BANQUE DU GROUPE FINANCIER JAMES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

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

?the effects of the COVID-19 pandemic on the business, customers, employees and
third-party service providers of Financial or any of its acquisition targets;
?operating, legal and regulatory risks, including the effects of legislative or
regulatory developments affecting the financial industry generally or Financial
specifically;
?government legislation and policies (including the impact of the Dodd-Frank
Wall Street Reform and the Consumer Protection Act and its related regulations),
including changes to address the impact of COVID-19;
?economic, market, political and competitive forces affecting Financial's
banking and other businesses;
?competition for our customers from other providers of financial services;
government legislation and regulation relating to the banking industry (which
changes from time to time and over which we have no control) including but not
limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act;
?changes in interest rates, monetary policy and general economic conditions,
which may impact Financial's net interest income;
?changes in the value of real estate securing loans made by the Bank;
?diversion of management time on pandemic-related issues;
?adoption of new accounting standards or changes in existing standards;
?changes to statutes, regulations, or regulatory policies or practices resulting
from the COVID-19 pandemic;
?compliance or operational risks related to new products, services, ventures, or
lines of business, if any, that Financial may pursue or implement;
?a potential resurgence of economic and political tensions with China, the
ongoing war between Russia and Ukraine and potential expansion of combatants,
and the sanctions imposed on Russia by numerous countries and private companies,
all of which may have a destabilizing effect on financial markets and economic
activity; and
?the risk that Financial's analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
Other risks, uncertainties and factors could cause our actual results to differ
materially from those projected in any forward-looking statements we make.

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

                               IMPACT OF COVID-19

Effects on market areas

The COVID-19 pandemic and certain provisions of the Coronavirus Aid, Relief and
Economic Security Act ("CARES Act") and other recent legislative and regulatory
relief efforts have had and are expected to continue to have a material impact
on the Company's operations, as further discussed below.


?

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Policy and regulatory developments

Federal, state, and local governments and regulatory authorities have adopted and released a range of policy responses to the COVID-19 pandemic, including the following:

?On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and
Economic Security Act, or CARES Act, which established a $2.0 trillion economic
stimulus package, including cash payments to individuals, supplemental
unemployment insurance benefits and a $349 billion loan program administered
through the U.S. Small Business Administration (SBA), referred to as the
Paycheck Protection Program, or PPP Program, which was subsequently increased by
$320 billion on April 24, 2020. Under the PPP program, small businesses, sole
proprietorships, independent contractors and self-employed individuals could
apply for loans from existing SBA lenders and other approved regulated lenders
that enroll in the program, subject to numerous limitations and eligibility
criteria. The Bank participated as a lender in the PPP program. Effective August
8, 2020, banks ceased taking applications under the PPP program. In addition,
the CARES Act provided financial institutions the option to temporarily suspend
certain requirements under GAAP related to loan modifications and classification
as troubled debt restructurings ("TDRs") for a limited period of time to account
for the effects of COVID-19.
?On April 7, 2020, federal banking regulators issued a revised Interagency
Statement on Loan Modifications and Reporting for Financial Institutions, which,
among other things, encouraged financial institutions to work prudently with
borrowers who are or may be unable to meet their contractual payment obligations
because of the effects of COVID-19, and stated that institutions generally do
not need to categorize COVID-19-related modifications as TDRs, and that the
agencies will not direct supervised institutions to automatically categorize all
COVID-19 related loan modifications as TDRs. In addition, upon expiration of the
initial loan modification period, the Bank, pursuant to the "Joint Statement on
Additional Loan Accommodations Related to COVID-19" published August 3, 2020, is
encouraged to continue to work with effected borrowers on additional loan
modifications. Since the beginning of the pandemic in the spring of 2020, the
Bank has modified a total of 191 loans. The principal balances of these loans on
March 31, 2022 (adjusted for payoffs) totaled approximately $76 million. As of
June 30, 2022, none of the 191 previously modified loans remain in deferment and
all such previously deferred loans are current.
?On December 27, 2020, President Trump signed the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") into law to
provide continued assistance to individuals and businesses that have been
financially impacted by the ongoing coronavirus pandemic. Section 311 of the
Economic Aid Act added a new temporary provision that authorizes the SBA to
guarantee Paycheck Protection Program Second Draw Loans (the "PPP Second Draw
Program"), under generally the same terms and conditions available under the PPP
Under section 311, SBA was authorized to guarantee loans under the PPP Second
Draw Program through May 31, 2021 ("Second Draw PPP Loans") to borrowers that
previously received an initial PPP loan and have used or will use the full
amount of the initial PPP loan for authorized purposes on or before the expected
date of disbursement of the Second Draw PPP Loan. In addition, the Economic Aid
Act permitted individuals and business that did not receive an initial PPP loan
to apply under the PPP Program.
?In accordance with the relief provisions of the CARES Act and the March 22,
2020 (revised April 2020) Joint Interagency Regulatory Guidance, the above
modifications were not considered to be troubled debt restructurings and were
excluded from TDR classification. The TDR relief provisions provided for by the
CARES Act were extended in December 2020 by the Consolidated Appropriations Act
through the earlier of January 1, 2022 or 60 days after the national COVID-19
emergency terminates.
Effects on Our Business

The COVID-19 pandemic and the specific developments referred to above have had
an impact on our business. Initially, we anticipated that the COVID-19 pandemic
could have a negative impact on our financial condition, capital levels and
results of operations could be significantly adversely affected. Mitigation
efforts, as described in further detail below, helped offset the effects of the
pandemic.

COVID-19 Crisis Management

As an essential service provider, Bank of the James has continued to provide
uninterrupted service to its clients throughout the COVID-19 crisis. On March 2,
2020 the Company's Management Committee initiated plans in response to the
emerging risk related to the pandemic.

From the beginning, our management of the crisis has focused on protecting the
health and well-being of our employees and clients while continuing to provide
our clients with full access to banking services. As the operational risk
related to the COVID-19 crisis evolved, the Company took proactive measures to
manage operational risk, including the following:

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?The Company has implemented its Business Continuity Plan.
?All branches remain open, with routine banking services offered through online
banking, drive-thru, ATMs, and full lobby access.
?Implemented a number of actions to support a healthy workforce, including:
-Flexible work practices such as work-from-home options, working in shifts and
placing greater distances between employees;
-Limitation of business travel and in-person meetings; and
-Use of online meeting platforms, including successfully conducting the 2020,
2021, and 2022 Annual Meetings of Shareholders in a virtual format.

We anticipate that the Company will continue to maintain these policies as long
as necessary.

                                    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.

Financial's critical accounting policies include the evaluation of the allowance
for loan losses which is based on management's estimate of an amount that is
adequate to absorb probable losses inherent in the loan portfolio of the Bank.
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, 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 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 "Receivables", 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").

The Bank's policy with respect to the methodology for determining the allowance
for loan losses involves a higher degree of complexity and requires management
to make subjective judgments that often require assumptions or estimates about
uncertain matters. This critical policy and its assumptions are periodically
reviewed with the Board of Directors.

See "Management Discussion and Analysis Results of Operations - Allowance and
Provision for Loan Losses" below for further discussion of the allowance for
loan losses.

Financial also considers valuation of other real estate owned (OREO) a critical
accounting policy. OREO consists of properties acquired through foreclosure or
deed in lieu of foreclosure. These properties are carried at fair value less
estimated costs to sell at the date of foreclosure. Losses from the acquisition
of property in full or partial satisfaction of loans are charged against the
allowance for loan losses. Subsequent write-downs, if any, are charged against
expense. Gains and losses on the sales of foreclosed properties are included in
determining net income in the year of the sale. Operating costs after
acquisition are expensed.

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

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and circumstances exists that indicate that a goodwill impairment test should be
performed. The initial goodwill impairment test will occur in 2022 as goodwill
was the result of a transaction on December 31, 2021. The Company has selected
September 1 of each year as the date to perform the annual impairment test.
Intangible assets with definite useful lives are amortized over their estimated
useful lives to their estimated residual values. Goodwill is the only intangible
asset with an indefinite life on our consolidated balance sheet.

Insight

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

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

We conduct our investment advisory business through PWW, which Financial
acquired on December 31, 2021. PWW is a Lynchburg, Virginia-based investment
advisory firm that had approximately $650 million in assets under management and
advisement at the time of the acquisition. PWW operates as a subsidiary of
Financial. PWW generates revenue primarily through investment advisory fees.

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

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

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

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

Full Service Branches

?The main office located at 828 Main Street in Lynchburg (the "Main Street
Office"),
?A branch located at 5204 Fort Avenue in Lynchburg (the "Fort Avenue Branch"),
?A branch located at 4698 South Amherst Highway in Amherst County (the "Madison
Heights Branch"),
?A branch located at 17000 Forest Road in Forest (the "Forest Branch"),
?A branch located at 4935 Boonsboro Road, Suites C and D in Lynchburg (the
"Boonsboro Branch"),
?A branch located at 164 South Main Street, Amherst, Virginia (the "Amherst
Branch"),
?A branch located at 1405 Ole Dominion Boulevard in the Town of Bedford,
Virginia, located off of Independence Boulevard (the "Bedford Branch"),
?A branch located at 1110 Main Street, Altavista, Virginia (the "Altavista
Branch"),
?A branch located at 1391 South High Street, Harrisonburg, VA (the "Harrisonburg
Branch"),
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?A branch located at 1745 Confederate Blvd, Appomattox, VA (the "Appomattox
Branch"),
?A branch located at 225 Merchant Walk Avenue, Charlottesville, VA (the "5th
Street Station Branch"),
?A branch located at 3562 Electric Road, Roanoke, VA (the "Roanoke Branch"),
?A branch located at 45 South Main St., Lexington, VA (the "Lexington Branch"),
?A branch located at 550 Water St., Charlottesville, VA (the "Water Street
Branch"),
?A branch located at 2101 Electric Rd, Roanoke, VA (the "Oak Grove Branch"), and
?A branch located at 13 Village Highway, Rustburg, VA (the "Rustburg Branch").

Limited Service Branches

?Westminster-Canterbury facilities located at 501 VES Road, Lynchburg, Virginiaand

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

Loan origination offices

?Residential mortgage production office located at the Direction de la Forêt,

?Residential Mortgage Origination Office located at 570 Main Street West.,
Wytheville, Virginia

?Residential Mortgage Origination Office located at 2001 South Main Street,
Blacksburg, Virginiaand

?Commercial, consumer and residential mortgage origination office located at the Water Street branch.

The investment division and the insurance business operate primarily from offices located at the Main Street Office. PWW conducts its investment advisory business primarily from its offices located in 1925 Atherholt Road in Lynchburg.

The Bank is continuously evaluating areas within our service areas to identify other viable branches. Based on this ongoing assessment, the Bank may acquire one or more additional suitable sites.

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

?Real property located in the Timberlake Road area of Campbell County
(Lynchburg), Virginia. The Timberlake property is not suitable for its intended
use as a branch bank. Management anticipates that it will be necessary to raze
the current structures and replace it with appropriate new construction. The
Bank estimates that the cost of improvements, furniture, fixtures, and equipment
necessary to upfit and construct a branch at this location could be between
$900,000 and $1,500,000.
?Real property located at 4105 Boonsboro Road, Lynchburg, Virginia. This
property is a former bank branch and with minor cosmetic improvements is
suitable as is to be used as a bank branch. The Bank does not anticipate
utilizing this location as a bank branch prior to the fourth quarter of 2022.
?Real property located at 1925 Atherholt Road, Lynchburg, Virginia. On December
31, 2021, the Bank purchased real property located at 1925 Atherholt Road,
Lynchburg, Virginia. The building currently serves as the offices for
Financial's wholly-owned subsidiary, PWW. PWW is currently leasing the
space from the Bank on a month-to-month basis. While the Bank currently does not
have a timeline for a branch at this location, the space is attractive for a
branch due to its close proximity to Centra's Lynchburg General Hospital.
The investment needed to upfit the property will be minimal.

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

Except as otherwise provided herein, the Bank does not anticipate purchasing any major property or equipment in the next 12 months. Future branch openings are subject to regulatory approval.

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                         OFF-BALANCE SHEET ARRANGEMENTS

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

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

                              June 30, 2022
                             (in thousands)
Commitments to extend credit $       191,935
Letters of Credit                      4,263
Total                        $       196,138


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.

Stand-by letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client towards a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk associated with issuing letters of credit is essentially the same as that associated with granting loans to customers. The amount of collateral obtained, if the Bank deems it necessary when granting credit, is based on the Bank’s credit assessment of the client.

The Bank has pledged to lock in rates to provide mortgages through its mortgage division. The Bank has entered into corresponding commitments with third party investors to sell each of these loans which will be closed. No other obligation exists. Because of these contractual relationships with these investors, the Bank is not exposed to losses and ultimately will not realize gains related to its rate lock commitments due to changes in interest rates.

            SUMMARY OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion represents management's discussion and analysis of the
financial condition of Financial as of June 30, 2022 and December 31, 2021 and
the results of operations of Financial for the three and six month periods ended
June 30, 2022 and 2021. This discussion should be read in conjunction with the
financial statements included elsewhere herein.

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

                          Financial Condition Summary

                 June 30, 2022 as Compared to December 31, 2021

Total assets were $959,577,000 on June 30, 2022 compared with $987,634,000 at
December 31, 2021, a decrease of 2.84%. The decrease in total assets was
primarily due to a decrease in cash and cash equivalents. This decrease in cash
and cash equivalents was due primarily to i) a decrease in deposits; ii) the use
of cash to fund loan growth; and iii) the use of cash to purchase securities
available-for-sale to take advantage of the increase in interest rates. The
resulting increase in securities available-for-sale was offset by an increase in
the unrealized loss (mark to market) on the securities available-for-sale.

Total deposits decreased by $887,056,000 of the December 31, 2021 at
$875,346,000 on June 30, 2022, a decrease of 1.32%. This decrease is largely due to decreases in the following deposit categories: non-interest bearing demand deposits and term deposits.

Total loans, excluding loans held for sale, increased to $613,938,000 on June
30, 2022 from $583,384,000 on December 31, 2021, resulting from an increase in
commercial real estate loans (owner occupied and non-owner occupied and
excluding construction loans). Growth was partially offset by the continued
payoff of PPP loans, the payoff of two substandard loans, and normal

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amortization. Loans, excluding loans held for sale and net of deferred fees and
costs and the allowance for loan losses, increased to $607,322,000 on June 30,
2022 from $576,469,000 on December 31, 2021, an increase of 5.35%. The following
summarizes the position of the Bank's loan portfolio as of the dates indicated
by dollar amount and percentages (dollar amounts in thousands):

                             June 30, 2022               December 31, 2021
                        Amount    Percentage (%)      Amount     Percentage (%)
Commercial             $ 102,879            16.76  $    105,067            18.01
Commercial Real Estate   354,061            57.66       338,149            57.97
Consumer                 100,165            16.32        89,102            15.27
Residential               56,833             9.26        51,066             8.75
Total loans            $ 613,938           100.00  $    583,384           100.00


Total nonperforming assets, which consist of non-accrual loans, loans past due
90 days or more and still accruing, and OREO decreased to $1,616,000 on June 30,
2022 from $1,715,000 on December 31, 2021. OREO remained constant at $761,000 on
both June 30, 2022 and December 31, 2021. Non-performing loans decreased
slightly from $954,000 at December 31, 2021 to $855,000 at June 30, 2022.

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

Due to the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may experience economic difficulties, which could lead to an increase in our levels of non-performing assets, impaired loans and distressed debt restructurings. Any potential financial impact is unknown at this time.

OREO represents real property acquired by the Bank for debts previously
contracted, including through foreclosure or deeds in lieu of foreclosure. On
December 31, 2021, the Bank was carrying two OREO properties on its books at a
value of $761,000. During the six months ended June 30, 2022, the Bank neither
acquired or disposed of any OREO property. The OREO properties are available for
sale and are being actively marketed.

The Bank had loans in the amount of $432,000 at June 30, 2022 classified as
performing TDRs as compared to $372,000 at December 31, 2021. None of these TDRs
were included in non-accrual loans. These loans have had their original terms
modified to facilitate payment by the borrower. The loans have been classified
as TDRs primarily due to a change to interest only payments and the maturity of
these modified loans is primarily less than one year.

At the beginning of the COVID-19 pandemic, we developed relief programs to
assist borrowers in financial need. Accordingly, we offered short-term
modifications made in response to COVID-19 to certain borrowers who were current
and otherwise not past due. These included short-term, 180 days or less,
modifications in the form of payment deferrals, fee waivers, extensions of
repayment terms, deferral of principal only (interest only payments), or other
delays in payment that were insignificant. The Bank modified a total of 191
loans. The principal balances of these loans on June 30, 2022 (adjusted for
payoffs) totaled approximately $76 million. As of June 30, 2022 and December 31,
2021, none of the 191 previously modified loans remain in deferment and all such
previously deferred loans are current.

Cash and cash equivalents decreased to $74,854,000 on June 30, 2022 from
$183,153,000 on December 31, 2021. Cash and cash equivalents consist of cash due
from correspondents, cash in vault, and overnight investments (including federal
funds sold). This decrease was due primarily to i) a decrease in deposits; ii)
the use of cash to fund loan growth; and iii) the use of cash to purchase
securities available-for-sale to take advantage of the increase in interest
rates. In addition, cash and cash equivalents are subject to routine
fluctuations in deposits, including fluctuations in transactional accounts and
professional settlement accounts.

Held-to-maturity securities remained essentially flat, declining slightly for
$3,647,000 on June 30, 2022 of $3,655,000 on December 31, 2021. This decrease is the result of normal premium amortization within the held-to-maturity portfolio.

Securities available-for-sale, which are carried on the balance sheet at fair
market value, increased to $201,429,000 on June 30, 2022, from $161,267,000 on
December 31, 2021. During the six months ended June 30, 2022, the Bank purchased
$71,580,000 in available-for-sale securities, which was responsible for the
increase in securities available-for sale. During the six months ended June 30,
2022 the Bank did not sell any securities available-for-sale and received
$6,027,000 in proceeds from calls, maturities, and

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redemptions of available-for-sale securities, which partially offset the increase. The increase was partially offset by an increase in the unrealized loss on available-for-sale securities of approximately $25,162,000.

Financial's investment in Federal Home Loan Bank of Atlanta (FHLBA) stock
totaled $489,000 at June 30, 2022 and $426,000 at December 31, 2021, an increase
of $63,000. FHLBA stock is generally viewed as a long-term investment and
because there is no market for the stock other than other Federal Home Loan
Banks or member institutions, FHLBA stock is viewed as a restricted security.
Therefore, when evaluating FHLBA stock for impairment, its value is based on the
ultimate recoverability of the par value rather than by recognizing temporary
declines in value.

Liquidity and Capital

At June 30, 2022, Financial, on a consolidated basis, had liquid assets of
$276,283,000 in the form of cash, interest-bearing and noninterest-bearing
deposits with banks, and available-for-sale investments. Of this amount,
approximately $35,596,000 (representing current market value) of the
available-for-sale securities are pledged as collateral with $30,165,000 pledged
as security for public deposits, and $5,431,000 pledged as security on a line of
credit the Bank may draw on from time to time to meet liquidity needs. This line
of credit currently has a zero balance. Management believes that liquid assets
were adequate at June 30, 2022. Management anticipates that additional liquidity
will be provided by the growth in deposit accounts and loan repayments at the
Bank. In addition, if additional liquidity is needed, the Bank has the ability
to purchase federal funds on the open market, borrow from the FHLBA using loans
or investments within the Bank's portfolio as collateral, and to borrow from the
Federal Reserve Bank's discount window.

The COVID-19 pandemic could have a material negative impact on Financial's
short-term or long-term liquidity. For example, if customers unexpectedly draw
down on existing lines of credit, our liquidity could be impacted. While we have
not experienced any unusual pressure on our deposit balances or our liquidity
position as a result of the COVID-19 pandemic, management is closely monitoring
our sources and uses of funds in order to meet our cash flow requirements while
maximizing profits. Based in part on recent loan activity including loans made
pursuant to the PPP as discussed below under "Allowance and Provision for Loan
Losses," the Bank is monitoring liquidity to ensure it is able to fund future
loans and withdrawals related to the use of PPP funds.

At June 30, 2022, the Bank had a leverage ratio of approximately 8.28%, a Tier 1
risk-based capital ratio and a CET1 ratio of approximately 11.08% and a total
risk-based capital ratio of approximately 11.96%. As of June 30, 2022 and
December 31, 2021, the Bank's regulatory capital levels exceeded those
established for well-capitalized institutions. The following table sets forth
the minimum capital requirements and the Bank's capital position as of June 30,
2022 and December 31, 2021:


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Capital ratios at bank level only

Capital analysis for Bank of the James (Bank only)

                   (dollars in thousands)

                                 June 30,       December 31,
Analysis of Capital                2022             2021

Tier 1 capital
Common Stock                   $       3,742    $      3,742
Surplus                               22,325          22,325
Retained earnings                     57,052          52,821
Total Tier 1 capital           $      83,119    $     78,888

Common Equity Tier 1 Capital
(CET1)                         $      83,119    $     78,888

Tier 2 capital
Allowance for loan losses      $       6,616    $      6,915

Total Tier 2 capital:          $       6,616    $      6,915
Total risk-based capital       $      89,735    $     85,803

Risk weighted assets           $     749,994    $    693,400
Average total assets           $   1,003,598    $    959,794

                                          Actual                    Regulatory Benchmarks
                                                                 For Capital      For Well
                                 June 30,       December 31,       Adequacy      Capitalized
                                   2022             2021         Purposes (1)     Purposes
Capital Ratios:
Tier 1 capital to average
total assets                           8.28%           8.22%           4.000%         5.000%
Common Equity Tier 1 capital          11.08%          11.38%           7.000%         6.500%
Tier 1 risk-based capital
ratio                                 11.08%          11.38%          

8.500% 8.000% Risk-Based Total Capital Ratio 11.96% 12.37% 10.500% 10.000%


(1)Includes the capital conservation buffer of 2.50% for all ratios, excluding
the Tier 1 capital to average total assets ratio.
The above tables set forth the capital position and analysis for the Bank only.
Because total assets on a consolidated basis are less than $3,000,000,000,
Financial is not subject to the consolidated capital requirements imposed by the
Bank Holding Company Act. Consequently, Financial does not calculate its
financial ratios on a consolidated basis. If calculated, the capital ratios for
the Company on a consolidated basis at June 30, 2022 would be slightly lower
than those of the Bank because a portion of proceeds from the sale of notes
previously issued by the holding company were contributed to the Bank as equity.

In July 2013, the Federal Reserve Board approved a final rule establishing a
regulatory capital framework for smaller, less complex financial institutions.
The rule was fully implemented on January 1, 2019 and implemented a capital
conservation buffer of 2.5%. As a result, the Bank is required to have a minimum
ratio of common equity Tier 1 capital to risk-weighted assets of 7.0% (inclusive
of the capital conservation buffer) and a Tier 1 risk-based capital ratio of
8.5% (inclusive of the capital conservation buffer). Failure to maintain the
capital conservation buffer will limit the ability of the Bank and Financial to
pay dividends, repurchase shares or pay discretionary bonuses. The rule also
raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6%
and includes a minimum leverage ratio of 4% for all banking organizations.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule
that introduced an optional simplified measure of capital adequacy for
qualifying community banking organizations (i.e., the community bank leverage
ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief
and Consumer Protection Act. The CBLR framework is designed to reduce burden by
removing the requirements for calculating and reporting risk-based capital
ratios for qualifying community banking organizations that opt into the
framework.

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In order to qualify for the CBLR framework, a community banking organization
must have a tier 1 leverage ratio of greater than 9 percent, less than
$10 billion in total consolidated assets, and limited amounts of
off-balance-sheet exposures and trading assets and liabilities. A qualifying
community banking organization that opts into the CBLR framework and meets all
requirements under the framework will be considered to have met the
well-capitalized ratio requirements under the Prompt Corrective Action
regulations and will not be required to report or calculate risk-based capital.

While the CBLR framework is currently available for banks to use in their June
30, 2022 Call Report, the Bank has elected not to opt into the CBLR framework at
this time.

                             Results of Operations
      Comparison of the Three and Six Months Ended June 30, 2022 and 2021

Income Summary

Financial had net income including all operating segments of $2,292,000 and
$4,431,000 for the three and six months ended June 30, 2022, compared to
$2,014,000 and $3,849,000 for the comparable periods in 2021. Basic and diluted
earnings per common share for the three and six months ended June 30, 2022 were
$0.48 and $0.93, compared to basic and diluted earnings per share of $0.42 and
$0.81 for the three and six months ended June 30, 2021.

The increase in net income for the three months ended June 30, 2022, as compared
to the prior year period was due primarily to i) a recovery of $300,000 from the
allowance for loan losses during the quarter as compared to no recovery in the
same period in 2021; and ii) an increase in net interest income in the quarter
of $414,000.

The increase in net income for the six months ended June 30, 2022, as compared
to the prior year period was due primarily to i) a recovery of $600,000 from the
allowance for loan losses during the first six months as compared to no recovery
in the same period in 2021; and ii) an increase in noninterest income of for the
six months ended June 30, 2022 of $1,182,000, which was primarily due to an
increase in wealth management fees from the services provided by PWW. Because
the acquisition of PWW closed on December 31, 2021, PWW did not contribute any
noninterest income in the first six months of 2021.

These operating results represent an annualized return on average stockholders'
equity of 12.68% and 12.48% for the three and six months ended June 30, 2022,
compared with 12.23% and 11.86% for the three and six months ended June 30,
2021. This increase for the three and six months ended June 30, 2022 was due to
an increase in our net income and a decrease in stockholders' equity as a result
of a decrease in the value of the available-for-sale securities resulting from
an application of the mark-to-market accounting rules. The Company had an
annualized return on average assets of 0.89% for both the three and six months
ended June 30, 2022 compared with 0.88% and 0.86% for the same periods in 2021.
The increase for the three and six months ended June 30, 2022 largely resulted
from an increase in the Bank's net income and was partially offset by an
increase in average assets.

See “Non-interest income” below for discussion of mortgage and wealth management activities.

Net interest income, interest expense and interest income

For the three months ended June 30, 2022, interest income increased to
$7,598,000 from $7,234,000 for the same period in 2021, due primarily to an
increase in interest earning assets, which was offset in part by a decrease in
yields on total earning assets. In the comparable period of 2021, the yield on
loans were elevated due to the accretion of PPP fees as PPP loans were forgiven.
The average rate received on loans was 4.12% for the three months ended June 30,
2022 as compared to 4.33% for the same period in 2021. The rate on total average
earning assets decreased for the three months ended June 30, 2022 as compared to
the three months ended June 30, 2021 primarily because a decrease in the rates
previously discussed.

For the six months ended June 30, 2022, interest income decreased slightly to
$14,513,000 from $14,599,000 for the same period in 2021, due primarily to a
decrease in yields on total interest earning assets, which was partially offset
by an increase in total earning assets. In the comparable period of 2021, the
yield on loans were elevated due to the accretion of PPP fees as PPP loans were
forgiven. The average rate received on loans was 4.08% for the six months ended
June 30, 2022 as compared to 4.42% for the same period in 2021. The rate on
total average earning assets decreased for the six months ended June 30, 2022 as
compared to the three months ended June 30, 2021 primarily because a decrease in
the rates previously discussed.

Interest expense decreased to $474,000 and $999,000 for the three and six months
ended June 30, 2022 from $524,000 and $1,141,000 for the same periods in 2021,
decrease of 9.54% and 12.45%. The decrease for the three and six month periods
resulted primarily from a decrease in interest rates paid on deposits. The
Bank's average rate paid on interest bearing deposits was 0.14% and 0.16% during
the three and six months ended June 30, 2022 as compared to 0.25% and 0.29% for
the same periods in 2021.

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The fundamental source of the Bank's net revenue is net interest income, which
is determined by the difference between (i) interest and dividend income on
interest earning assets, which consist primarily of loans, investment securities
and other investments, and (ii) interest expense on interest-bearing
liabilities, which consist principally of deposits and other borrowings. Net
interest income for the three and six months ended June 30, 2022 of $7,124,000
and $13,514,000 as compared to $6,710,000 and $13,458,000 for the same periods
in 2021. The net interest margin was 2.99% and 2.92% for the three and six
months ended June 30, 2022 as compared to 3.15% and 3.25% for the same periods
in 2021. The decreases was primarily attributable to the decrease in loan fees
related to the PPP program in 2022 as compared to 2021. As a result of the
spread of COVID-19, economic uncertainties have arisen that are likely to
negatively impact net interest margin. The FOMC has taken actions that are
likely to positively impact our net interest margin in the near term. Other
financial impacts could occur, though such potential impacts are unknown at this
time.

Financial’s net interest margin analysis and average balance sheets are set out in Appendix I below.

Noninterest Income

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

Noninterest income decreased to $3,034,000 for the three months ended June 30,
2022 from $3,049,000 for the same period in 2021. This decrease was primarily
related to a decrease in gains on sales of loans held for sale of $1,011,000
from $2,310,000 during the quarter ended June 30, 2021 to $1,299,000 for the
same period in 2022. The decrease was partially offset by fees generated from
PWW's investment advisory business. Fee income from PWW was $961,000 in for the
period ended June 30, 2022 as compared to $0 for the same period in 2021.

Noninterest income increased to $6,665,000 for the six months ended June 30,
2022 from $5,483,000 for the same period in 2021. This increase was primarily
related to fees generated from PWW's investment advisory business and was
partially offset by the decrease in gains on sale of loans held for sale. Fee
income from PWW was $1,976,000 in for the period ended June 30, 2022 as compared
to $0 for the same period in 2021.

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

Purchase mortgage originations totaled $50,235,000 and $87,404,000 or 81.93% and
71.17%, respectively, of the total mortgage loans originated in the three and
six months ended June 30, 2022 as compared to $54,116,000 and $84,954,000 or
64.44% and 52.94% of the total mortgage loans originated in the same periods in
2021. Because of a rising mortgage interest rate environment, management
anticipates that in the short term purchase mortgage originations will continue
to represent a majority of mortgage originations. However, management also
believes that a continued increase in long term market interest rates could
limit refinancing activity.

Although mortgage rates increased dramatically in the first six months of 2022,
rates remain attractive when compared to rates over the last 20 years. Because
of uncertainty surrounding current and near-term economic conditions arising
from the COVID-19 pandemic, supply chain issues, inflation, and geopolitical
concerns, management cannot predict future mortgage rates. Nevertheless,
management expects that the Mortgage division's reputation in Region 2000,
steady residential real estate inventory and the recent hiring of additional
mortgage loan originators in Roanoke, Harrisonburg, Charlottesville, Blacksburg,
and most recently, Wytheville, will result in strong mortgage originations
through the remainder of 2022. Management also believes that the rising interest
rates could put revenue from the mortgage segment under pressure.

Our Investment division provides brokerage services through an agreement with a
third-party broker-dealer. Pursuant to this arrangement, the third-party
broker-dealer operates a service center adjacent to one of the branches of the
Bank. The center is staffed by two dual employees of the Bank and the
broker-dealer. Investment receives commissions on transactions generated and in
some cases ongoing management fees such as mutual fund 12b-1 fees. The
Investment division's financial impact on our consolidated revenue has been
immaterial. Although management cannot predict the financial impact of
Investment with certainty, management anticipates the Investment division's
impact on noninterest income will remain immaterial in 2022.

The Bank provides insurance and annuity products to Bank customers and others,
through the Bank's Insurance subsidiary. The Bank has three employees that are
licensed to sell insurance products through Insurance. Insurance generates
minimal revenue

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and its financial impact on our consolidated revenues was insignificant. Management expects the impact of insurance on non-interest income to remain immaterial in 2022.

Financial provides investment advisory services through PWW. In the three and
six months ended June 30, 2022, PWW generated non interest revenue (fee income)
of $961,000 and $1,976,000 as compared to $0 for the same periods in 2021.

Non-interest expenses

Noninterest expense for the three and six months ended June 30, 2022 increased
to $7,592,000 and $15,240,000 from $7,237,000 and $14,126,000 for the same
periods in 2021, increases of 4.91% and 7.89%, respectively. These increases
resulted from increases in personnel expenses from variable compensation along
with the added personnel expense of PWW employees, occupancy expense, and supply
expense. The increases were offset in part by a decrease in equipment expense,
marketing expense, and credit expense. FDIC insurance expense increased in the
quarter ended June 30, 2022, but decreased for the six months ended June 30,
2022. Total personnel expense was $4,533,000 and $8,522,000 for the three and
six month periods ended June 30, 2022 as compared to $4,076,000 and $7,808,000
for the same periods in 2021.

Allowance and provision for loan losses

The allowance for loan losses represents an amount that, in our judgment, will
be adequate to absorb probable losses inherent in the loan portfolio. The
provision for loan losses increases the allowance, and loans charged-off, net of
recoveries, reduce the allowance. The provision for 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 two components - specific impairment
and general reserves. As discussed below, loans having a risk rating of 7 or
below that are significantly past due, and the borrower's performance and
financial condition provide evidence that it is probable that the Bank will be
unable to collect all amounts when due as well as all TDRs, are evaluated for
specific impairment. The general reserve component is based on an evaluation of
general economic conditions, actual and expected credit losses, and loan
performance measures. Based on the application of the loan loss calculation, the
Bank had a recovery of $300,000 and $600,000 from the allowance for loan losses
in the three and six month periods ended June 30, 2022. This compares to a
provision of $0 for each of the comparable periods in 2021.

At June 30, 2022, the allowance for loan losses was 1.08% of total loans
outstanding, versus 1.19% and 1.20% of total loans outstanding at December 31,
2021 and June 30, 2021, respectively. The decrease in the allowance for loan
losses was largely driven by decreased qualitative factor adjustments related to
the ongoing COVID-19 pandemic, primarily in relation to the economy and because
all loans previously in deferral due to COVID-19 conditions have returned to
normal status. The specific reserve was $0 at December 31, 2021 and June 30,
2022. PPP loans are guaranteed in full by the U.S. Small Business
Administration, and therefore, are excluded from the Company's allowance for
loan losses calculation. As shown in the table below, the total balance in the
allowance decreased, from $6,915,000 as of December 31, 2021 to $6,616,000 on
June 30, 2022. The decrease was due in part to the $600,000 recovery discussed
above and was offset by recoveries exceeding charge-offs during the first six
months of 2022. The effects of the pandemic may require the Company to fund
increases in the allowance for loan losses in future periods.

Charged-off loans, which are loans that management deems uncollectible, are
charged against the allowance for loan losses and constitute a realized loss.
Charged-off loans were $1,000 and $9,000 for the three and six months ended June
30, 2022 as compared to $0 and $64,000 for the comparable periods in 2021. While
a charged-off loan may subsequently be collected, such recoveries generally are
realized over an extended period of time. In the three and six months ended June
30, 2022, the Bank had recoveries of charged-off loans of $47,000 and $310,000
as compared with $106,000 and $120,000 for the comparable periods in 2021.

In light of the current economic environment, management continues its ongoing
assessment of specific impairment in the Bank's loan portfolio. As set forth in
the tables below, the Bank's allowance arising from the specific impairment
evaluation as of June 30, 2022 was unchanged as compared to December 31, 2021.


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The following tables summarize the allowance activity for the periods indicated:

                                    Allowance for Loan Losses and Recorded Investment in Loans
                                                      (dollars in thousands)
                                         As of and For the Six Months Ended June 30, 2022

                                             Commercial
                            Commercial      Real Estate        Consumer      Residential       Total

Allowance for Loan Losses:

Beginning Balance          $     1,471    $         3,637     $      860     $       947    $     6,915
Charge-Offs                           -                  -            (9)               -            (9)
Recoveries                           87                206             12               5            310
Provision (Recovery of)           (261)              (709)             58             312          (600)
Ending Balance                    1,297              3,134            921           1,264          6,616

Ending Balance:
Individually evaluated for
impairment                            -                  -              -               -              -

Ending Balance:
Collectively evaluated for
impairment                        1,297              3,134            921           1,264          6,616

Totals:                    $     1,297    $         3,134     $      921    $      1,264    $     6,616

Financing Receivables:
Ending Balance:
Individually evaluated for
impairment                            -              1,735            252           1,362          3,349

Ending Balance:
Collectively evaluated for
impairment                      102,879            352,326         99,913          55,471        610,589

Totals:                    $   102,879    $       354,061    $   100,165    $     56,833    $   613,938



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                                    Allowance for Loan Losses and Recorded Investment in Loans
                                                      (dollars in thousands)
                                          As of and For the Year Ended December 31, 2021

                                             Commercial
                            Commercial      Real Estate        Consumer      Residential       Total

Allowance for Loan Losses:

Beginning Balance          $     2,001    $         3,550     $      868     $       737    $     7,156
Charge-Offs                        (53)                  -           (38)               -           (91)
Recoveries                          112                 72             29             137            350
Provision (Recovery of)           (589)                 15              1             73           (500)
Ending Balance                    1,471              3,637            860             947          6,915

Ending Balance:
Individually evaluated for
impairment                            -                  -              -               -              -

Ending Balance:
Collectively evaluated for
impairment                        1,471              3,637            860             947          6,915

Totals:                    $     1,471    $         3,637     $      860     $       947    $     6,915

Financing Receivables:
Ending Balance:
Individually evaluated for
impairment                           17              2,694             59           1,316          4,086

Ending Balance:
Collectively evaluated for
impairment                      105,050            335,455         89,043          49,750        579,298

Totals:                    $   105,067    $       338,149    $    89,102    $     51,066    $   583,384

The following table presents the reconciliation of the allowance for loan losses:

                                    Three Months Ended           Six Months Ended
                                         June 30,                    June 30,
                                      (in thousands)              (in thousands)
                                    2022          2021          2022          2021
Balance, beginning of period    $      6,870  $      7,106  $      6,915  $      7,156
Recovery of loan losses                (300)             -         (600)             -
Loans charged off                        (1)             -           (9)          (64)
Recoveries of loans charged off           47           106           310           120
Net recoveries                            46           106           301            56
Balance, end of period          $      6,616  $      7,212  $      6,616  $      7,212


No nonaccrual loans were excluded from the impaired loan disclosures at June 30,
2022 and December 31, 2021. If interest on these loans had been accrued, such
income cumulatively would have approximated $201,000 and $177,000 on June 30,
2022 and December 31, 2021, respectively. Loan payments received on nonaccrual
loans are applied to principal. When a loan is placed on nonaccrual status there
are several negative implications. First, all interest accrued but unpaid at the
time of the classification is deducted from the interest income totals for the
Bank. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest can be repaid. Third, there may be actual
losses that necessitate additional provisions for credit losses charged against
earnings.

The Bank’s internal risk rating system is in place to classify commercial and commercial real estate loans. Grade ratings are reviewed periodically by lenders and the Bank’s credit review department based on the borrower’s individual circumstances. In addition, internal and external control and credit review are carried out on an annual basis.

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

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


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

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

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

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

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

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

?”Loss.” These are loans with a risk rating of 9. Loans with a loss rating are not considered collectible under normal circumstances and there is no realistic expectation of future payment on the loan. Loss rated loans are fully written off.

Income taxes

For the three and six months ended June 30, 2022, Financial had an income tax
expense of $574,000 and $1,108,000 as compared to $508,000 and $966,000 for the
three and six months ended June 30, 2021. This represents an effective tax rate
of 20.03% and 20.00% for the three and six months ended June 30, 2022 as
compared with 20.14% and 20.06% for the three and six months ended June 30,
2021. Our effective rate was lower than the statutory corporate tax rate in all
periods primarily because of federal income tax benefits resulting from the tax
treatment of earnings on bank owned life insurance.

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Net Interst Margin Analysis
Average Balance Sheets
For the Three Months Ended
June 30, 2022 and 2021
(dollars in thousands)
                                              2022                                2021
                                                          Average                            Average
                                 Average      Interest     Rates     Average     Interest     Rates
                                 Balance      Income/     Earned/    Balance     Income/     Earned
                                  Sheet       Expense      Paid       Sheet      Expense      /Paid
ASSETS
Loans, including fees (1)(2)   $   596,775   $    6,126     4.12%   $ 610,338   $    6,587     4.33%
Loans held for sale                  4,074           48     4.73%       5,542           37     2.68%
Federal funds sold                 103,575          164     0.64%     103,439           20     0.08%
Interest-bearing bank balances      18,863           27     0.57%      18,823            5     0.11%
Securities (3)                     232,697        1,211     2.09%     116,214          559     1.93%
Federal agency equities              1,253           27     8.64%       1,276           29     9.12%
CBB equity                             116            -       - %         116            -       - %

Total earning assets               957,353        7,603     3.19%     855,748        7,237     3.39%

Allowance for loan losses          (6,894)                            (7,139)
Non-earning assets                  80,525                             69,741

                                 1,030,984
Total assets                   $ 1,030,984                          $ 918,350

LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits
Demand interest bearing            460,350           97     0.08%     404,554          109     0.11%
Savings                            131,171           18     0.06%     109,813           29     0.11%
Time deposits                      138,142          146     0.42%     143,633          278     0.78%

Total interest bearing
deposits                           729,663          261     0.14%     

658,000,416 0.25%

Other borrowed funds
Other borrowings                    10,807          108     4.01%           -            -       - %
Financing leases                     3,359           24     2.87%       3,783           27     2.86%
Capital Notes                       10,034           81     3.24%      10,029           81     3.24%
Total interest-bearing
liabilities                        753,863          474     0.25%     

671,812,524 0.31%

Noninterest bearing deposits       194,431                            171,187
Other liabilities                   10,201                              9,285

Total liabilities                  958,495                            852,284

Stockholders' equity           72,489                             66,066

Total liabilities and
                                 1,030,984
Stockholders' equity           $ 1,030,984                          $ 918,350

Net interest earnings                        $    7,129                         $    6,713

Net interest margin                                         2.99%                              3.15%

Interest spread                                             2.94%                              3.08%


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Contents

(1) The net accretion or amortization of commissions and deferred costs on loans is included in interest income.

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

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

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  Table of Contents



Net Interst Margin Analysis
Average Balance Sheets
For the Six Months Ended June
30, 2022 and 2021
(dollars in thousands)
                                             2022                               2021
                                                         Average                           Average
                                 Average     Interest     Rates     Average    Interest     Rates
                                 Balance      Income/    Earned/    Balance     Income/    Earned
                                  Sheet       Expense     Paid       Sheet      Expense     /Paid
ASSETS
Loans, including fees (1)(2)   $   592,702   $  12,003     4.08%   $ 610,876   $  13,379     4.42%
Loans held for sale                  3,856          76     3.97%       5,848         105     3.62%
Federal funds sold                 100,437         201     0.40%      93,067          34     0.07%
Interest-bearing bank balances      18,883          34     0.36%      18,740          19     0.20%
Securities (3)                     215,718       2,178     2.04%     106,283       1,032     1.96%
Federal agency equities              1,231          31     5.08%       1,355          35     5.21%
CBB equity                             116           -       - %         116           -       - %

Total earning assets               932,943      14,523     3.14%     836,285      14,604     3.52%

Allowance for loan losses          (6,929)                           (7,147)
Non-earning assets                  80,307                            68,779

                                 1,006,321
Total assets                   $ 1,006,321                         $ 897,917

LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits
Demand interest bearing            455,376         204     0.09%     391,298         216     0.11%
Savings                            127,835          37     0.06%     106,009          57     0.11%
Time deposits                      140,031         324     0.47%     146,580         651     0.90%

Total interest bearing
deposits                           723,242         565     0.16%     643,887         924     0.29%

Other borrowed funds
Other borrowings                    10,873         222     4.12%           -           -     0.00%
Financing leases                     3,419          49     2.89%       3,841          54     2.84%
Capital Notes                       10,033         163     3.28%      10,028         163     3.28%
Total interest-bearing
liabilities                        747,567         999     0.27%     

657 756 1,141 0.35%

Noninterest bearing deposits       176,950                           164,974
Other liabilities                   10,204                             9,753

Total liabilities                  934,721                           832,483

Stockholders' equity           71,600                            65,434

Total liabilities and
                                 1,006,321
Stockholders' equity           $ 1,006,321                         $ 897,917

Net interest earnings                        $  13,524                         $  13,463

Net interest margin                                        2.92%                             3.25%

Interest spread                                            2.87%                             3.17%


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Contents

(1) The net accretion or amortization of commissions and deferred costs on loans is included in interest income.

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

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

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Contents

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