its consolidated financial statements.



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##### 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. We undertake 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 relating to the banking industry (which changes from time to
time and over which we have no control) including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in 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) ASC 450 Contingencies, which requires that losses be accrued when they are probable of occurring and are reasonably estimable and (ii) ASC 310 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. Guidelines for
determining allowances for loan losses are also provided in the SEC Staff Accounting Bulletin No. 102  Selected Loan Loss Allowance Methodology and Documentation Issues and the Federal Financial Institutions Examination
Councils interagency guidance, Interagency Policy Statement on the Allowance for Loan and Lease Losses (the FFIEC Policy Statement). 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.



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##### Table of Contents

Overview

Financial is a bank holding company headquartered in Lynchburg, Virginia. Our primary business is retail banking which we conduct through our wholly-owned subsidiary, Bank of the James (which we refer to
as the Bank). We conduct three other business activities, mortgage banking through the Banks Mortgage division (which we refer to as Mortgage), investment services through the Banks Investment division (which we
refer to as Investment), and insurance activities through BOTJ Insurance, Inc., a subsidiary of the Bank, (which we refer to as Insurance).

Financial declared a 10% stock dividend on May 18, 2010 which was paid on July 23, 2010 to shareholders of record on June 21, 2010.

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.

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.

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 now services its banking customers through the following nine full service
branch locations in the Region 2000 area.



| |  |  | The main office located at 828 Main Street in Lynchburg (opened October 2004) (the Main Street Office),
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | A branch located at 615 Church Street in Lynchburg (opened July 1999) (the Church Street Branch),
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | A branch located at 5204 Fort Avenue in Lynchburg (opened November 2000) (the Fort Avenue Branch),
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | A branch located on South Amherst Highway in Amherst County (opened June 2002) (the Madison Heights Branch),
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | A branch located at 17000 Forest Road in Forest (opened February 2005) (the Forest Branch),
| | - |  | ---------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (opened April 2006) (the Boonsboro Branch),
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | A branch located at 164 South Main Street, Amherst, Virginia (opened January 2007) (the Amherst Branch),
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | A branch located at 1405 Ole Dominion Boulevard in the City of Bedford, Virginia, located off of Independence Boulevard (opened October 2008) (the
Bedford Branch), and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A branch located at 1110 Main Street, Altavista, Virginia (relocated from temporary branch in June 2009) (the Altavista Branch).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

The Bank also has opened a limited-service branch located in the Westminster-Canterbury facilities located at 501 VES Road,
Lynchburg, Virginia 24503.

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 1152 Hendricks Store Road, Moneta, Virginia.

The Investment division 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 following discussion provides a general overview of the additional branch location that the Bank currently
is considering.

Timberlake Road Area, Campbell County (Lynchburg), Virginia.As previously disclosed, the Bank has
purchased certain real property located at the intersection of Turnpike and Timberlake Roads, Campbell County, Virginia. The Bank does not anticipate opening a branch at this location prior to 2012. The Bank has determined that the existing
structure is not suitable for use as a bank branch.

Rustburg, Virginia. In March, 2011 the Bank purchased certain real
property near the intersection of Routes 501 and 24 in Rustburg, Virginia. The structure on the property is being demolished and removed. The Bank does not anticipate opening a branch at this location prior to the first quarter of 2013.

The Bank estimates that the cost of improvements, furniture, fixtures, and equipment necessary to upfit the property will be between
$900,000 and $1,500,000 per location.

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.



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##### Table of Contents

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, 2011(in
thousands) |       
|Commitments to extend credit |  | $                            | 48,040 | 
|Letters of Credit            |  |                              | 2,107  | 
|                             |  |                              |        | 
|Total                        |  | $                            | 50,147 | 
|                             |  |                              |        | 

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.

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, 2011 and December 31, 2010 and the results of operations of Financial for the three month period ended March 31,
2011 and 2010. 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, 2011 as Compared to December 31, 2010

Total assets
were $430,903,000 on March 31, 2011 compared with $418,928,000 at December 31, 2010, an increase of 2.86%. The increase in total assets is due primarily to an increase in Federal funds sold and securities available-for-sale resulting from
an increase in deposits, as explained in the following paragraph.



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##### Table of Contents

Total deposits increased from $368,390,000 as of December 31, 2010 to $379,207,000 on
March 31, 2011, an increase of 2.94%. This increase occurred because of the Banks increased efforts to obtain lower costing demand deposits and the Banks increased presence in the market.

Total loans increased to $328,284,000 on March 31, 2011 from $326,182,000 on December 31, 2010. Loans, net of unearned income
and allowance, increased to $322,966,000 on March 31, 2011 from $320,715,000 on December 31, 2010, an increase of 0.70%. 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, 2011 |         |  | December 31, 2010 | 
|                       |  | Amount         |         |  | Percentage        |  |        | Amount |  |   | Percentage | 
|Commercial             |  | $              | 65,735  |  |                   |  | 20.02  | %      |  | $ | 62,786     |  |  |  | 19.25  | %
|Commercial Real Estate |  |                | 148,376 |  |                   |  | 45.20  | %      |  |   | 143,428    |  |  |  | 43.97  | %
|Consumer               |  |                | 67,879  |  |                   |  | 20.68  | %      |  |   | 68,289     |  |  |  | 20.94  | %
|Residential            |  |                | 46,294  |  |                   |  | 14.10  | %      |  |   | 51,679     |  |  |  | 15.84  | %
|                       |  |                |         |  |                   |  |        |        |  |   |            |  |  |  |        |  
|Total loans            |  | $              | 328,284 |  |                   |  | 100.00 | %      |  | $ | 326,182    |  |  |  | 100.00 | %
|                       |  |                |         |  |                   |  |        |        |  |   |            |  |  |  |        |  

Total nonperforming assets, which consist of non-accrual loans and other real estate owned
(OREO) decreased to $10,916,000 on March 31, 2011 from $11,806,000 on December 31, 2010. This decrease was primarily due to a decrease in nonperforming loans. The decrease largely resulted from charge-offs of $739,000 in the
quarter ended March 31, 2011. Non-accrual loans decreased 16.50% to $6,985,000 on March 31, 2011 from $8,366,000 on December 31, 2010. As discussed in more detail below under Results of OperationsAllowance for Loan
Losses, management has provided for the anticipated losses on these loans in the loan loss reserve. If interest on non-accrual loans had been accrued, such interest on a cumulative basis would have approximated $837,000 and $1,059,000, as of
March 31, 2011 and December 31, 2010, 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.

OREO represents real property owned by the Bank acquired either through purchase at foreclosure or received from the borrower through a
deed in lieu of foreclosure. On December 31, 2010, the Bank was carrying 15 OREO properties on its books at a value of $3,440,000. During the quarter ended March 31, 2011, the Bank acquired 7 additional OREO properties and disposed of 5
OREO properties, and as of March 31, 2011 the Bank is carrying 17 OREO properties at a value of $3,931,000. The OREO properties are available for sale and are being actively marketed on the Banks website and through other means.

The amount of troubled debt restructurings (TDR) included at March 31, 2011 and December 31, 2010 was
$5,064,000 and $4,987,000, respectively.

Cash and cash equivalents increased to $23,913,000 on March 31, 2011 from
$18,759,000 on December 31, 2010. Cash and cash equivalents consist of cash due from correspondents, cash in vault, and overnight investments (including federal funds sold). This increase is due primarily to routine fluctuations in deposits,
including fluctuations in transactional accounts and professional settlement accounts, both of which are subject to fluctuations, and will contribute to variations in cash and cash equivalents.



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Because of the call of one bond, securities held-to-maturity decreased slightly to
$13,241,000 on March 31, 2011 from $14,297,000 on December 31, 2010. Securities available-for-sale increased to $44,047,000 on March 31, 2011 from $38,586,000 December 31, 2010. During the three months ended March 31, 2011
the Bank received $719,000 in proceeds from maturities and/or calls of securities-available-for sale. The Bank purchased $8,324,000 in securities available-for sale during the same period. The increase from December 31, 2010 in securities
available-for-sale was primarily due to the investment of funds received from an increase in deposit accounts.

Financials investment in FHLBA stock totaled $1,372,700 at both March 31, 2011 and December 31, 2010. FHLBA stock is
generally viewed as a long-term investment and because there is no market for the stock other than other Federal Home Loan Banks or member institutions, FHLBA stock is viewed as a restricted security. Therefore, when evaluating FHLBA stock for
impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Effective August 17, 2010, the FHLBA resumed the repurchase of Subclass B2 activity-based stock.

At March 31, 2011, Financial had liquid assets of approximately $67,960,000 in the form of cash, interest-bearing and
noninterest-bearing deposits with banks, federal funds sold and available-for-sale investments. Management believes that liquid assets were adequate at March 31, 2011. 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) in 2009. The Notes bear interest at the rate of 6% per year with interest payable quarterly in arrears. No principal payments are due until the Notes mature on April 1, 2012, the date on which the Notes mature and the
principal and all accrued but unpaid interest on the Notes will be due and payable. During the three months ended March 31, 2011, Financial made an interest payment on the Notes totaling $105,000.

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

At March 31, 2011, the Bank had a leverage ratio of 7.72%, a Tier 1
risk-based capital ratio of 10.23% and a total risk-based capital ratio of 11.49%. As of March 31, 2011 and December 31, 2010 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, 2011 and December 31, 2010:

Bank Level Only Capital Ratios



|                               |  |               |         |  |                  |   |         | 
|------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|Analysis of Capital (in 000s) |  | March 31,2011 |         |  | December 31,2010 |  
|Tier 1 Capital:                |  |               |         |  |                  |   |         | 
|Common stock                   |  | $             | 3,743   |  |                  | $ | 3,742   | 
|Surplus                        |  |               | 19,325  |  |                  |   | 19,325  | 
|Retained earnings              |  |               | 9,570   |  |                  |   | 9,049   | 
|                               |  |               |         |  |                  |   |         | 
|Total Tier 1 capital           |  | $             | 32,638  |  |                  | $ | 32,116  | 
|                               |  |               |         |  |                  |   |         | 
|                               |  |              
|Tier 2 Capital:                |  |               |         |  |                  |   |         | 
|Allowance for loan losses      |  | $             | 4,003   |  |                  | $ | 3,989   | 
|                               |  |               |         |  |                  |   |         | 
|                               |  |              
|Total Tier 2 Capital:          |  | $             | 4,003   |  |                  | $ | 3,989   | 
|                               |  |               |         |  |                  |   |         | 
|Total risk-based capital       |  | $             | 36,641  |  |                  | $ | 36,105  | 
|                               |  |               |         |  |                  |   |         | 
|                               |  |              
|Risk weighted assets           |  | $             | 318,917 |  |                  | $ | 317,606 | 
|                               |  |              
|Average total assets           |  | $             | 422,577 |  |                  | $ | 423,349 | 



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|                                                              |  |               |       |   |                       |  |       |                            |  |  |                             |   |  |  |       |  
|------------------------------------------------------------- |  | ------------- | ----- | - | --------------------- |  | ----- | -------------------------- |  |  | --------------------------- | - |  |  | ----- | -
|                                                              |  | Actual        |       |   | Regulatory Benchmarks | 
|                                                              |  | March 31,2011 |       |   | December 31,2010      |  |       | ForCapitalAdequacyPurposes |  |  | For WellCapitalizedPurposes |  
|Capital Ratios:                                               |  |               |       |   |                       |  |       |                            |  |  |                             |   |  |  |       |  
|Tier 1 capital to average total assets ratio (leverage ratio) |  |               | 7.72  | % |                       |  | 7.59  | %                          |  |  | 4.00                        | % |  |  | 5.00  | %
|Tier 1 risk based capital ratio                               |  |               | 10.23 | % |                       |  | 10.11 | %                          |  |  | 4.00                        | % |  |  | 6.00  | %
|Total risk-based capital ratio                                |  |               | 11.49 | % |                       |  | 11.37 | %                          |  |  | 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, 2011 and 2010

Earnings Summary

Financial had net income of $435,000 for the three months ended March 31, 2011 compared to $366,000 for the comparable period in 2010. The basic and diluted earnings per common share for the three
months ended March 31, 2011 were $0.13 compared to $0.11 for the same period in 2010. All earnings per share amounts have been adjusted to reflect the 10% stock dividend paid by Financial in July 2010 and all prior stock dividends.

The increase in net income was due in large part to a significant decrease in interest expense.

These operating results represent an annualized return on stockholders equity of 6.74% for the three months ended March 31,
2011, compared with 6.13% for the same period in 2010. The Company had an annualized return on average assets for the three months ended March 31, 2011 of 0.42%, compared with 0.35% for the same period in 2010.

Interest Income, Interest Expense, and Net Interest Income

Interest income decreased to $4,942,000 for the three months ended March 31, 2011 from $5,368,000 for the same period in 2010, a
decrease of 7.94%. The rate on total average earning assets decreased from 5.55% for the three month period ended March 31, 2010 to 5.11% for the three months ended March 31, 2011 in part because the Bank invested a greater percentage of
its earning assets in loans and investment securities rather than federal funds. Although management cannot be certain, management expects that interest rates will remain near historic lows for the remainder of 2011 and may negatively impact our
interest income.



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Interest expense decreased to $1,235,000 for the three months ended March 31, 2011 from
$2,079,000 for the same period in 2010, a decrease of 40.60%. This significant decrease in interest expense resulted in large part from a decrease in the rate paid on those balances. The Banks average rate paid on deposits was 2.29% during the
three month period ended March 31, 2010 as compared to 1.30% for the same period in 2011. This resulted from managements efforts to minimize the Banks interest expense and maximize its net interest margin.

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, 2011 was $3,707,000 compared with $3,289,000 for the same period in 2010. The net interest margin increased to 3.83% for the three months ended March 31, 2011 from 3.40%
in the same period a year ago. The increase in net interest income for the three months ended March 31, 2011 as compared with the comparable three months in 2010 was due to a decrease in the average rate paid on deposits, primarily resulting
from a decrease in the balance in and rate paid on the 2010 Savings Account.

Financials net interest margin analysis
and average balance sheets are shown in Schedule I on page 37.

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, decreased to $672,000 ($641,000 exclusive of a gain of $31,000 on the sale of securities) for the three months ended March 31, 2011 from
$800,000 ($725,000 exclusive of a gain of $75,000 on the sale of securities). This decrease for the three months ended March 31, 2011 as compared to the same periods last year was due primarily to a decrease in service charges, fees, and
commissions.

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.

Management anticipates that residential
mortgage rates will remain near the current historic lows for the remainder of 2011. 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. Revenue from mortgage origination fees increased in the three month period ended March 31, 2011 as compared to the same period for 2010. Management believes that regulatory pressure may result in a decreased number of competitors to
the Mortgage Division and this could result in an increase in market share.

Our Investment division provides brokerage
services through an agreement with a third-party broker-dealer. Pursuant to this arrangement, the third party broker-dealer operates a service center adjacent to one of the branches of the Bank. The center is staffed by dual employees of the Bank
and the broker-dealer. Investment receives commissions on transactions generated and in some cases ongoing management fees such as mutual fund 12b-1 fees. The Investment divisions financial impact on our consolidated revenue has been
immaterial. Although management cannot predict the financial impact of Investment with certainty, management anticipates it will continue to be an immaterial component of revenue in 2011.

In the third quarter of 2008, we began providing insurance and annuity products to Bank customers and others, through the Banks
Insurance subsidiary. The Bank has one full-time and one part-time



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employee that are dedicated to selling insurance products through Insurance. Insurance generates minimal revenue and its financial impact on our consolidated revenue has been immaterial.
Management anticipates that Insurances impact on noninterest income will remain immaterial in 2011.

Non-Interest
Expense

Non-interest expense for the three months ended March 31, 2011 increased to $3,170,000, or 0.38% from
$3,158,000 for the comparable period in 2010. This slight increase in non-interest expense from the comparable period in 2010 can be attributed to increased occupancy and outside expenses, loss on sale of OREO and OREO related expenses, as well as
increase in the FDIC assessment. These increased expenses were offset in part by a decrease in compensation expense, which resulted primarily from a decrease in commission expense as well as the Banks decision to restructure certain
departments and the resulting reduced staffing.

Total personnel expense was $1,427,000 for the three month period ended
March 31, 2011 as compared to $1,649,000 for the same period in 2010. Compensation for some employees of the Mortgage Division and Investment Division is commission-based and therefore subject to fluctuation.

During the quarter ended March 31, 2011, the FDIC premium expense increased to $229,000 from $192,000 for the three months ended
March 31, 2010. FDIC Assessment payments have increased in large part because of i) FDIC coverage on accounts has increased from $100,000 to $250,000; ii) the FDIC is charging additional premiums for participation in the Transactional Account
Guarantee Program (TAGP); and iii) an increase in the total base assessment rates needed to replenish the fund.

Allowance
for Loan Losses

The provision to the allowance 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 $579,000 to the allowance for loan loss for the three months ended March 31, 2011 compared to provision of $387,000 for the
comparable period in 2009.

The increase in the loan loss provision for the quarter ended March 31, 2011 as compared to
the same quarter in 2010 was due to the following factors:



| |  |  | The quality of certain assets, primarily commercial development loans and residential speculative housing construction loans, were impacted by a
decline in the value of the collateral supporting the loan. Managements initial evaluation of these assets classes resulted in the increased provision in the quarter ended March 31, 2011.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In light of the current economic environment, management continues its ongoing assessment of specific impairment in the Banks loan portfolio. The
analysis resulted in a decrease in the provision for the quarter ended March 31, 2011 as compared to the same quarter in 2010.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Management believes that the current allowance for loan loss of $5,318,000 (or 1.62% of total loans) at March 31, 2011, as compared to $5,467,000 (or 1.68% of total loans) as of December 31,
2010 is adequate.



34



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##### Table of Contents

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



|                                |  |                                            |       |   |      |   |       |  
|------------------------------- |  | ------------------------------------------ | ----- | - | ---- | - | ----- | -
|                                |  | Three months endedMarch 
31,(in thousands) |      
|                                |  | 2011                                       |       |   | 2010 |  
|                                |  |                                           
|Balance, beginning of period    |  | $                                          | 5,467 |   |      | $ | 4,288 |  
|Provision for loan losses       |  |                                            | 579   |   |      |   | 387   |  
|Loans charged off               |  |                                            | (739  | ) |      |   | (226  | )
|Recoveries of loans charged off |  |                                            | 11    |   |      |   | 195   |  
|                                |  |                                            |       |   |      |   |       |  
|Net Charge Offs                 |  |                                            | (728  | ) |      |   | (31   | )
|                                |  |                                            |       |   |      |   |       |  
|Balance, end of period          |  |                                            | 5,318 |   |      |   | 4,644 |  
|                                |  |                                            |       |   |      |   |       |  

Net charge offs increased from $31,000 for the three months ended March 31, 2010 to $728,000 for the
same period in 2011. Charged off loans, which are loans that management deems uncollectible, are written against the loan loss reserve and constitute a realized loss. While a charged off loan may subsequently be collected, such recoveries generally
are realized over an extended period of time. The decreased balance in the allowance for loan loss reserve (both in amount and percentage of total loans) as of March 31, 2011 as compared to March 31, 2010 resulted from the charge-offs that
occurred in the first quarter of 2011.

Income Taxes

For the three months ended March 31, 2011, Financial had an income tax expense of $195,000.

Legislation

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Reform Act) was signed into law. The Dodd-Frank Reform Act represents a significant
overhaul of many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that are significantly larger than Financial. The
Dodd-Frank Reform Act directs applicable regulatory authorities to promulgate regulations implementing its provisions, and its effect on Financial and on the financial services industry as a whole will be clarified as those regulations are issued.
Major elements of the Dodd-Frank Reform Act include:



| |  |  | A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited deposit insurance on noninterest-bearing transaction
accounts, and an increase in the minimum Deposit Insurance Fund reserve requirement for banks having consolidated assets in excess of $10 billion from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New disclosure and other requirements relating to executive compensation and corporate governance.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator
compensation, minimum repayment standards, and prepayment considerations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by
financial firms, activities, and practices.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The development of regulations to limit debit card interchange fees.
| | - |  | --------------------------------------------------------------------



| |  |  | The future elimination of trust preferred securities as a permitted element of Tier 1 capital.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an
orderly liquidation fund.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating
derivatives-market participants.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC.
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the
asset-backed securities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory
body.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On February 7, 2011, the FDIC issued a final rule redefining the assessment base as required by Dodd-Frank. The final rule adopted a separate
risk-based assessment system for large insured depository institutions (institutions with greater than $10 billion in assets). The final rule applies to all insured depository institutions and is effective on April 1, 2011.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial continues to evaluate the potential impact of the Dodd-Frank Reform Act.



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##### Table of Contents

Schedule I

Net Interest Margin Analysis

Average Balance Sheets

For the Quarter Ended March 31, 2011 and 2010



|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|----------------------------------------- |  | --------------------- | ------- | - | ------------------------ | - | ----- | ------------------------- |  |  | --------------------- | - |  | ------------------------ | ------- | - | -------------------------- | - | ----- |  |  |  | ---- | -
|                                          |  | 2011                  |         |   | 2010                     |  
|                                          |  | Average Balance Sheet |         |   | Interest Income/ Expense |   |       | Average RatesEarned/ Paid |  |  | Average Balance Sheet |   |  | Interest Income/ Expense |         |   | Average Rates Earned/
Paid |  
|ASSETS                                    |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|Loans, including fees                     |  | $                     | 326,054 |   |                          | $ | 4,473 |                           |  |  | 5.56                  | % |  | $                        | 325,956 |   |                            | $ | 4,844 |  |  |  | 6.03 | %
|Federal funds sold                        |  |                       | 8,371   |   |                          |   | 5     |                           |  |  | 0.24                  | % |  |                          | 12,196  |   |                            |   | 7     |  |  |  | 0.23 | %
|Securities                                |  |                       | 55,888  |   |                          |   | 461   |                           |  |  | 3.35                  | % |  |                          | 52,076  |   |                            |   | 516   |  |  |  | 4.02 | %
|Federal agency equities                   |  |                       | 2,065   |   |                          |   | 3     |                           |  |  | 0.59                  | % |  |                          | 2,218   |   |                            |   | 1     |  |  |  | 0.18 | %
|CBB equity                                |  |                       | 116     |   |                          |   |      |                           |  |  |                      |   |  |                          | 116     |   |                            |   |      |  |  |  |     |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Total earning assets                      |  |                       | 392,494 |   |                          |   | 4,942 |                           |  |  | 5.11                  | % |  |                          | 392,562 |   |                            |   | 5,368 |  |  |  | 5.55 | %
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Allowance for loan losses                 |  |                       | (5,417  | ) |                          |   |       |                           |  |  |                       |   |  |                          | (4,368  | ) |                            |   |       |  |  |  |      |  
|Non-earning assets                        |  |                       | 36,355  |   |                          |   |       |                           |  |  |                       |   |  |                          | 36,073  |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Total assets                              |  | $                     | 423,432 |   |                          |   |       |                           |  |  |                       |   |  | $                        | 424,267 |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|Deposits                                  |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|Demand interest bearing                   |  | $                     | 61,945  |   |                          | $ | 111   |                           |  |  | 0.73                  | % |  | $                        | 49,520  |   |                            | $ | 137   |  |  |  | 1.12 | %
|Savings                                   |  |                       | 182,728 |   |                          |   | 501   |                           |  |  | 1.11                  | % |  |                          | 190,488 |   |                            |   | 1,087 |  |  |  | 2.31 | %
|Time deposits                             |  |                       | 80,968  |   |                          |   | 429   |                           |  |  | 2.15                  | % |  |                          | 86,324  |   |                            |   | 617   |  |  |  | 2.90 | %
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Total interest bearing deposits           |  |                       | 325,641 |   |                          |   | 1,041 |                           |  |  | 1.30                  | % |  |                          | 326,332 |   |                            |   | 1,841 |  |  |  | 2.29 | %
|                                          |  |                       |         |   |                          |  
|Other borrowed funds                      |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|Repurchase agreements                     |  |                       | 7,206   |   |                          |   | 16    |                           |  |  | 0.90                  | % |  |                          | 9,553   |   |                            |   | 33    |  |  |  | 1.40 | %
|Other borrowings                          |  |                       | 10,000  |   |                          |   | 73    |                           |  |  | 2.96                  | % |  |                          | 13,889  |   |                            |   | 100   |  |  |  | 2.92 | %
|Capital Notes                             |  |                       | 7,000   |   |                          |   | 105   |                           |  |  | 6.00                  | % |  |                          | 7,000   |   |                            |   | 105   |  |  |  | 6.00 | %
|Total interest-bearing liabilities        |  |                       | 349,847 |   |                          |   | 1,235 |                           |  |  | 1.43                  | % |  |                          | 356,774 |   |                            |   | 2,079 |  |  |  | 2.36 | %
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Non-interest bearing deposits             |  |                       | 47,095  |   |                          |   |       |                           |  |  |                       |   |  |                          | 42,296  |   |                            |   |       |  |  |  |      |  
|Other liabilities                         |  |                       | 331     |   |                          |   |       |                           |  |  |                       |   |  |                          | 999     |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Total liabilities                         |  |                       | 397,273 |   |                          |   |       |                           |  |  |                       |   |  |                          | 400,069 |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Stockholders equity                      |  |                       | 26,159  |   |                          |   |       |                           |  |  |                       |   |  |                          | 24,198  |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Total liabilities and Stockholders equity |  | $                     | 423,432 |   |                          |   |       |                           |  |  |                       |   |  | $                        | 424,267 |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Net interest earnings                     |  |                       |         |   |                          | $ | 3,707 |                           |  |  |                       |   |  |                          |         |   |                            | $ | 3,289 |  |  |  |      |  
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Net interest margin                       |  |                       |         |   |                          |   |       |                           |  |  | 3.83                  | % |  |                          |         |   |                            |   |       |  |  |  | 3.40 | %
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  
|                                          |  |                       |         |   |                          |  
|Interest spread                           |  |                       |         |   |                          |   |       |                           |  |  | 3.68                  | % |  |                          |         |   |                            |   |       |  |  |  | 3.19 | %
|                                          |  |                       |         |   |                          |   |       |                           |  |  |                       |   |  |                          |         |   |                            |   |       |  |  |  |      |  



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##### Table of Contents

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

Not applicable.



|Item 4. | Controls and Procedures
|------- | -----------------------

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

There have been no significant changes during the quarter ended March 31, 2011, 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, 2010, as filed with the SEC on March 28, 2011.



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

Not applicable.



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

Not applicable



|Item 4. | [Removed and Reserved]
|------- | ----------------------



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

Not
applicable.



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##### 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, 2011                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13, 2011                            
|            | 
|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, 2011



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##### 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, 2011 |  |  |  | By                                      |  | /S/ Robert R. Chapman III                                                                              
|                   |  |  |  |                                         |  | Robert R. Chapman III, President (Principal Executive Officer)                                         
|                   |  |  | 
|Date: May 13, 2011 |  |  |  | By                                      |  | /S/ J. Todd Scruggs                                                                                    
|                   |  |  |  |                                         |  | J. Todd Scruggs, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)



40



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##### 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, 2011                      
|            | 
|31.2        |  | Certification of J. Todd Scruggs Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 13, 2011                            
|            | 
|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, 2011



41