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 September 30, 1998 [ ] 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) 728-1200 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 October 31, 1998. Class Outstanding at October 31, 1998 Common Stock, $5.00 par value 2,575,444 shares
OLD POINT FINANCIAL CORPORATION FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements...........................................1 Consolidated Balance Sheets September 30, 1998 and December 31, 1997.............1 Consolidated Statement of Earnings Three months ended September 30, 1998 and 1997..............2 Nine months ended September 30, 1998 and 1997...............2 Consolidated Statement of Cash Flows Nine months ended September 30, 1998 and 1997..............3 Consolidated Statements of Changes in Stockholders' Equity Nine months ended September 30, 1998 and 1997..............4 Notes to Consolidated Financial Statements........................5 Parent Only Balance Sheets September 30, 1998 and December 31, 1997................6 Parent Only Statement of Earnings Three months ended September 30, 1998 and 1997..........6 Nine months ended September 30, 1998 and 1997...........6 Parent Only Statement of Cash Flows Three months ended September 30, 1998 and 1997..........7 Nine months ended September 30, 1998 and 1997...........7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................8 Analysis of Changes in Net Interest Income....................9 Interest Sensitivity Analysis................................13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................14 (i)
<TABLE> <CAPTION> September 30, December 31, Consolidated Balance Sheets 1998 1997 (Dollars in Thousands) Assets <S> <C> <C> Cash and due from banks........................ $ 8,473,684 $ 12,208,408 Investments: Securities available for sale, at market..... 74,063,267 67,546,008 Securities to be held to maturity............ 59,918,168 28,979,825 Trading account securities..................... --- --- Federal funds sold............................. 6,897,899 6,977,386 Loans, total .................................. 230,540,008 221,743,937 Less reserve for loan losses............... 2,745,958 2,671,174 ____________ ____________ Net loans.............................. 227,794,050 219,072,763 Bank premises and equipment.................... 12,036,142 9,742,209 Other real estate owned........................ 483,864 773,864 Other assets................................... 4,258,604 3,370,689 ____________ ____________ Total assets.............................. $393,925,678 348,671,152 ____________ ____________ ____________ ____________ Liabilities Noninterest-bearing deposits................... $ 58,144,547 $ 52,359,579 Savings deposits............................... 114,990,788 99,991,102 Time deposits.................................. 153,660,303 134,749,126 ____________ ____________ Total deposits.............................. 326,795,638 287,099,807 Federal funds purchased and securities sold under agreement to repurchase.............. 24,414,154 20,164,902 Interest-bearing demand notes issued to the United States Treasury and other liabilities for borrowed.................... 1,336,205 4,025,090 Other liabilities.............................. 1,713,379 1,048,885 ____________ ____________ Total liabilities........................... 354,259,376 312,338,684 Stockholders' Equity Common stock, $5.00 par value.................. 12,873,220 12,830,860 1998 1997 Shares Outstanding....2,574,644 2,566,172 Surplus........................................ 9,996,866 9,693,301 Undivided profits.............................. 15,491,481 13,097,716 Unrealized gain/(loss) on securities........... 1,304,735 710,591 ____________ ____________ Total stockholders' equity................. 39,666,302 36,332,468 Total liabilities and stockholders' equity. $393,925,678 $348,671,152 ____________ ____________ ____________ ____________ 1 </TABLE>
<TABLE> <CAPTION> ___________________________________________________ _______________________ _______________________ Three Months Ended Nine Months Ended Consolidated Statements of Earnings September 30, September 30, 1998 1997 1998 1997 ____________________________________________________ _______________________ _______________________ (Dollars in Thousands except per share amounts) Interest Income <S> <C> <C> <C> <C> Interest and fees on loans..................... $5,065,052 $4,813,519 $15,111,942 $13,863,861 Interest on federal funds sold................. 132,098 86,515 455,373 189,410 Interest on securities: Taxable..................................... 1,406,532 1,133,518 3,896,480 3,390,617 Exempt from Federal income tax.............. 462,728 339,442 1,231,401 919,222 Interest on trading account.................... 0 0 0 0 _______________________ ________________________ 1,869,260 1,472,960 5,127,881 4,309,839 _______________________ ________________________ Total interest income...................... 7,066,410 6,372,994 20,695,196 18,363,110 Interest Expense Interest on savings deposits................... 888,466 700,397 2,496,733 2,065,006 Interest on time deposits...................... 2,118,854 1,794,177 6,063,180 5,111,683 Interest on federal funds purchased and securities sold under agreement to repurchase 301,014 243,406 757,466 620,535 Interest on demand notes (note balances) issued to the United States Treasury and on other borrowed........................ 21,562 22,030 74,408 73,727 _______________________ ________________________ Total interest expense..................... 3,329,896 2,760,010 9,391,787 7,870,951 Net interest income............................ 3,736,514 3,612,984 11,303,409 10,492,159 Provision for loan losses...................... 150,000 100,000 500,000 300,000 _______________________ ________________________ Net interest income after provision for loan losses............................... 3,586,514 3,512,984 10,803,409 10,192,159 Other Income Income from fiduciary activities............... 449,850 434,805 1,349,550 1,304,505 Service charges on deposit accounts............ 495,878 431,440 1,402,651 1,284,963 Other service charges, commissions and fees.... 153,124 153,252 497,178 424,365 Other operating income......................... 74,621 37,530 275,625 195,356 Security gains (losses)........................ 0 0 9 (4,068) Trading account income......................... 0 0 0 0 _______________________ ________________________ Total other income......................... 1,173,473 1,057,027 3,525,013 3,205,121 Other Expenses Salaries and employee benefits................. 1,960,710 1,941,618 5,719,487 5,757,690 Occupancy expense of Bank premises............. 251,186 207,132 694,549 624,658 Furniture and equipment expense................ 289,313 277,825 875,985 814,473 Other operating expenses....................... 760,652 761,831 2,347,527 2,346,816 _______________________ ________________________ Total other expenses....................... 3,261,861 3,188,406 9,637,548 9,543,637 _______________________ ________________________ Income before taxes............................ 1,498,126 1,381,605 4,690,874 3,853,643 Applicable income taxes ....................... 343,000 335,600 1,194,100 970,276 _______________________ ________________________ Net income..................................... $1,155,126 $1,046,005 $ 3,496,774 $ 2,883,367 _______________________ ________________________ _______________________ ________________________ Per Share Based on weighted average number of common shares outstanding.................... 2,573,235 2,565,496 2,568,964 2,559,356 Basic Earnings Per Share....................... $ 0.45 $ 0.41 $ 1.36 $ 1.13 Diluted Earnings Per Share..................... $ 0.44 $ 0.41 $ 1.34 $ 1.12 2 </TABLE>
<TABLE> <CAPTION> ________________________________________________________________________________________________ OLD POINT FINANCIAL CORPORATION Nine Months Ended Consolidated Statements of Cash Flows Sept 30, (Unaudited) 1998 1997 ________________________________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net income.................................................... $ 3,496,774 $ 2,883,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 717,882 703,477 Provision for loan losses................................... 500,000 300,000 (Gains) loss on sale of investment securities, net.......... (9) 4,068 Net amortization & accretion of securities.................. 121,766 310,772 Net (increase) decrease in trading account.................. 0 0 (Increase) in other real estate owned....................... (296,909) (565,000) (Increase) decrease in other assets (net of tax effect of FASB 115 adjustment)................ (1,193,989) (420,955) Increase (decrease) in other liabilities.................... 664,494 429,063 ____________ ____________ Net cash provided by operating activities................. 4,010,009 3,644,792 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities .................................... (64,422,396) (18,401,556) Proceeds from maturities & calls of securities ............. 27,745,253 9,749,000 Proceeds from sales of available - for - sale securities.... 0 6,217,797 Proceeds from sales of held - to - maturity securities...... 0 0 Loans made to customers..................................... (103,860,859) (93,637,350) Principal payments received on loans........................ 94,639,573 72,744,454 Proceeds from sales of other real estate owned.............. 586,910 145,000 Purchases of premises and equipment......................... (3,011,815) (698,872) (Increase) decrease in federal funds sold................... 79,487 (4,602,592) ____________ ____________ Net cash provided by (used in) investing activities....... (48,243,847) (28,484,119) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in non-interest bearing deposits........ 5,784,968 5,201,772 Increase (decrease) in savings deposits..................... 14,999,686 1,957,402 Proceeds from the sale of certificates of deposit........... 49,570,250 46,257,128 Payments for maturing certificates of deposit............. (30,659,073) (34,137,125) Increase (decrease) in federal funds purchased & repurchase agreements...................................... 4,249,252 2,313,076 Increase (decrease) in other borrowed money................. (2,688,885) 1,726,178 Proceeds from issuance of common stock...................... 142,138 230,431 Dividends paid.............................................. (899,222) (767,859) ____________ ____________ Net cash provided by financing activities................. 40,499,114 22,781,003 Net increase (decrease) in cash and due from banks........ (3,734,724) (2,058,324) Cash and due from banks at beginning of period............ 12,208,408 10,988,495 ____________ ____________ Cash and due from banks at end of period.................. $ 8,473,684 $ 8,930,171 ____________ ____________ ____________ ____________ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest.................................................. $9,212,018 $7,780,638 Income taxes.............................................. 1,350,000 1,025,000 See accompanying notes - 3 - </TABLE>
<TABLE> <CAPTION> OLD POINT FINANCIAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) ____________________________________________________________________________________________________________________________ Unrealized Common Stock Undivided Gain/(Loss) Shares Amount Surplus Profits On Securities Total _________________________________________________________________________________ FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 <S> <C> <C> <C> <C> <C> <C> Balance at end of period ................... 2,566,172 $12,830,860 $9,693,301 $13,097,716 $710,591 $36,332,468 Net Income ................................. -- -- -- 3,496,774 -- 3,496,774 Sale of Common Stock ....................... 8,472 42,360 303,565 (203,787) -- 142,138 Cash dividends ............................. -- -- -- (899,222) -- (899,222) Increase in unrealized gain on securities . -- -- -- -- 594,144 594,144 ___________ ___________ ___________ ___________ ___________ ___________ Balance at end of period ................... 2,574,644 $12,873,220 $9,996,866 $15,491,481 $1,304,735 $39,666,302 FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 <S> <C> <C> <C> <C> <C> <C><S> Balance at beginning of period ............. 1,273,546 $6,367,730 $9,345,091 $16,638,880 $48,199 $32,399,900 Net income ................................. -- -- -- 2,883,367 -- 2,883,367 Sale of common stock ....................... 9,540 47,700 348,210 (165,479) -- 230,431 Cash dividends ............................. -- -- -- (767,859) -- (767,859) Increase in unrealized gain on securities . -- -- -- -- 482,674 482,674 ___________ ___________ ___________ ___________ ___________ ___________ Balance at end of period ................... 1,283,086 $6,415,430 $9,693,301 $18,588,909 $530,873 $35,228,513 See accompanying note -4- </TABLE>
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 1997 Annual Report to Shareholders and Form 10-K. 2. Earnings per common share outstanding are computed by dividing income by the weighted average number of outstanding common shares for each period presented. 5
<TABLE> <CAPTION> ______________________________________________________________________________ OLD POINT FINANCIAL CORPORATION Parent only Balance Sheets September 30, December 31, (Unaudited) 1998 1997 ______________________________________________________________________________ <S> <C> <C> Assets Cash in bank................................ $ 274,021 $ 289,230 Investment Securities....................... 2,117,277 1,877,175 Total Loans................................. 0 0 Investment in Subsidiary.................... 37,290,279 34,170,604 Equipment................................... 0 0 Other assets................................ 11,125 7,759 __________ __________ Total Assets................................ $39,692,702 $ 36,344,768 __________ __________ __________ __________ Liabilities and Stockholders' Equity Total Liabilities........................... $ 26,400 $ 12,300 Stockholders' Equity........................ 39,666,302 36,332,468 __________ __________ Total Liabilities & Stockholders' Equity.... $ 39,692,702 $ 36,344,768 __________ __________ __________ __________ <CAPTION> ________________________________________________________________________________________________________ OLD POINT FINANCIAL CORPORATION Three Months Ended: Nine Months Ended: Parent only Income Statements September 30, September 30, (Unaudited) 1998 1997 1998 1997 ________________________________________________________________________________________________________ <S> <C> <C> <C> <C> Income Cash dividends from Subsidiary.............. $ 950,000 $ 250,000 $ 950,000 $ 750,000 Interest and fees on loans.................. 0 0 0 579 Interest income from investment securities.. 79,281 26,978 79,281 78,683 Gains (losses) from sale of investment securities.................... 0 0 0 0 Other income................................ 0 0 0 0 __________ __________ __________ __________ Total Income................................ 1,029,281 276,978 1,029,281 829,262 Expenses Salaries and employee benefits.............. 0 0 0 0 Other expenses.............................. 37,406 10,192 37,406 42,706 __________ __________ __________ __________ Total Expenses.............................. 37,406 10,192 37,406 42,706 __________ __________ __________ __________ Income before taxes & undistributed net income of subsidiary................ 991,875 266,786 991,875 786,556 Income tax.................................. 14,100 5,600 14,100 13,000 Net income before undistributed net income of subsidiary.................. 977,775 261,186 977,775 773,556 __________ __________ __________ __________ Undistributed net income of subisdiary...... 2,518,999 784,819 2,518,999 2,109,811 __________ __________ __________ __________ Net Income.................................. $ 3,496,774 $ 1,046,005 $ 3,496,774 $ 2,883,367 __________ __________ __________ __________ __________ __________ __________ __________ 6 </TABLE>
<TABLE> <CAPTION> ____________________________________________________________________________ OLD POINT FINANCIAL CORPORATION Nine Months Ended: Parent only Statements of Cash Flows September 30, (Unaudited) 1998 1997 ____________________________________________________________________________ Cash Flows from Operating Activities: <S> <C> <C> Net Income.................................. $ 3,496,774 $ 2,883,367 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiary.......................... (2,518,999) (2,109,811) Depreciation.............................. 0 0 Gains(losses) on sale of securities (net) 0 0 (Increase) decrease in other assets..... 0 52,614 Increase (decrease) in other liabilities 14,100 6,100 ___________ ___________ Net cash provided by operating activities... 991,875 832,270 Cash flows from investing activities: (Increase)decrease in investment securities. (250,000) (200,000) Sale of equipment 0 14,411 Purchase of equipment....................... 0 0 Repayment of loans by customers............. 0 49,884 ___________ ___________ Net cash provided by investing activities... (250,000) (135,705) Cash flows from financing activities: Proceeds from issuance of common stock...... 142,138 230,431 Dividends paid.............................. (899,222) (767,859) ___________ ___________ Net cash provided by financing activities... (757,084) (537,428) Net increase (decrease) in cash & due from bank............................. (15,209) 159,137 Cash & due from banks at beginning of period 289,230 142,683 ___________ ___________ Cash & due from banks at end of period...... $ 274,021 $ 301,820 ___________ ___________ ___________ ___________ 7 </TABLE>
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary Net income for the third quarter of 1998 increased 10% to $1,155,126 from $1,046,005 for the comparable period in 1997. Basic earnings per share were $0.45 in the third quarter of 1998 compared with $0.41 in 1997. For the nine months ended September 30, 1998 net income increased 21% to $3,496,774 from $2,883,367 in 1997. Basic earnings per share were $1.36 for the first nine months of 1998 compared with $1.13 in 1997. Return on average assets was 1.19% for the third quarter of 1998 and 1.24% for the comparable period in 1997. Return on average equity was 11.81% for the third quarter of 1998 and 11.96% for the third quarter of 1997. For the nine months ended September 30, 1998 and 1997 return on average assets was 1.24% and 1.17% respectively. Return on average equity was 12.26% in 1998 and 11.35% in 1997. Net Interest Income Net interest income, on a fully tax equivalent basis, increased $185 thousand, or 5%, for the third quarter of 1998 over 1997. Average earning assets increased 15% and the net interest yield, defined as the ratio of net interest income on a fully tax equivalent basis to total earning assets, decreased from 4.78% in 1997 to 4.37% in 1998. For the nine months ended September 30, 1998 net interest income increased $963 thousand, or 9%, over the comparable period in 1997. Average earning assets increased 14% and the net interest yield decreased from 4.77% in 1997 to 4.55% in 1998. This increase in earning assets is due to growth in the investment and loan portfolios. During 1998 there has been a shift in investment securities from taxable to tax exempt which have higher tax equivalent yields. Interest rates on deposits increased 19 basis points during the first nine months of 1998 over the comparable period in 1997 while loan rates increased only 4 basis points during the same period. This contributed to the decrease in the net interest yield. Page 9 shows an analysis of average earning assets, interest bearing liabilities and rates and yields. 8
<TABLE> <CAPTION> ______________________________________________ ________________________________________________________________________ OLD POINT FINANCIAL CORPORATION NET INTEREST INCOME ANALYSIS For the quarter ended September 30, (Fully taxable equivalent basis) * 1998 1997 ______________________________________________ ________________________________________________________________________ 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)**............. $228,335 5,082 8.90% $214,992 4,835 9.00% Investment securities:*** Taxable.................................... 91,557 1,406 6.14% 72,088 1,131 6.28% Tax-exempt................................. 36,625 701 7.66% 25,414 515 8.11% ________ ________ ________ ________ Total investment securities.............. 128,182 2,107 6.58% 97,502 1,646 6.75% Federal funds sold........................... 9,252 132 5.71% 6,009 86 5.72% ________ ________ ________ ________ Total earning assets....................... $365,769 $7,321 8.01% $318,503 $6,567 8.25% Time and savings deposits: Interest-bearing transaction accounts...... $19,643 $108 2.20% $25,446 $140 2.20% Money market deposit accounts.............. 69,982 601 3.44% 48,550 381 3.14% Savings accounts........................... 26,081 180 2.76% 25,954 179 2.76% Certificates of deposit, $100,000 or more.. 26,677 385 5.77% 20,655 307 5.95% Other certificates of deposit.............. 124,156 1,733 5.58% 110,022 1,487 5.41% ________ ________ ________ ________ Total time and savings deposits.......... 266,539 3,007 4.51% 230,627 2,494 4.33% Federal funds purchased and securities sold under agreement to repurchase.............. 24,314 301 4.95% 20,301 244 4.81% Other short term borrowings.................. 1,541 21 5.45% 1,560 22 5.64% ________ ________ ________ ________ Total interest bearing liabilities......... $292,394 3,329 4.55% $252,488 2,760 4.37% Net interest income/yield.................... $3,992 4.37% $3,807 4.78% ________ ________ ________ ________ ________ ________ ________ ________ <CAPTION> ____________________________________________________________ For the nine months ended September 30, 1998 1997 __________________________________________________________ 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)**............. $225,059 $15,163 8.98% $207,666 $13,928 8.94% Investment securities:*** Taxable.................................... 84,174 3,896 6.17% 72,915 3,388 6.20% Tax-exempt................................. 31,542 1,866 7.89% 22,876 1,393 8.12% ________ ________ ________ ________ Total investment securities.............. 115,716 5,762 6.64% 95,791 4,781 6.65% Federal funds sold........................... 10,721 455 5.66% 4,554 189 5.53% ________ ________ ________ ________ Total earning assets....................... $351,496 $21,380 8.11% $308,011 $18,898 8.18% Time and savings deposits: Interest-bearing transaction accounts...... $19,880 $321 2.15% $25,891 $428 2.20% Money market deposit accounts.............. 65,593 1,638 3.33% 47,405 1,108 3.12% Savings accounts........................... 26,241 538 2.73% 25,816 529 2.73% Certificates of deposit, $100,000 or more.. 25,441 1,081 5.67% 18,433 787 5.69% Other certificates of deposit.............. 119,847 4,982 5.54% 107,561 4,325 5.36% ________ ________ ________ ________ Total time and savings deposits.......... 257,002 8,560 4.44% 225,106 7,177 4.25% Federal funds purchased and securities sold under agreement to repurchase.............. 21,419 757 4.71% 17,631 621 4.70% Other short term borrowings.................. 1,799 74 5.48% 1,805 74 5.47% ________ ________ ________ ________ Total interest bearing liabilities......... $280,220 9,391 4.47% $244,542 7,872 4.29% Net interest income/yield.................... $11,989 4.55% $11,026 4.77% _________ ________ ________ ________ _________ ________ ________ ________ * 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 *** All investment securities are reported at amortized cost for this schedule. 9 </TABLE>
Provision/Allowance for Loan Losses The provision for loan losses was $500,000 for the first nine months of 1998, up $200,000 over the comparable period in 1997. Loans charged off (net of recoveries) were $425,215 in the first nine months of 1998, compared with $156,591 for the same period in 1997. The increase is attributable to second quarter deficiencies recorded on foreclosed real estate as well as a commercial loan relationship charged off due to bankruptcy. On an annualized basis net loan charge-offs were 0.25% of total loans for the first nine months of 1998 compared with .10% for the same period in 1997. On September 30, 1998 nonperforming assets totalled $838 thousand compared with $1.84 million on September 30, 1997. The September 1998 total consisted of $130 thousand in foreclosed real estate, $354 thousand in a former branch site now listed for sale, and $354 thousand in nonaccrual loans. The September 1997 total consisted of $420 thousand in foreclosed real estate, $354 thousand in a former branch site, and $1.063 million in nonaccrual loans. Loans still accruing interest but past due 90 days or more increased to $1.18 million as of September 30, 1998 compared with $769 million on September 30, 1997. The allowance for loan losses on September 30, 1998 was $2.75 million. It represented a multiple of 3.28 times nonperforming assets and 7.76 times nonperforming loans. The allowance for loan losses on September 30, 1998 was 1.19% of loans compared to 1.13% at September 30, 1997. Other Income Other income increased $116,446, or 11%, for the third quarter of 1998 over the same period in 1997. Income from service charges on deposit accounts increased 14% mainly due to an increase of $20.8 million in checking and savings deposits in 1998. For the nine months ended September 30, 1998 other income increased $319,892 or 10% from 1997. Contributing to the higher income in 1998 were increases in deposit service charges, debit card income and mortgage brokerage income. Other Expenses Other expenses increased $73,455, or 2%, in the third quarter of 1998 over 1997. Occupancy expenses were up 21% due to the opening of the new Oyster Point Office. Furniture and equipment expenses increased 4% due to higher depreciation on computer equipment and furniture for the new office building. For the nine months ended September 30, 1998 other expenses increased $93,911 or 1%, from 1997. As mentioned above the increase is primarily due occupancy and furniture & equipment expenses related to the opening of the new office and the refurbishing of existing offices. Financial Condition At September 30, 1998 total assets were $393.9 million, up 13% from $348.7 million at December 31, 1997. Total loans grew $8.8 million, or 4% and investment securities grew $37.5 million, or 39%, in 1998. Total deposits increased $39.7 million, or 14% in 1998 and demand note balances to the U. S. Treasury decreased $2.69 million to $1.34 from $4.03 million at year end 1997. 10
Capital Resources The Company's capital position remains strong as evidenced by the regulatory capital measurements. At September 30, 1998 the Tier I capital ratio was 14.95%, the total capital ratio was 16.02% and the leverage ratio was 9.81%. These ratios were all well above the regulatory minimum levels of 4.00%, 8.00%, and 3.00%, respectively. Liquidity and Interest Sensitivity Liquidity is the ability of the Company to meet present and future obligations to depositors and borrowers. As loan demand increases, liquidity will be provided by liquidation of short term investment securities as well as other means of financing such as purchase of federal funds and demand note to the U.S. Treasury. The Company was liability sensitive as of September 30, 1998. There were $122.345 million more in liabilities than assets subject to repricing within three months. 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 the savings deposits; 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. The table on page 12 reflects the earlier of the maturity or repricing data for various assets and liabilities as of September 30, 1998. Effects of Inflation Management believes that the key to achieving satisfactory performance in an inflationary environment 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 inflationary economy. General The Company opened a new facility which is now home to the Old Point Commercial Services as well as Trust and Financial Services. The Company has also acquired property in Norge, VA on which a full service branch office will be built. This office is scheduled to be open in the first quarter of 1999. Year 2000 The "Year 2000" problem relates to the fact that many computer programs use two digits to define a year and assume that the century is 1900. Therefore, these programs will not recognize the turn of the century. For example, the year 1998 is defined as "98" and the year 2003 is defined as "03". Because the assumed century is 1900 computers recognize the year 2003, defined as "03", as 1903. The Company is aware of the Year 2000 problem and is taking action to ensure that all of its computer hardware and software will be Year 2000 compliant. The Company has a five-step plan to identify, correct, upgrade and test all of its hardware and software. This plan conforms to the standard established by the Federal Financial Institutions Examination Council (FFIEC). A Year 2000 project team has been assembled which meets on a monthly basis to monitor progress and address any new issues that might arise. The Company has identified and 11
cataloged all of its hardware and software. Software and hardware that is not Year 2000 compliant has been identified and plans are being developed to upgrade and/or replace hardware and software that is not Year 2000 compliant. Additionally, the Company's vendors and major customers are being contacted to determine their Year 2000 efforts so that the Company can plan accordingly. The FFIEC standard requires banks to have a written contingency plan in the event a mission critical application fails. Old Point has developed this contingency plan to process the core applications using personal computers until the core application software can be repaired. The Company is on schedule to meet the regulatory deadlines established by the FFIEC. The Office of the Comptroller of the Currency (OCC) is responsible for examining the Bank for compliance to the regulatory standard. In addition, the internal audit department and the Company's external certified public accountants will independently verify and validate the processes the Company uses to test the applications. The Company is testing its core applications which process loans, deposits and the general ledger. Fiserv provides the software used to process these applications. Fiserv performed extensive testing of its software and has stated that it is Year 2000 compliant under their test conditions. In addition, other software that interfaces with the core application is also being tested. This testing is expected to be complete by the first quarter of 1999. The Company continues to upgrade other hardware and software as needed. Any hardware or software purchased subsequently will be tested for Year 2000 compliance. The Company is dependent on public utility companies to supply electricity, gas, water, sewage, and telecommunications. These utility companies have provided Old Point with some information regarding their status in becoming Year 2000 compliant. The Year 2000 project team continues to monitor their progress. The Company has installed a diesel generator at the Main Office location to provide electricity in the event of a power failure. Operating and capital budgets incorporate projected expenditures necessary to ensure that all systems are Year 2000 compliant. Through September 30, 1998 the Company has spent approximately $500,000 in capital expenditures to upgrade its computer hardware and software to be Year 2000 compliant. In addition, the Company has spent approximately $100,000 in operating expenses to test its software applications and hardware for year 2000 compliance. An additional $300,000 in capital expenditures is budgeted for the remainder of 1998 and 1999 for Year 2000 hardware and software upgrades as well as another $100,000 for operating expenses to complete the testing for Year 2000 compliance. At this time management does not believe that Year 2000 related expenditures will have an adverse material effect on the Company. 12
<TABLE> <CAPTION> _____________________________________________________________________________________ INTEREST SENSITIVITY ANALYSIS As of September 30, 1998 MATURITY (in thousands) Within 4-12 1-5 Over 5 3 Months Months Years Years Total ______________________________________________________________________________________ Uses of funds <S> <C> <C> <C> <C> <C> Federal funds sold.............. 6,898 -- -- -- 6,898 Taxable investments............. 7,448 7,608 53,659 23,978 92,693 Tax-exempt investments.......... 100 266 1,553 39,369 41,288 ________ ________ ________ ________ ________ Total investments............. 14,446 7,874 55,212 63,347 140,879 Loans: Commercial.................... 19,635 2,598 34,449 3,869 60,551 Tax-exempt.................... 1,468 73 144 0 1,685 Installment................... 3,780 2,680 52,295 2,469 61,224 Real estate................... 19,719 10,087 56,896 19,459 106,161 Other......................... 461 -- 458 0 919 ________ ________ ________ ________ ________ Total loans..................... 45,063 15,438 144,242 25,797 230,540 ________ ________ ________ ________ ________ Total earning assets............ 59,509 23,312 199,454 89,144 371,419 Sources of funds Interest checking deposits...... 20,912 -- -- -- 20,912 Money market deposit accounts... 68,308 -- -- -- 68,308 Regular savings accounts........ 25,771 -- -- -- 25,771 Certificates of deposit......... $100,000 or more.............. 6,604 10,220 10,185 -- 27,009 Other time deposits............. 34,509 48,203 43,939 -- 126,651 Federal funds purchased and securities sold under agreements to repurchase...... 24,414 -- -- -- 24,414 Other borrowed money............ 1,336 -- 18 -- 1,354 ________ ________ ________ ________ ________ Total interest bearing liabilities 181,854 58,423 54,142 0 294,419 Rate sensitivity GAP............ (122,345) (35,111) 145,312 89,144 77,000 Cumulative GAP.................. (122,345) (157,456) (12,144) 77,000 - 13 - </TABLE>
PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a)none (b)No reports on Form 8-K were filed during the third quarter of 1998. 14
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 November 13, 1998 By: /s/ Robert F Shuford President and Director Principal Executive Officer By: /s/ Louis G Morris Senior Vice President and Treasurer Principal Financial and Accounting Officer 15