BOTJ — Q2 2026 Financial Report Analysis

Cheaper deposits and a lower tech bill lift BOTJ's profit 20%

Bank of the James Financial Group, a Lynchburg, Virginia community bank with about $1.04 billion of assets, earned $3.24 million ($0.71 per share) in the second quarter of 2026, up 19.8% from $2.70 million ($0.60) a year earlier. Two things drove it. The bank paid less for its funding: the average rate on interest-bearing liabilities fell to about 1.49% from 1.71%. Its overhead also shrank, with data processing costs down a third under a renegotiated core-systems contract. Fee income from its wealth-management arm kept growing as well. The headline growth actually understates the improvement, because the year-ago quarter was helped by a one-time release of loan-loss reserves (see below).

At a glance

• Net interest margin of 3.71%, up from 3.45%. This is the gap between what the bank earns on loans and securities and what it pays depositors, as a share of its earning assets. A 0.26-point rise on roughly $1 billion of assets is the main reason net interest income grew 12.2%, to $9.25 million.
• Loans grew $37.3 million (5.7%) in the quarter alone, to $692.7 million. That followed a first quarter in which unusually heavy payoffs had shrunk the book. Most of the growth was in commercial real estate, mainly construction/land loans and owner-occupied properties.
• Profit before loan-loss charges rose about 54%. Pre-tax income plus the credit-loss provision (our calculation from the income statement) was $4.42 million, against $2.87 million a year ago. That year-ago quarter's net income was flattered by a $528,000 reserve release, while this quarter carried a $350,000 charge.

Key figures

The filing compares loans, deposits and capital with December 31, 2025, not June 30, 2025, so the table does the same. The company does not publish an efficiency ratio, net charge-off ratio or return on tangible equity in this 10-Q.

Takeaway: This quarter's earnings growth came from durable sources: lower funding costs, a cheaper systems contract and growing advisory fees. A favourable credit swing did not contribute; it actually worked against the bank by about $0.9 million pre-tax. The open question is the funding side. Management says it has started offering a limited-time certificate-of-deposit special "in response to rising market interest rates and continued deposit competition", which is the lever that has done most of the margin work so far.

Where the money came from

Lending spread. Interest income rose 5.6% to $12.29 million. The average yield on loans edged up to 5.77% from 5.70%, and the bank moved money out of low-yielding overnight funds (federal funds sold fell from $55.9 million at year-end to $10.9 million) into loans and securities. Interest expense fell 10.5% to $3.03 million. Part of that was falling deposit rates: the average rate on interest-bearing deposits was about 1.44%, down from 1.66%, as maturing deposits renewed at lower rates. The rest came from repaying $10.05 million of capital notes in June 2025, which removed $81,000 a quarter of interest cost. The filing says the margin expansion was "primarily attributable to a decline in the cost of interest-bearing liabilities", with higher asset yields the smaller part.

Fees. Noninterest income, the money the bank earns from services rather than lending, rose to $4.48 million:

• Wealth management (Pettyjohn, Wood & White, acquired in 2021): fees up 12.8% to $1.47 million. Assets under management and advisement reached about $1.09 billion, up 17.4% from a year earlier, from new client money and market gains.
• Service charges and fees rose 17.8% to $1.15 million, from debit-card and merchant-services income and higher returned-check fees.
• Mortgage gains slipped to $1.53 million from $1.59 million. The bank sells every mortgage it makes to outside buyers, so this line is pure origination volume. About 86% of the quarter's originations were home purchases rather than refinancings. Management still expects elevated rates to weigh on this business.
• A small-business investment fund stake contributed $70,000, against nothing a year ago.

Costs. Noninterest expense fell 1.5%, to $9.31 million. Data processing dropped $263,000 (33.6%) to $519,000 under the core-processing contract that started April 1, 2025 and runs 65 months. Salaries and benefits rose 2.9% to $5.51 million on merit raises and production-based incentive pay. By our arithmetic, expenses took about 67.8% of revenue, down from about 76.7%. Banks call this the efficiency ratio, and lower is better. It is our calculation, not a figure the company reports.

What the headline numbers hide

• The credit swing hides how much better operations got. Q2 2025 benefited from a $528,000 recovery of credit losses, booked in the same quarter the bank updated its loss-estimate models; Q2 2026 booked a $350,000 provision, mostly to cover loan growth ($410,000 for loans, partly offset by a $60,000 release on unused credit lines). Credit itself is quiet. Gross charge-offs were about $90,000 in the quarter (mostly consumer loans), with $76,000 recovered. Nonperforming loans fell to $1.09 million, just 0.16% of loans, and the reserve covers them about six times over. There were no nonaccrual commercial real estate loans.
• The year-to-date comparison is flattered by a one-off. First-half net income rose 69.6%, to $6.01 million. But the first half of 2025 included a roughly $1.0 million nonrecurring consulting fee to renegotiate the core-processing contract. Use the quarterly +19.8% as the cleaner read. Management also warns that data processing costs "may increase in future periods as additional services are implemented", so part of the cost saving may come back.
• EPS growth is all from operations. The share count was unchanged at 4,543,338, with no buybacks. The tax rate was steady at 20.4%, against 20.4% a year ago. Interest cost was lower, as described above, but that is part of operations for a bank.
• Cash conversion is adequate. Operating cash flow for the first half was $5.37 million against $6.01 million of net income, about 0.9 times. The gap comes mainly from timing in mortgage loans held for sale and other assets, not from accruals that aren't turning into cash.
• Book value is being held down by bond losses on paper. Equity rose to $83.2 million (about $18.30 per share, by our calculation), but accumulated other comprehensive loss widened by $2.0 million in the half, to −$16.9 million. That is the unrealised loss on available-for-sale bonds after rates moved up. Comprehensive income for the quarter was $2.32 million, below net income of $3.24 million. These losses don't hit regulatory capital (CET1 is computed without them), but they would become real if the bonds had to be sold.
• Liquidity is thinner than at year-end. Total deposits barely moved: −0.2%, with seasonal year-end withdrawals by foundations cited. Loan growth and $34.6 million of securities purchases were funded by running down overnight cash, which cut cash and equivalents from $84.5 million to $35.5 million. Unencumbered liquid assets fell 12.9% to $159.3 million. The bank had no borrowings and no brokered deposits, and about 26.9% of deposits are uninsured once collateralized public funds are excluded. Coverage is still comfortable, but the cash cushion that funded the first half's growth is largely spent. Future loan growth now needs deposit growth, which is where the CD special comes in.
• Holding-company debt got more expensive. The parent's $8.7 million note to National Bank of Blacksburg was extended to 2030 at 5.65%, up from 3.90%. Interest on "other borrowings" rose to $127,000 from $87,000 in the quarter. It is small, but the cost is rising.

Concentration to watch

Non-owner-occupied commercial real estate is $200.5 million, about 29% of loans. Within it, multi-family accounts for $50.8 million, offices $40.8 million and hotels/motels $39.5 million. Add construction and land loans and it reaches 34% of loans. The filing says these properties are mostly within the bank's own markets. It puts the weighted-average loan-to-value on the largest loans in each category at roughly 53–58%, so borrowers have substantial equity ahead of the bank. None of these loans were on nonaccrual at June 30.

Outlook

Management gives no numeric guidance. Its own discussion frames the margin as the swing factor. A stable rate environment "may support net interest margin through continued repricing of interest-bearing liabilities". Sustained rate increases or deposit competition "could result in higher overall deposit costs." The CD special is an early sign the second case is starting to matter.

Our read is that BOTJ enters the second half with real momentum. Loan growth turned sharply positive in Q2, wealth assets are up 17%, and the cost base has been reset lower. But the easiest source of margin gains, deposits rolling over to lower rates, is fading just as the bank has to pay up to fund growth from deposits rather than idle cash. For the Q3 report (10-Q expected around mid-November), the numbers that matter are:

• whether the net interest margin holds near 3.7% as CD pricing rises;
• whether deposits grow enough to fund loans without drawing down liquidity further;
• whether data processing costs creep back up as management flagged.

This is the first BOTJ report we have published, so there is no earlier outlook to check.