UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period Ended March 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission File No. 0-12896 (1934 Act) OLD POINT FINANCIAL CORPORATION ------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1265373 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1 West Mellen Street, Hampton, Va. 23663 ------------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (757) 722-7451 Not Applicable Former name, former address and former fiscal year, if changed since last report. Check whether the registrant (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 2002. Class Outstanding at April 30, 2002 ----- ----------------------------- Common Stock, $5.00 par value 2,602,577 shares <page> OLD POINT FINANCIAL CORPORATION FORM 10-Q INDEX ----- PART I - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements...................................... 1 Consolidated Balance Sheets March 31, 2002 and December 31, 2001........ 1 Consolidated Statement of Earnings Three months ended March 31, 2002 and 2001......... 2 Consolidated Statement of Cash Flows Three months ended March 31, 2002 and 2001........ 3 Consolidated Statements of Changes in Stockholders' Equity Three months ended March 31, 2002 and 2001......... 4 Notes to Consolidated Financial Statements................... 5 Parent Only Balance Sheets March 31, 2002 and December 31, 2001........ 6 Parent Only Statement of Earnings Three months ended March 31, 2002 and 2001.. 6 Parent Only Statement of Cash Flows Three months ended March 31, 2002 and 2001.. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 8 Analysis of Changes in Net Interest Income.............. 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.......................... 14 (i) <page> <table> <caption> - ---------------------------------------------------------------------------------------- Unaudited March 31, December 31, Consolidated Balance Sheets 2002 2001 - ---------------------------------------------------------------------------------------- <s> <c> <c> Assets Cash and due from banks................................... $ 11,124,930 $ 14,402,541 Interest bearing balances due from banks.................. 354,278 383,324 ------------ ------------ Total cash due from banks.............................. $ 11,479,208 $ 14,785,865 Investments: Securities available for sale, at market................ 92,554,170 97,917,884 Securities to be held to maturity....................... 34,265,273 38,082,927 Trading account securities................................ - - Federal funds sold........................................ 19,023,529 5,018,240 Loans, total ............................................. 349,977,986 346,482,751 Less reserve for loan losses.......................... 3,997,543 3,893,559 Net loans......................................... 345,980,443 342,589,192 Bank premises and equipment............................... 13,513,076 14,419,564 Other real estate owned................................... 1,360,000 1,003,229 Other assets.............................................. 9,695,752 4,942,161 ------------ ------------ Total assets......................................... $527,871,451 $518,759,062 ============ ============ Liabilities Noninterest-bearing deposits.............................. $ 79,602,843 $ 79,978,127 Savings deposits.......................................... 146,491,607 140,848,118 Time deposits............................................. 193,062,416 191,476,949 ------------ ------------ Total deposits......................................... 419,156,866 412,303,194 Federal funds purchased and securities sold under agreement to repurchase............................... 22,798,321 28,320,881 Interest-bearing demand notes issued to the United States Treasury and other liabilities for borrowed money...... 6,000,000 369,075 Federal Home Loan Bank.................................... 25,000,000 25,000,000 Other liabilities......................................... 2,770,303 1,853,841 ------------ ------------ Total liabilities...................................... 475,725,490 467,846,991 Stockholders' Equity Common stock, $5.00 par value............................. $ 13,012,885 $ 12,997,885 2002 2001 Shares authorized.... 10,000,000 10,000,000 Shares outstanding... 2,602,577 2,599,577 Surplus................................................... 10,523,439 10,455,061 Undivided profits......................................... 28,553,328 27,340,908 Accumulated other comprehensive income (loss)............. 56,309 118,217 ------------ ------------ Total stockholders' equity............................ 52,145,961 50,912,071 ------------ ------------ Total liabilities and stockholders' equity............ $527,871,451 $518,759,062 ============ ============ </table> 1 <page> <table> <caption> - ---------------------------------------------------------------------------------------- Three Months Ended Consolidated Statements of Earnings March 31 2002 2001 - ---------------------------------------------------------------------------------------- <s> <c> <c> Interest Income Interest and fees on loans................................ $ 6,655,916 $ 6,930,782 Interest on federal funds sold............................ 42,347 170,863 Interest on securities: Interest on United States Treasury securities (taxable)... 23,109 23,997 Interest on obligations of other United States Government agencies (taxable)............. 1,054,950 904,798 Interest on obligations of states and political subdivisions (tax exempt)..................... 595,590 635,463 Interest on obligations of states and political subdivisions (taxable)........................ 19,349 19,906 Interest on trading account securities.................... - - Dividends and interest on all other securities............ 31,610 91,322 ------------ ------------ Total interest on securities........................ 1,724,608 1,675,486 Trading account securities................................ - - ------------ ------------ Total interest income................................. 8,422,871 8,777,131 Interest Expense Interest on savings deposits.............................. 402,422 930,394 Interest on time deposits................................. 2,248,636 2,838,115 Interest on federal funds purchased and securities sold under agreement to repurchase...................... 103,213 314,808 Interest on Federal Home Loan Bank advances 379,375 379,375 Interest on demand notes (note balances) issued to the United States Treasury and on other borrowed money...... 10,306 25,769 ------------ ------------ Total interest expense................................ 3,143,952 4,488,461 Net interest income....................................... 5,278,919 4,288,670 Provision for loan losses................................. 300,000 150,000 ------------ ------------ Net interest income after provision for loan losses....... 4,978,919 4,138,670 Other Income Income from fiduciary activities.......................... 528,944 621,930 Service charges on deposit accounts....................... 697,620 600,679 Other service charges, commissions and fees............... 277,006 209,280 Other operating income.................................... 132,913 49,843 Security gains (losses)................................... 5,215 - Trading account income.................................... - - ------------ ------------ Total other income.................................... 1,641,698 1,481,732 Other Expenses Salaries and employee benefits............................ 2,613,831 2,403,413 Occupancy expense of Bank premises........................ 299,096 263,132 Furniture and equipment expense........................... 406,274 419,665 Other operating expenses.................................. 1,071,612 939,451 ------------ ------------ Total other expenses.................................. 4,390,813 4,025,661 ------------ ------------ Income before taxes....................................... 2,229,804 1,594,741 Applicable income taxes .................................. 572,244 353,225 ------------ ------------ Net income................................................ $ 1,657,560 $ 1,241,516 ============ ============ Per Share Based on weighted average number of common shares outstanding............................... 2,602,044 2,590,540 Basic Earnings per Share $ 0.64 $ 0.48 Diluted Earnings per Share $ 0.63 $ 0.48 </table> 2 <page> <table> <caption> - ---------------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION Three Months Ended Consolidated Statements of Cash Flows March 31, (Unaudited) 2002 2001 - ---------------------------------------------------------------------------------------- <s> <c> <c> CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 1,657,560 $ 1,241,516 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 351,103 346,226 Provision for loan losses............................... 300,000 150,000 (Gains) loss on sale of investment securities, net...... (5,215) - Net amortization & accretion of securities ............. 20,460 8,363 Net (increase) decrease in trading account.............. - - Loss on disposal of equipment........................... 90,669 - (Increase) in other real estate owned................... - - (Increase) decrease in other assets (net of tax effect of FASB 115 adjustment)............ (4,721,699) 383,998 Increase (decrease) in other liabilities................ 916,462 862,730 ------------ ------------ Net cash provided by operating activities............. (1,390,660) 2,992,833 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities ................................ (2,584,766) (6,009,159) Proceeds from maturities & calls of securities ......... 11,098,900 7,700,000 Proceeds from sales of available-for-sale securities.... 558,189 275,000 Proceeds from sales of held-to-maturity securities...... - - Loans made to customers................................. (56,473,578) (38,294,407) Principal payments received on loans.................... 52,782,327 30,762,963 Proceeds from sales of other real estate owned.......... 158,229 - Purchases of premises and equipment..................... (50,284) (363,238) (Increase) decrease in federal funds sold............... (14,005,289) (17,352,294) ------------ ------------ Net cash provided by (used in) investing activities... (8,516,272) (23,281,135) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in non-interest bearing deposits.... (375,284) 4,216,293 Increase (decrease) in savings deposits................. 5,643,489 7,148,938 Proceeds from the sale of certificates of deposit....... 14,243,620 19,454,889 Payments for maturing certificates of deposit........... (12,658,153) (9,364,135) Increase (decrease) in federal funds purchased & repurchase agreements.................................. (5,522,560) (637,859) Increase (decrease) in Federal Home Loan Bank advances.. - - Increase (decrease) in other borrowed money............. 5,630,925 (1,462,053) Proceeds from issuance of common stock.................. 54,650 - Dividends paid.......................................... (416,412) (388,581) ------------ ------------ Net cash provided by financing activities............. 6,600,275 18,967,492 Net increase (decrease) in cash and due from banks.... (3,306,657) (1,320,810) Cash and due from banks at beginning of period........ 14,785,865 11,043,772 ------------ ------------ Cash and due from banks at end of period.............. $ 11,479,208 $ 9,722,962 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest.............................................. $ 3,198,292 $ 4,376,996 Income taxes.......................................... - - SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS Unrealized gain(loss) on investment securities, net of tax................................................ (61,908) 915,433 Additional minimum liability related to pension......... - - Transfer of property from Premises & Equipment to Other Real Estate Owned..................................... 515,000 - </table> See accompanying notes 3 <page> <table> <caption> - ------------------------------------------------------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Unaudited Accumulated Other Total Common Stock Par Capital Retained Comprehensive Stockholder's Shares Value Surplus Earnings Income(Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> <c> <c> FOR THREE MONTHS ENDED MARCH 31, 2002 Balance at beginning of period............ 2,599,577 $12,997,885 $10,455,061 $27,340,908 $ 118,217 $50,912,071 Comprehensive Income Net income.............................. - - - 1,657,560 - 1,657,560 Increase (decrease) in unrealized gain on investment securities (61,908) (61,908) Minimum pension liabilty adjustment...... - - - - - - --------- ----------- ----------- ----------- ----------- ----------- Total Comprehensive Income 1,657,560 (61,908) 1,595,652 Sale of common stock...................... 3,000 15,000 68,378 (28,728) - 54,650 Cash dividends............... ............ - - - (416,412) - (416,412) --------- ----------- ----------- ----------- ----------- ----------- Balance at end of period.................. 2,602,577 $13,012,885 $10,523,439 $28,553,328 $ 56,309 $52,145,961 FOR THREE MONTHS ENDED MARCH 31, 2001 Balance at beginning of period............ 2,590,540 $12,952,700 $10,288,301 $23,297,402 $ (40,918) $46,497,485 Comprehensive Income Net income.............................. - - - 1,241,516 - 1,241,516 Increase (decrease) in unrealized gain on investment securities - - - - 915,433 915,433 --------- ----------- ----------- ----------- ----------- ----------- Total Comprehensive Income 1,241,516 915,433 2,156,949 Sale of common stock...................... - - - - - - Cash dividends............... ............ - - - (388,581) - (388,581) --------- ----------- ----------- ----------- ----------- ----------- Balance at end of period.................. 2,590,540 $12,952,700 $10,288,301 $24,150,337 $ 874,515 $48,265,853 </table> See accompanying notes 4 <page> OLD POINT FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accounting and reporting policies of the Registrant conform to generally accepted accounting principles and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. These adjustments include estimated provisions for bonus, profit sharing and pension plans that are settled at year-end. These financial statements should be read in conjunction with the financial statements included in the Registrant's 2001 Annual Report to Shareholders and Form 10-K. 2. Basic earnings per common share outstanding are computed by dividing income by the weighted average number of outstanding common shares for each period presented. Diluted earnings per share are computed using the treasury stock method. 3. Certain amounts in the financial statements have been reclassified to conform with classifications adopted in the current year. 5 <page> <table> <caption> - --------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION Parent only Balance Sheets March 31, December 31, (Unaudited) 2002 2001 - --------------------------------------------------------------------------------- <s> <c> <c> Assets Cash in bank........................................ $ 69,953 $ 275,795 Investment Securities............................... 1,215,000 1,215,000 Total Loans......................................... - - Investment in Subsidiaries.......................... 50,769,826 49,407,931 Other assets........................................ 91,182 13,345 ----------- ----------- Total Assets........................................ $52,145,961 $50,912,071 Liabilities and Stockholders' Equity Total Liabilities................................... $ - $ - Stockholders' Equity................................ 52,145,961 50,912,071 ----------- ----------- Total Liabilities & Stockholders' Equity............ $52,145,961 $50,912,071 =========== =========== </table> <table> <caption> - -------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION Three Months Ended: Parent only Income Statements March 31, (Unaudited) 2002 2001 - -------------------------------------------------------------------------------- <s> <c> <c> Income Cash dividends from Subsidiaries.................... $ 450,000 $ 425,000 Interest and fees on loans.......................... - - Interest income from investment securities.......... 22,688 31,356 Gains (losses) from sale of investment securities... - - Other income........................................ 36,000 36,000 ----------- ----------- Total Income........................................ 508,688 492,356 Expenses Salaries and employee benefits...................... 68,975 62,014 Other expenses...................................... 23,712 32,440 ----------- ----------- Total Expenses...................................... 92,687 94,454 ----------- ----------- Income before taxes & undistributed net income of subsidiaries...................... 416,001 397,902 Income tax.......................................... (17,756) (15,775) ----------- ----------- Net income before undistributed net income of subsidiaries........................ 433,757 413,677 Undistributed net income of subsidiaries............ 1,223,803 827,839 ----------- ----------- Net Income.......................................... $ 1,657,560 $ 1,241,516 =========== =========== </table> 6 <page> <table> <caption> - --------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION Three Months Ended: Parent only Statements of Cash Flows March 31, (Unaudited) 2002 2001 - --------------------------------------------------------------------------------- <s> <c> <c> Cash Flows from Operating Activities: Net Income.......................................... $ 1,657,560 $ 1,241,516 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries.. (1,223,803) (827,839) Depreciation...................................... - - Gains(losses) on sale of securities [net]....... - - (Increase) Decrease in other assets............. (77,837) (56,196) Increase (decrease) in other liabilities........ - 4,175 ----------- ----------- Net cash provided by operating activities........... 355,920 361,656 Cash flows from investing activities: (Increase)decrease in investment securities......... - - Payments for investment in subsidiaries (200,000) (135,000) Repayment of loans by customers..................... - - ----------- ----------- Net cash provided by investing activities........... (200,000) (135,000) Cash flows from financing activities: Proceeds from issuance of common stock.............. 54,650 - Dividends paid...................................... (416,412) (388,581) ----------- ----------- Net cash provided by financing activities........... (361,762) (388,581) Net increase (decrease) in cash & due from banks.... (205,842) (161,925) Cash & due from banks at beginning of period........ 275,795 225,339 ----------- ----------- Cash & due from banks at end of period.............. $ 69,953 $ 63,414 =========== =========== </table> 7 <page> Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ---------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- Earnings Summary - ---------------- Net income for the first quarter of 2002 increased 33.51% to $1.66 million from $1.24 million for the comparable period in 2001. Basic earnings per share were $0.64 in the first quarter of 2002 compared with $0.48 in 2001. Return on average assets was 1.27% for the first quarter of 2002 and 1.03% for the comparable period in 2001. Return on average equity was 12.62% for the first quarter of 2002 and 10.36% for the first quarter of 2001. Net Interest Income - ------------------- The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Net interest income, on a fully tax equivalent basis, increased $1.02 million, or 22.51%, for the first quarter of 2002 over the same period in 2001. The net interest yield, defined as the ratio of net interest income on a fully tax equivalent basis to total earning assets, increased to 4.54% in 2002 from 3.99% in 2001. Tax equivalent interest income decreased $321 thousand, or 3.55%, in the first quarter of 2002 from the same period of 2001. Average earning assets increased $34.72 million, or 7.62% in the first quarter of 2002 compared to the first quarter of 2001. Comparing the first three months of 2002 to 2001, average loans increased $27.80 million or 8.64% while investment securities increased $9.17 million or 7.53%. Certificates of deposits increased $5.40 million or 2.88% while checking and savings accounts increased $15.29 million or 11.94%. Interest expense decreased $1.35 million or 29.97% in the first quarter of 2002 from the first quarter of 2001 while interest bearing liabilities increased $20.64 million or 5.59 % in the first quarter of 2002 over the same period in 2001. The cost of funding those liabilities decreased 163 basis points from 2001. Page 9 shows an analysis of average earning assets, interest bearing liabilities and rates and yields. 8 <page> <table> <caption> - ----------------------------------------------------------------------------------------------------------------------- OLD POINT FINANCIAL CORPORATION NET INTEREST INCOME ANALYSIS For the quarter ended March 31, (Fully taxable equivalent basis)* 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Dollars in thousands Balance Expense Paid Balance Expense Paid - ----------------------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> <c> <c> Loans (net of unearned income)**................ $349,391 $ 6,674 7.64% $321,592 $ 6,954 8.65% Investment securities: Taxable....................................... 80,931 1,097 5.42% 64,553 949 5.88% Tax-exempt.................................... 50,012 903 7.22% 57,225 962 6.73% -------- --------- -------- --------- Total investment securities................. 130,943 2,000 6.11% 121,778 1,912 6.28% Federal funds sold.............................. 10,296 42 1.63% 12,538 171 5.46% -------- --------- -------- --------- Total earning assets.......................... $490,630 $ 8,716 7.11% $455,908 9,037 7.93% Time and savings deposits: Interest-bearing transaction accounts......... $ 7,228 $ 10 0.55% $ 5,610 $ 32 2.28% Money market deposit accounts................. 105,836 317 1.20% 94,340 708 3.00% Savings accounts.............................. 30,331 75 0.99% 28,152 190 2.70% Certificates of deposit, $100,000 or more..... 51,296 524 4.09% 43,079 682 6.33% Other certificates of deposit................. 141,902 1,725 4.86% 144,716 2,156 5.96% -------- --------- -------- --------- Total time and savings deposits............. 336,593 2,651 3.15% 315,897 3,768 4.77% Federal funds purchased and securities sold under agreement to repurchase................. 25,367 103 1.62% 26,205 315 4.81% Federal Home Loan Bank advances 25,000 379 6.06% 25,000 379 6.06% Other short term borrowings..................... 2,774 10 1.44% 1,991 26 5.22% -------- --------- -------- --------- Total interest bearing liabilities............ $389,734 3,143 3.23% $369,093 4,488 4.86% Net interest income/yield....................... $ 5,573 4.54% $ 4,549 3.99% ========= ========= * Tax equivalent yields based on 34% tax rate. ** Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis </TABLE> 9 <page> Provision/Allowance for Loan Losses - ----------------------------------- The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the portfolio. The provision for loan losses was $300 thousand for the first three months of 2002, up from $150 thousand in the comparable period in 2001. Loans charged off (net of recoveries) were $196 thousand compared with loans charged off (net of recoveries) of $337 thousand in the first three months of 2001. On March 31, 2002 nonperforming assets totaled $1.71 million compared with $879 thousand on March 31, 2001. The March 2002 total consisted of $680 thousand in foreclosed real estate, $680 thousand in two former branch sites now listed for sale, and $345 thousand in nonaccrual loans. The March 2001 total consisted of $585 thousand in foreclosed real estate, $165 thousand in a former branch site now listed for sale, and $129 thousand in nonaccrual loans. Loans still accruing interest but past due 90 days or more decreased to $488 thousand as of March 31, 2002 compared with $1.37 million as of March 31, 2001. The allowance for loan losses on March 31, 2002 was $4.00 million compared with $3.46 million on March 31, 2001. It represented a multiple of 2.34 times nonperforming assets and 11.59 times nonperforming loans. The allowance for loan losses was 1.14% of loans on March 31, 2002 compared to 1.06% at March 31, 2001. Other Income - ------------ For the first quarter of 2002 other income increased $160 thousand, or 10.80% over the same period in 2001. Service charges on deposit accounts increased $97 thousand or 16.14%. Foreclosed property income increased $26 thousand. Mortgage brokerage income increased $59 thousand. Other Expenses - -------------- For the first quarter of 2002 other expenses increased $365 thousand or 9.07% over the same period in 2001. Salaries and employee benefits increased $210 thousand or 8.75%. Occupancy expense increased $36 thousand or 13.67%. Other operating expense increased $132 thousand or 14.07%. Assets - ------ At March 31, 2002 total assets were $527.87 million, up 1.76% from $518.76 million at December 31, 2001. Total loans grew $3.50 million or 1.01%. Investment securities decreased by $9.18 million, or 6.75%, in 2002. Federal funds sold increased $14.01 million or 279.09%. Total deposits increased $6.85 million, or 1.66% in 2002 and demand note balances to the United States Treasury increased $5.63 million from year-end 2001. 10 <page> Capital Ratios - -------------- The Company's capital position remains strong as evidenced by the regulatory capital measurements. At March 31, 2002 the Tier I capital ratio was 14.01%, the total capital ratio was 15.09% and the leverage ratio was 9.91%. These ratios were all well above the regulatory minimum levels of 4.00%, 8.00%, and 3.00%, respectively. Capital Resources - ----------------- The Company transferred $515 thousand into OREO in the first quarter of 2002 for a vacant branch site which is expected to be sold in the 2nd quarter of 2002. The Company expects to purchase land in the 2nd quarter of 2002 for an additional branch location in Chesapeake. The Company continues to expand the implementation of the new imaging system by working towards the use of imaged signature cards in 2002. The Company believes that it has adequate internal and external resources available to fund its capital expenditure requirements. Liquidity - --------- Liquidity is the ability of the Company to meet present and future obligations to depositors and borrowers. The Company experienced moderate deposit growth in the first quarter of 2002. Loan growth for the first quarter of 2002 was below targeted projections. The Company has maintained liquidity as reflected in the large balance in federal funds sold as of March 31, 2002. The Company continues to monitor and seek investment opportunities in an environment of relatively unchanged interest rates. Effects of Inflation - -------------------- Management believes that the key to achieving satisfactory performance is its ability to maintain or improve its net interest margin and to generate additional fee income. The Company's policy of investing in and funding with interest sensitive assets and liabilities is intended to reduce the risks inherent in a volatile economy. Critical Accounting Policies - ---------------------------- The Company's consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management's estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. 11 <page> Allowance for Loan Losses. The allowance for loan losses is ------------------------- an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accounting Standards (SFAS) No. 5 "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. In evaluating the adequacy of the allowance for loan losses, the Company has divided the loan portfolio into six pools of loans. Allocation percentages are applied to the loan pools utilizing the following factors: 1. economic trends and conditions 2. trends in volume and terms of loans 3. delinquency and non-accruals 4. lending policies 5. lending management and staff 6. concentrations of credit The Company also maintains a four-year loss experience history on each category of loan. Using the six factors listed above, management can modify the allocation from the four-year historical average. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold all affect the required level of the allowance for loan losses and the associated provision for loan losses. Deferred Loan Fees. As part of the lending process, the -------------------- Company receives fees from borrowers or potential borrowers related to loans underwritten. All origination fees received in the origination of a loan that are not pass-through fees, and certain direct origination costs are deferred and amortized over the life of the loan. 12 <page> Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ---------------------------------------------------------- Interest Sensitivity - -------------------- Old Point Financial Corporation does not have any risk sensitive instruments entered into for trading purposes. Trading market risk is the risk to net income from changes in the fair values of assets and liabilities that are marked-to-market through the income statement. The Company does not carry a trading portfolio and is currently not exposed to trading risk. Old Point Financial Corporation does have risk sensitive instruments entered into for other than trading purposes. Based on scheduled maturities, the Company was liability sensitive as of March 31, 2002. There were $136 million more in liabilities than assets subject to repricing within three months. As of December 31, 2001 the Company had $125 million more in liabilities than assets subject to repricing within three months. When the company is liability sensitive, net interest income should improve if interest rates fall since liabilities will reprice faster than assets. Conversely, if interest rates rise, net interest income should decline. It should be noted, however, that deposits totaling $146.49 million; which consist of interest checking, money market, and savings accounts; are less interest sensitive than other market driven deposits. In a rising rate environment these deposit rates have historically lagged behind the changes in earning asset rates, thus mitigating somewhat the impact from the liability sensitivity position. Market risk is the risk of loss due to changes in instrument values or earnings variations caused by changes in interest rates, commodity prices and market variables such as equity price risk. Old Point Financial Corporation's equity price risk is immaterial and the company's primary exposure is to interest rate risk. Non-trading market risk is the risk to net income from changes in interest rates on asset and liabilities, other than trading. The risk arises through the potential mismatch resulting from timing differences in repricing of loans and deposits. Old Point Financial Corporation monitors this risk by reviewing the timing differences and using a portfolio rate shock model that projects various changes in interest income under a changing rate environment of up to plus or minus 300 basis points. The rate shock model reveals that a 200 basis point rise in rates would cause approximately a 0.64% increase in net income. The model indicates a 300 basis point rise in rates would cause approximately a .17% decrease in net income at March 31, 2002. 13 <page> PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits None (b) No reports on Form 8-K were filed during the first quarter of 2002. 14 <page> SIGNATURES ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OLD POINT FINANCIAL CORPORATION May 8, 2002 By: /s/Louis G. Morris ------------------ Louis G. Morris Executive Vice President and CFO By: /s/Laurie D. Grabow ------------------- Laurie D. Grabow Senior Vice President Principal Financial and Accounting Officer 15