BANK OF THE JAMES FINANCIAL GROUP INC (BOTJ) stock intrinsic value fair value estimate & owner earnings analysis

WHAT THE BUSINESS IS Bank of the James Financial Group is the holding company for Bank of the James, a Virginia-chartered community bank that opened in Lynchburg in July 1999. At June 30, 2026 it had $1.04 billion of assets, $935 million of deposits and $83.2 million of shareholders' equity (about $18.30 a share), served from about two dozen offices. Most lending is in the Lynchburg area (the City of Lynchburg and Bedford, Campbell, Amherst and Appomattox counties), with newer offices in Roanoke, Charlottesville, Harrisonburg, Lexington, Blacksburg and Wytheville. Two fee businesses sit beside the bank: Pettyjohn, Wood & White, a Lynchburg investment adviser bought on December 31, 2021 with about $650 million under management and now managing about $1.03 billion, and a mortgage division that sells every loan it makes (about $200 million of loans in 2025). Almost all profit still comes from ordinary banking: gathering local deposits and lending them out at a higher rate. HOW WE MEASURED EARNINGS We start from cash generated by operations, remove timing swings in working capital (mainly mortgages waiting to be sold), and subtract the spending needed to keep the branches running. For credit, we charge what the bank actually wrote off net of recoveries rather than its accounting provision, which also moves with estimated reserve changes; in 2021 to 2024 the bank released reserves, so the provision flattered those years. On this basis earnings per share were $1.46 in 2021, $2.18 in 2022, $2.07 in 2023, $1.49 in 2024 and $1.93 in 2025. We anchor on the five-year median, $1.93. The window starts with the adviser purchase and covers a full interest-rate cycle, from near-zero rates through the 2022-2023 increases, the 2024 squeeze on deposit costs and the cuts that followed. Earlier years describe a much smaller bank. Amortization of the acquired adviser relationships is added back as non-cash; that is fair because the adviser's assets have grown by more than half since the purchase. Because interest is a bank's raw material, we value earnings after interest and do not subtract deposits or borrowings. A bank also cannot pay out everything it earns: regulators require capital to grow with assets, and core capital was 9.05% of average assets at the end of 2025, so in every case we hold back 9.05% of each year's assumed asset growth before counting anything as value to shareholders. RECENT RESULTS Earnings on our basis grew about 30% in 2025 as the net interest margin rose from 3.11% to 3.39% on falling deposit costs, and the bank repaid $10.05 million of 3.25% subordinated notes in June 2025. The first half of 2026 continued the trend: net interest income of $18.0 million, up 12.6%; noninterest income of $8.4 million, up 14.7%; noninterest expense of $18.7 million, down 3.1%; and net income of $6.01 million against $3.55 million a year earlier. Cash interest paid fell to $6.19 million from $6.77 million. With the 2025 actual gain at about 30%, the base case assumes 20% for 2026, taking earnings to about $2.32 a share, which the first-half results already support. THE CASES Base case (about $46.80 per share): 2026 earnings of about $2.32 a share, then assets and earnings growing about 4% a year for ten years, matching the bank's roughly 3.8% annual asset growth from 2022 to 2025. That growth is the continuation of a long-running, self-funded branch-by-branch expansion, so we credit it, but not the faster pace of earlier years. Growth then slows to 2.5% a year for a second decade and levels off. We assume the franchise keeps earning because it has a 27-year record of gathering local deposits and lending them out. Credit losses stay near the 2025 level of about 0.06% of loans. Bear case (about $17.76): we build this from the bank's own history in the 2009 to 2011 downturn. Net charge-offs were $2.7 million in 2009, about $1.9 million in 2010 and about $4.7 million in 2011 on a loan book of roughly $320 million, about 3% of loans over three years, and the bank lost money in 2009 and earned only $0.6 million in 2011. Applying that depth to today's roughly $661 million of loans means about $20 million of losses before tax spread over years three to five, plus a reserve build of about 0.5% of loans in year three that has to come out of capital. During those years earnings fall to near zero and the balance sheet does not grow. Before and after the downturn, the margin drops back to its 2024 level as rates fall and competitors bid up deposits, putting earnings near $1.28 a share and growing 2% a year to year ten, then flat. Commercial real estate is 57% of loans, so this concentration is where such losses would show up. Equity is about 8% of assets, so losses fall directly on shareholders; in 2009 the bank's equity actually fell. In this case the shares are worth slightly less than today's book value, because the downturn consumes several years of earnings and the business emerges with lower earning power. The holding company also owes about $8.7 million on a 5.65% bank loan used to buy the adviser, due August 31, 2030 with a final payment of about $7.4 million, which must be repaid from bank dividends; in a downturn that timing would be tight but manageable relative to the bank's earnings. Bull case (about $55.20): the roughly $2.46 a share earning power of the past four quarters holds, credit losses stay near 2025 levels, and the bank returns to its 2016 to 2025 pace of about 6 to 7% annual asset growth, helped by the adviser and the newer offices. We assume 6% a year for ten years, then 3% for a decade, then level. The bull case is only modestly above the base because faster growth forces the bank to retain much more capital. WHAT CHANGED SINCE THE PREVIOUS ANALYSIS The base and bull cases are essentially unchanged; the business news since then has been consistent with them. The bear case is lower: rather than assume a single commercial real estate loss of 1% of that portfolio, it now applies the full depth of the losses this bank actually took in 2009 to 2011 to today's larger loan book. THE MARGIN-OF-SAFETY PRICE How sure are we of the earnings level? Reasonably: the five-year median of $1.93 sits below what the bank earned in 2025 and well below the current run rate, and it spans a full rate cycle. The worst plausible outcome is a regional commercial real estate downturn that repeats or exceeds 2009 to 2011; the bank survived that once with thinner capital, and today's capital ratios and a small, amortizing holding-company loan suggest it would survive again, but shareholders could see several lean years and no growth in book value. If we are wrong about the margin holding and about credit staying clean, the shares are worth roughly book value, about $18. During the holding period the bank pays $0.40 a share a year in dividends and builds book value by roughly $1.50 a share a year. The margin-of-safety price is $24. At that price, the business only needs to keep earning near its current level for the shares to work their way toward value within a few years, while a repeat of the last credit cycle would leave a bank worth near its book value rather than a permanent large loss of value. A higher price would leave too little margin for the concentration in one region and in commercial real estate. WHAT COULD MAKE THIS WRONG The business is small and concentrated: most lending is in one region of Virginia and commercial real estate is a majority of loans. Costs are high, with operating expenses taking roughly three quarters of revenue, leaving little cushion if revenue falls. Lower rates could squeeze the margin, and the adviser's fees rise and fall with markets. Most of the value rests on the deposit franchise lasting for decades.