UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-12896
OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1 West Mellen Street, Hampton, Virginia 23663
(Address of principal executive offices) (Zip Code)
(757) 722-7451
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
4,016,144 shares outstanding of Common Stock ($5.00 par value) at August 1, 2005
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements.
Consolidated Balance SheetsJune 30, 2005 and December 31, 2004
Consolidated Statements of IncomeThree months ended June 30, 2005 and 2004
Six months ended June 30, 2005 and 2004
Consolidated Statements of Changes in Stockholders’ EquitySix months ended June 30, 2005 and 2004
Consolidated Statements of Cash FlowsSix months ended June 30, 2005 and 2004
Notes to Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 4.Controls and Procedures.
Item 1.Legal Proceedings.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4.Submission of Matters to a Vote of Security Holders.
Item 5.Other Information.
Item 6.Exhibits.
(i)
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets
June 30,
2005
Assets
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity(fair value approximates $3,188,265 and $9,542,067)
Loans, net of allowance for loan losses of $4,178,630 and $4,302,756
Premises and equipment, net
Other assets
Liabilities & Stockholders’ Equity
Deposits:
Noninterest-bearing deposits
Savings deposits
Time deposits
Total deposits
Federal funds purchased, repurchase agreements and other borrowings
Federal Home Loan Bank advances
Accrued expenses and other liabilities
Total liabilities
Stockholders’ equity:
Common stock, $5 par value, 10,000,000 shares authorized; 4,016,144 and 4,013,644 shares issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Income
Three Months Ended
Six Months Ended
Interest and Dividend Income:
Interest and fees on loans
Interest on federal funds sold
Interest on securities:
Taxable
Tax-exempt
Dividends and interest on all other securities
Total interest and dividend income
Interest Expense:
Interest on savings deposits
Interest on time deposits
Interest on federal funds purchased, securities sold under agreement to repurchase and other borrowings
Interest on Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income, after provision for loan losses
Noninterest Income:
Income from fiduciary activities
Service charges on deposit accounts
Other service charges, commissions and fees
Income from bank owned life insurance
Gain on available-for-sale securities, net
Other operating income
Total noninterest income
Noninterest Expense:
Salaries and employee benefits
Occupancy and equipment
Supplies
Postage and courier
Service fees
Data processing
Marketing
Customer development
Employee professional development
Other
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Basic Earnings per Share:
Average shares outstanding
Net income per share of common stock
Diluted Earnings per Share:
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Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
Common
Stock
Shares
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Comprehensive
Income(Loss)
Total
Stockholders’
Equity
FOR SIX MONTHS ENDED JUNE 30, 2005
Balance at beginning of period
Comprehensive income:
Unrealized holding losses arising during the period (net of tax, $474,939)
Reclassification adjustment, (net of tax, $3,032)
Total comprehensive income (loss)
Sale of common stock
Nonqualified stock options
Cash dividends ($.32 per share)
Balance at end of period
FOR SIX MONTHS ENDED JUNE 30, 2004
Unrealized holding gains arising during the period (net of tax, $1,355,840)
Reclassification adjustment, (net of tax, $67,640)
Minimum pension liability adjustment
Total comprehensive income
Repurchase and retirement of common stock
Cash dividends ($.30 per share)
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Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Net gain on sale of available-for-sale securities
Amortization of securities, net
Loss on disposal of equipment
Increase in other real estate owned
Decrease in other assets
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities
Proceeds from maturities and calls of securities
Proceeds from sales of available-for-sale securities
Net increase in loans
Purchases of premises and equipment
Net cash provided by (used) in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits
Net increase (decrease) in savings deposits
Net increase in time deposits
Increase (decrease) in federal funds purchased and repurchase agreements
Increase in Federal Home Loan Bank advances
Increase (decrease) in interest bearing demand notes and other borrowed money
Proceeds from issuance of common stock
Effect of nonqualified stock options
Cash dividends paid on common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
Income taxes
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities
Reduction in minimum liability related to pension
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. General
The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (the Company) and its subsidiaries have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications consisting of a normal and recurring nature considered necessary to present fairly the financial positions at June 30, 2005 and December 31, 2004, the results of operations for the three months and six months ending June 30, 2005 and 2004, and statements of changes in stockholders’ equity and cash flows for the six months ended June 30, 2005 and 2004. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.
Note 2. Securities
Amortized costs and fair values of securities held-to-maturity at June 30, 2005 and December 31, 2004 are as follows:
June 30, 2005
Obligations of U. S. Government agencies
Obligations of state and political subdivisions
December 31, 2004
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Amortized costs and fair values of securities available-for-sale at June 30, 2005 and December 31, 2004 are as follows:
Fair
Value
United States Treasury securities
Money market investments
Federal Home Loan Bank stock - restricted
Federal Reserve Bank stock - restricted
Other marketable equity securities
Securities with loss are considered temporarily impaired.
Note 3. Loans
Loans at June 30, 2005 and December 31, 2004, are summarized as follows:
Commercial and other
Real estate - construction
Real estate - mortgage
Installment loans
Tax exempt loans
Total loans
Less: Allowance for loan losses
Net deferred loan costs
Loans, net
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Note 4. Allowance for Loan Losses
The following summarizes activity in the allowance for loan losses at June 30, 2005 and December 31, 2004:
Balance, beginning of year
Recoveries
Loans charged off
Balance, end of period
Note 5. Stock-Based Compensation
At June 30, 2005, the Company had two stock option plans. The Company has elected to continue to apply the provisions of APB No. 25 and related interpretations in accounting for stock options and to continue to provide the pro forma disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosure”, in the table below. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the amount the employee or director must pay to acquire the stock. Because the Company’s stock option plans provide for the issuance of stock options at a price of no less than the fair market value at the date of the grant, no compensation cost is required to be recognized for the Company’s stock option plans.
Had compensation costs for the stock option plans been determined based upon the fair value at the date of grant consistent with SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table.
Pro forma disclosure SFAS No. 123 as amended by SFAS No. 148
Net income:
As reported
Fair value-based expense, net of tax
Pro forma
Basic earnings per share:
Diluted earnings per share:
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Note 6. Pension Plan
The Company provides pension benefits for eligible employees through a defined benefit pension plan. Substantially all employees participate in the retirement plan on a non-contributing basis, and are fully vested after 25 years of service. The components of net periodic pension cost are as follows:
Quarter ended June 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
Six months ended June 30,
Amortization of net lost
The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $500 thousand to its pension plan in 2005. As of June 30, 2005, no contributions have been made. The Company continues to anticipate contributing $500 thousand in 2005.
Note 7. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock options.
Note 8. Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, (“SFAS No. 154”) “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary
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change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements.
On December 16, 2004, FASB issued Statement No. 123R (revised 2004), “Share-Based Payment,” (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Company’s results of operations at the present time.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff’s view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Company’s results of operations at the present time.
In November 2003, the Emerging Issues Task Force (“EITF”) published Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Task Force discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within U. S. Generally Accepted Accounting Principles (“GAAP”) when developing its views. The Task Force also requested that the scope of the impairment issue be expanded to include equity investments and investments subject to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and that the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force reached a consensus on one issue that certain quantitative and qualitative disclosures should be required for securities accounted for under Statement 115 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The Board ratified the consensus on that one issue. In November 2004, the Financial Accounting Standards Board (“FASB”) directed the FASB staff to issue two proposed FASB Staff Positions
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(“FSP”): Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. In June 2005, the FASB reached a decision whereby they declined to provide additional guidance on the meaning of other-than-temporary impairment. The Board directed the FASB staff to issue EITF 03-1a as final and to draft a new FSP that will replace EITF 03-01. The final FSP (retitled FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”) would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to assist readers in understanding and evaluating the financial condition, changes in financial condition and the results of operations of Old Point Financial Corporation (the Company). Old Point Financial Corporation consists of the parent company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus and Old Point Trust and Financial Services, N.A., collectively referred to as the Company. This discussion should be read in conjunction with the consolidated financial statements and other financial information contained elsewhere in this report.
Caution About Forward Looking Statements
In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.
Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency, U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are
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cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results.
General
Old Point Financial Corporation (the Company) is the parent company of The Old Point National Bank of Phoebus (the Bank), a locally owned and managed community bank serving Hampton Roads with a 17-branch network extending from Chesapeake through James City County, and Old Point Trust & Financial Services, N.A., a wealth management services provider. The results of operations for the six months ended June 30, 2005 may not be indicative of the results that may be expected for the full year.
Critical Accounting Policies and Estimates
As of June 30, 2005, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. That disclosure included a discussion of the accounting policy that requires management’s most difficult, subjective or complex judgments: the allowance for loan losses.
Earnings Summary
Net income for the second quarter of 2005 was $1.9 million as compared with $2.3 million earned in the comparable quarter in 2004. Basic earnings per share for the second quarter of 2005 were $0.46, or $0.45 on a fully diluted basis and $0.58, or $0.57 on a fully diluted basis for the second quarter of 2004.
For the six months ended June 30, 2005 net income decreased 11.09% to $3.9 million from $4.4 million in 2004. Basic earnings per share for the first six months of 2005 were $0.97, or $0.95 on a fully diluted basis and $1.10, or $1.08 on a fully diluted basis for the first six months of 2004.
Annualized return on average assets (ROA) for the second quarter of 2005 was 1.08% and 1.39% for the comparable period in 2004. Return on equity (ROE) was 10.53% for the second quarter of 2005 compared with 14.33% for the same period in 2004.
For the six months ended June 30, 2005 and 2004, ROA was 1.14% and 1.35%, respectively. ROE was 11.20% in 2005 and 13.56% in 2004.
The Company is in the midst of an expansion program. Expanding our franchise in Hampton Roads is expensive. In addition, compliance with Sarbanes-Oxley has been very costly.
Expansion began early in 2005 with the opening of the seventeenth Old Point National Bank branch office in the New Town section of Williamsburg. Renovation of the eighteenth office, an existing former bank branch on Independence Boulevard in the
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Town Center area of Virginia Beach, is almost complete. This office should open late in the third quarter of 2005. The nineteenth office, in the Eagle Harbor section of Isle of Wight County, should open in early 2006. Personnel to staff these offices have been added in anticipation of these new branches.
As a public company, the Company is subject to the requirements of the Sarbanes-Oxley Act, which requires companies to ensure compliance with stringent internal control procedures. The Company has committed significant resources to comply with Sarbanes-Oxley.
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. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The net interest yield is calculated by dividing tax equivalent net interest income by average earning assets. Net interest income, on a fully tax equivalent basis, was $6.2 million in the second quarter of 2005, an increase of $8 thousand, or 0.13%, from the second quarter of 2004. The net interest yield was 3.87% in the second quarter of 2005 as compared to 4.01% in 2004.
For the six months ended June 30, 2005 net interest income on a fully tax equivalent basis increased $41 thousand, or 0.33%, over the comparable period in 2004. Comparing the first six months of 2005 to 2004, average loans increased $24.3 million or 5.95% while investment securities increased $17.3 million or 9.29%. Average earning assets increased 5.71% and the net interest yield decreased from 4.09% in 2004 to 3.89% in 2005. The cost of interest-bearing liabilities has increased more than the increased yield on earning assets, thus creating a decrease in the net interest income for 2005 compared to 2004.
Tax equivalent interest income increased $513 thousand, or 6.06%, in the second quarter of 2005 compared to the second quarter of 2004. Average earning assets grew $23.2 million, or 3.74%. Total average loans increased $20.2 million, or 4.86%, while average investment securities increased $4.2 million, or 2.12%. The yield on earning assets increased for the second quarter of 2005 compared to the second quarter of 2004 by 12 basis points due to increasing yields in the loan portfolio.
Interest expense increased $505 thousand, or 22.31% in the second quarter of 2005 from the second quarter of 2004 while interest-bearing liabilities increased $33.8 million or 7.08% in the second quarter of 2005 over the same period in 2004. The cost of funding those liabilities increased 27 basis points from 2004. For the six months ended June 30, 2005 interest expense increased $937 thousand, or 20.80%, over the same period in 2004.
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The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields. Nonaccrual loans are included in loans outstanding.
AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*
Loans
Investment securities:
Total investment securities
Total earning assets
Reserve for loan losses
Other nonearning assets
Total assets
Time and savings deposits:
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Time deposits, $100,000 or more
Other time deposits
Total time and savings deposits
Total interest-bearing liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/yield
Federal funds sold.
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Provision 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 $450 thousand for the first six months of 2005, up from $350 thousand in the comparable period in 2004. Loans charged off (net of recoveries) in the first six months of 2005 were $574 thousand compared with loans charged off (net of recoveries) of $439 thousand in the first six months of 2004. On an annualized basis net loan charge-offs were 0.27% of total net loans for the first six months of 2005 compared with 0.21% for the same period in 2004.
On June 30, 2005 nonperforming assets totaled $585 thousand compared with $1.5 million on June 30, 2004. The June 2005 total consisted of $420 thousand in nonaccrual loans and $165 thousand in a former branch site listed for sale. The June 2004 total consisted of $47 thousand in foreclosed real estate, $165 thousand in a former branch site listed for sale, $326 thousand in nonaccrual loans and $941 thousand in restructured loans. Loans still accruing interest but past due 90 days or more increased to $871 thousand as of June 30, 2005 compared with $597 thousand as of June 30, 2004.
The allowance for loan losses on June 30, 2005 was $4.2 million compared with $4.7 million on June 30, 2004. It represented a multiple of 7.14 times nonperforming assets and 9.95 times nonperforming loans at June 30, 2005. Nonperforming loans includes nonaccrual and restructured loans. The allowance for loan losses was 0.96% and 1.12% of total loans on June 30, 2005 and 2004, respectively.
Noninterest Income
For the second quarter of 2005, noninterest income decreased $4 thousand, or 0.17%, over the same period in 2004. For the six months ended June 30, 2005, noninterest income increased $354 thousand or 7.52% over the same period in 2004. The growth in noninterest income for the six month period is attributed to service charges on deposit accounts and other service charges, commissions and fees. The increase in other service charges, commissions and fees is attributed to increased activity in retail investment sales and debit card income. Service charges on deposit accounts increased due to the fees associated with the Company’s service called Old Point Overdraft Privilege, which began in April 2004.
Noninterest Expenses
For the second quarter of 2005, noninterest expenses increased $535 thousand, or 10.19% over the second quarter of 2004. For the six months ended June 30, 2005 noninterest expenses increased $904 thousand or 8.72% over the same period in 2004. For the six months ended June 30, 2005 salaries and employee benefits increased $508 thousand, or 7.85% over the same period in 2004. The Company has increased staff by 30 full time equivalents since June 30, 2004.
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Occupancy expenses increased $36 thousand, or 2.43%. Other operating expenses increased $105 thousand, or 8.72% in the second quarter of 2005 over the second quarter of 2004. The Company anticipates a continuing trend of increases in other expense in future periods. Salaries and employee benefits, as well as occupancy expenses, will continue to increase as the Company expands its branch system in the remainder of 2005 and into 2006. The Company also expects increases to back office staffing expense and consulting and accounting fees related to the implementation of changes to meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Balance Sheet Review
At June 30, 2005, the Company had total assets of $700.3 million, up 2.04% from $686.3 million at December 31, 2004. Net loans as of June 30, 2005 were $432.9 million, up 0.93% from $429.0 million at December 31, 2004. The Company realized significant growth in the real estate category of loans. Note 3 of the consolidated financial statements details the loan volume by category as of June 30, 2005 and December 31, 2004.
Average assets as of June 30, 2005 were $688.5 million compared to $653.8 million as of June 30, 2004. The growth in assets in 2005 was due to the increase in average investments, which were up 9.29% and average loans, which were up 5.95% as compared to the same period in 2004.
Total investment securities at June 30, 2005 were $199.8 million, down 5.22% from $210.8 million on December 31, 2004 due to security maturities and calls. The goal of the Company is to provide maximum return on the investment portfolio within the framework of its asset/liability objectives. These objectives include managing interest sensitivity, liquidity and pledging requirements.
At June 30, 2005, total deposits decreased to $509.3 million, down 0.55% from $512.2 million on December 31, 2004. FHLB advances increased by $15.0 million, or 27.27% from December 31, 2004 in anticipation of future loan growth.
Capital Resources
Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses. The following is a summary of the Company’s capital ratios at June 30, 2005. As shown below, these ratios were all well above the regulatory minimum levels.
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Tier 1
Total Capital
Tier 1 Leverage
Quarter-end book value was $17.65 in 2005 and $15.98 in 2004. Cash dividends were $1.3 million, or $0.32 per share in the six months ended June 30, 2005, and $1.2 million, or $0.30 per share in the six months ended June 30, 2004. The common stock of the Company has not been extensively traded.
The Company purchased an existing building in June 2004 for an additional branch location in Virginia Beach. The branch is expected to open in the third quarter of 2005.
The Company purchased land in April of 2004 for an additional branch location in Isle of Wight. The branch is anticipated to open in early 2006.
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year.
In addition, secondary sources are available through the use of borrowed funds if the need should arise. The Company’s sources of funds include a large stable deposit base and secured advances from the Federal Home Loan Bank (FHLB). As of the end of the second quarter, the Company had $20 million in FHLB borrowing availability. The Company has available short-term unsecured borrowed funds in the form of federal funds with correspondent banks. As of the end of the second quarter 2005, the Company had $40 million available in federal funds to handle any short-term borrowing needs.
Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available for sale. The Company’s primary external source of liquidity is advances from the FHLB of Atlanta.
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As a result of the Company’s management of liquid assets, availability of borrowed funds and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs.
Contractual Obligations
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require cash outflows. As of June 30, 2005, there have been no material changes outside the ordinary course of business in the Company’s contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Off-Balance Sheet Arrangements
As of June 30, 2005, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap and liquidity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which are variable rate instruments, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact of rising or falling interest rates on net interest income.
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generating and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.
Based on scheduled maturities only, the Company was liability sensitive as of June 30, 2005. It should be noted, however, that non-maturing deposit liabilities totaling $190 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
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asset rates, thus mitigating the impact from the liability sensitivity position. The asset/liability model allows the Company to reflect the fact that non-maturing deposits are less rate sensitive than other deposits by using a decay rate. The decay rate is a type of artificial maturity that simulates maturities for non-maturing deposits over the number of months that more closely reflects historic data.
When the Company is asset sensitive, net interest income should improve if interest rates rise since assets will reprice faster than liabilities. Conversely, if interest rates fall, net interest income should decline. This is dependent on the optionality of both assets and liabilities.
The most likely scenario represents the rate environment as management forecasts it to occur. From this base, rate shocks in 100 basis point increments are applied to see the impact on the Company’s earnings. The rate shock model reveals that a 100 basis point drop in rates would cause approximately a 1.42% decrease in net income. The rate shock model reveals that a 100 basis point rise in rates would cause approximately a 1.11% decrease in net income and that a 200 basis point rise in rates would cause approximately a 2.73% decrease in net income at June 30, 2005.
Item 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. No changes in the Company’s internal control over financial reporting occurred during the fiscal quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Chief Executive Officer and Chief Financial
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Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending or threatened legal proceedings to which the Company, or any of it subsidiaries, is a party or to which the property of either the Company or its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities or share repurchases during the quarter ending June 30, 2005.
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Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on April 26, 2005. A quorum of shareholders was present, consisting of a total of 2,842,061.2304 shares, represented in person or by proxy. At the Annual Meeting, the shareholders elected the 13 directors listed below to serve as directors of the Company for one-year terms, having received the following votes:
James Read Chisman
Dr. Richard F. Clark
Russell S. Evans, Jr.
Dr. Arthur D. Greene
Gerald E. Hansen
Stephen D. Harris
John Cabot Ishon
Eugene M. Jordan
John B. Morgan, II
Louis G. Morris
Dr. H. Robert Schappert
Robert F. Shuford
Melvin R. Zimm
No other matters were voted on during the 2005 Annual Meeting.
Item 5. Other Information.
(b) The company has made no changes to the procedures by which security holders may recommend nominees to its board of directors.
Item 6. Exhibits.
Exhibits
Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Robert F. Shuford
/s/ Laurie D. Grabow
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