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| OPOF > SEC Filings for OPOF > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
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 the Company. The Company consists of the parent company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust), 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. Forward-looking statements can also be identified 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.
There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in interest rates, general economic and business conditions, the quality or composition of the loan or investment portfolios, the level of nonperforming assets and charge-offs, the local real estate market, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, Federal Deposit Insurance
Corporation (FDIC) premiums and/or assessments, demand for loan products, deposit flows, competition, and accounting principles, policies and guidelines. Monetary and fiscal policies of the U.S. Government could also adversely affect the Company; such policies include the impact of any regulations or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (EESA), the American Recovery and Reinvestment Act of 2009 (ARRA) and other policies of the Office of the Comptroller of the Currency, U.S. Treasury and the Federal Reserve Board.
The Company has experienced losses due to the current economic climate. A continuation of the recent turbulence in significant portions of the global financial markets, particularly if it worsens, could further impact the Company's performance, both directly by affecting revenues and the value of the Company's assets and liabilities, and indirectly by affecting the Company's counterparties and the economy generally. Dramatic declines in the housing market in the past year have resulted in significant write-downs of asset values by the Company as well as by other financial institutions in the U.S. Concerns about the stability of the U.S. financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility.
On May 22, 2009, the FDIC approved a final rule to impose a special assessment of 5 basis points on each bank's total assets minus Tier 1 capital in order to replenish the Deposit Insurance Fund. Additional special assessments are probable later in 2009. These special assessments plus higher quarterly assessments have impacted and will continue to impact the Company's performance by directly affecting expenses.
It is not clear at this time what other impacts the EESA, the ARRA or other liquidity and funding initiatives of the U.S. Treasury and other bank regulatory agencies that have been announced or any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to affect the U.S. banking industry and the broader U.S. and global economies, which would have an effect on all financial institutions, including the Company.
These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are 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 the Company undertakes 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
The Company is the parent company of the Bank and Trust. The Bank is a locally managed community bank serving the Hampton Roads localities of Hampton, Newport News, Norfolk, Virginia Beach, Chesapeake, Williamsburg/James City County, York County and Isle of Wight County. The Bank currently has 20 branch offices. Trust is a wealth management services provider.
Critical Accounting Policies and Estimates
As of June 30, 2009, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in the Company's 2008 annual report on Form 10-K. 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 loss for the second quarter of 2009 was $622 thousand as compared with net income of $1.94 million earned in the second quarter of 2008, a decrease of 132.06%. During the second quarter of 2009, the Company increased its loan loss provision by $2.70 million compared to the second quarter of 2008. In addition, the cost of FDIC insurance dramatically increased over the second quarter of 2008. The increase to the loan loss provision was made to ensure that the Company has adequately provided for loan losses caused by the downturn in the economy and a decline in real estate values. Basic and diluted losses per share for the second quarter of 2009 were $(0.13). Basic and diluted earnings per share for the second quarter of 2008 were $0.40 and $0.39, respectively. For the six months ended June 30, 2009, basic and diluted earnings per share were $0.03. For the six months ended June 30, 2008, basic and diluted earnings per share were $0.80 and $0.79, respectively.
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 margin is calculated by dividing tax equivalent net interest income by average earning assets. Net interest income, on a fully tax equivalent basis, was $6.79 million in the second quarter of 2009, a decrease of $163 thousand from the second quarter of 2008. The net interest margin was 3.37% in the second quarter of 2009 and 3.55% in the second quarter of 2008. The net interest margin was lower in the second quarter of 2009 as compared to the second quarter of 2008, because the yield on average earning assets decreased 82 basis points while the yield on average interest-bearing liabilities only decreased 76 basis points.
Tax equivalent interest income decreased $1.31 million, or 11.09%, in the second quarter of 2009 compared to the same period of 2008. Average earning assets grew $23.53 million, or 3.01%, compared to the second quarter of 2008. Interest expense decreased $1.15 million, or 23.63%, and average interest-bearing liabilities increased by $16.42 million, or 2.53% in the second quarter of 2009 compared to the same period of 2008. The cost of funding interest-bearing liabilities decreased 76 basis points in the second quarter of 2009 compared to the second quarter of 2008.
The average yield on earning assets and on interest-bearing liabilities both decreased because the Company lowered its rates on loans, interest-bearing deposits and repurchase agreements in response to the action of the Federal Open Market Committee (FOMC) lowering the Federal Funds Target Rate during 2008 from 4.25% to a range of 0.00% to 0.25%. As higher yielding earning assets and interest-bearing liabilities that were booked prior to 2008 mature, they are being replaced with lower yielding earning assets and interest-bearing liabilities.
Net interest income, on a fully tax equivalent basis, was $13.37 million for the six months ended June 30, 2009, a decrease of $233 thousand or 1.71% compared to the same period of 2008. When comparing the first six months of 2009 to the first six months of 2008, the decrease in net interest income is due to the Company's response to the actions of the FOMC, which resulted in the yield on average earning assets to decrease more than the yield on average interest-bearing liabilities.
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*
For the quarter ended June 30,
2009 2008
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate** Balance Expense Rate**
(in thousands)
(unaudited)
Loans $ 634,239 $ 9,417 5.94 % $ 614,471 $ 10,111 6.58 %
Investment securities:
Taxable 123,470 710 2.30 % 84,714 864 4.08 %
Tax-exempt 12,504 234 7.49 % 20,348 370 7.28 %
Total investment securities 135,974 944 2.78 % 105,062 1,234 4.70 %
Federal funds sold 16,404 9 0.22 % 22,209 113 2.04 %
Other investments 19,140 120 2.51 % 40,481 341 3.37 %
Total earning assets 805,757 $ 10,490 5.21 % 782,223 $ 11,799 6.03 %
Reserve for loan losses (6,984 ) (5,052 )
Other nonearning assets 66,752 62,841
Total assets $ 865,525 $ 840,012
Time and savings deposits:
Interest-bearing transaction accounts $ 9,836 $ 2 0.08 % $ 10,772 $ 3 0.11 %
Money market deposit accounts 135,820 79 0.23 % 139,974 235 0.67 %
Savings accounts 41,857 17 0.16 % 37,898 24 0.25 %
Time deposits, $100,000 or more 153,660 981 2.55 % 123,582 1,263 4.09 %
Other time deposits 184,274 1,626 3.53 % 204,987 2,086 4.07 %
Total time and savings deposits 525,447 2,705 2.06 % 517,213 3,611 2.79 %
Federal funds purchased, repurchase
agreements and other borrowings 73,425 144 0.78 % 51,349 214 1.67 %
Federal Home Loan Bank advances 66,111 854 5.17 % 80,000 1,024 5.12 %
Total interest-bearing liabilities 664,983 3,703 2.23 % 648,562 4,849 2.99 %
Demand deposits 114,575 106,464
Other liabilities 3,224 3,335
Stockholders' equity 82,743 81,651
Total liabilities and stockholders'
equity $ 865,525 $ 840,012
Net interest income/yield $ 6,787 3.37 % $ 6,950 3.55 %
For the six months ended June 30,
2009 2008
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate** Balance Expense Rate**
(in thousands)
(unaudited)
Loans* $ 634,537 $ 18,850 5.94 % $ 609,151 $ 20,382 6.69 %
Investment securities:
Taxable 107,516 1,370 2.55 % 95,763 1,857 3.88 %
Tax-exempt * 13,203 475 7.20 % 22,141 788 7.12 %
Total investment securities 120,719 1,845 3.06 % 117,904 2,645 4.49 %
Federal funds sold 19,637 22 0.22 % 24,841 330 2.66 %
Other investments 21,236 267 2.51 % 26,265 476 3.62 %
Total earning assets 796,129 $ 20,984 5.27 % 778,161 $ 23,833 6.13 %
Allowance for loan losses (6,721 ) (5,089 )
Other nonearning assets 65,653 58,454
Total assets $ 855,061 $ 831,526
Time and savings deposits:
Interest-bearing transaction accounts $ 9,572 $ 4 0.08 % $ 10,426 $ 8 0.15 %
Money market deposit accounts 133,471 158 0.24 % 140,264 607 0.87 %
Savings accounts 40,631 31 0.15 % 37,362 58 0.31 %
Time deposits, $100,000 or more 144,940 2,032 2.80 % 111,791 2,617 4.68 %
Other time deposits 194,076 3,403 3.51 % 213,657 4,345 4.07 %
Total time and savings deposits 522,690 5,628 2.15 % 513,500 7,635 2.97 %
Federal funds purchased, repurchase
agreements and other borrowings 64,008 241 0.75 % 52,977 550 2.08 %
Federal Home Loan Bank advances 68,056 1,749 5.14 % 80,000 2,049 5.12 %
Total interest-bearing liabilities 654,754 7,618 2.33 % 646,477 10,234 3.17 %
Demand deposits 114,152 100,637
Other liabilities 3,153 3,184
Stockholders' equity 83,002 81,228
Total liabilities and stockholders'
equity $ 855,061 $ 831,526
Net interest income/yield $ 13,366 3.36 % $ 13,599 3.50 %
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* Computed on a fully tax-equivalent basis using a 34% rate
** Annualized
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 $3.00 million in the second quarter of 2009, as compared to $300 thousand in the second quarter of 2008. Net loans charged off were $2.54 million higher in the second quarter of 2009 as compared to the same period in 2008. Net loans charged off in the second quarter of 2009 were impacted by a $1.40 million write-down of a real estate construction project in the second quarter.
The provision for loan losses was $4.00 million for the first six months of 2009, and $600 thousand in the comparable period in 2008. Net loans charged off in the first six months of 2009 were $3.13 million as compared to $617 thousand in the first six months of 2008. On an annualized basis, net loan charge-offs were 0.99% of total loans for the first six months of 2009 compared with 0.20% for the same period in 2008.
Management contributed $4.00 million to the loan loss provision or $870 thousand more than net charge-offs in the first six months of 2009. This additional expense was based on management's estimate of credit losses that may be sustained in the loan portfolio. Management's evaluation included credit quality trends, collateral values, the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions, were used in developing estimated loss factors for determining the loan loss provision.
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans, and other real estate owned. Restructured loans are loans with terms that were modified in a troubled debt restructuring for borrowers experiencing financial difficulties. As of June 30, 2009, all restructured loans were still accruing interest. Other real estate owned is real estate from foreclosures of collateral of loans. $1.22 million of the Company's nonperforming loans consist of loans 90 days past due but still accruing interest, with $1.20 million of such loans secured by real estate. The majority of the loans 90 days past due but still accruing interest are classified as substandard. As noted below, substandard loans are a component of the allowance for loan losses. When a loan changes from "90 days past due but still accruing interest" to "nonaccrual" status, the loan is reviewed for impairment. If the loan is considered impaired, then the difference between the value of the collateral and the principal amount outstanding on the loan is charged off. If the Company is waiting on an appraisal to determine the collateral's value, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time.
The following table presents information concerning nonperforming assets as of June 30, 2009 and December 31, 2008:
NONPERFORMING ASSETS
June 30, December 31,
2009 2008
(unaudited)
(in thousands)
Nonaccrual loans
Commercial $ 574 $ 219
Real estate-construction 119 370
Real estate-mortgage 5,152 337
Installment loans to individuals 80 119
Total nonaccrual loans $ 5,925 $ 1,045
Loans past due 90 days or more and accruing interest
Commercial $ 6 $ 66
Real estate-construction - 375
Real estate-mortgage 975 2,744
Installment loans to individuals 226 335
Other 10 9
Total loans past due 90 days or more and accruing interest $ 1,217 $ 3,529
Restructured loans (accrual)
Real estate-construction $ - $ 6,594
Real estate-mortgage 689 -
Total restructured loans (accrual) $ 689 $ 6,594
Other real estate owned
Real estate-construction $ 5,820 $ 1,795
Real estate-mortgage 2,212 1,956
Total other real estate owned $ 8,032 $ 3,751
Total nonperforming assets $ 15,863 $ 14,919
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Nonperforming assets as of June 30, 2009 were $944 thousand higher than at December 31, 2008. As shown in the table above, the nonaccrual loan category increased by $4.88 million and the other real estate owned category increased by $4.28 million. The increase in nonaccrual loans is due to the continuing general decline in the economy overall and the depressed real estate market. The majority of the increase in nonperforming loans was related to a few large credit relationships. Of the $5.93 million of nonaccrual loans at June 30, 2009, $5.36 million or 90.39% was comprised of five credit relationships of $4.52 million, $275 thousand, $199 thousand, $187 thousand and $177 thousand. The increase in other real estate owned was primarily due to one lending relationship of $6.59 million in the real estate-construction portfolio that was classified as restructured loans as of December 31, 2008. During the first quarter of 2009 this relationship was moved to nonaccrual status and in the second quarter of 2009, $1.40 million was charged off, and the remaining balance was moved to other real estate owned.
Management believes that the increase in nonperforming assets could continue to have a negative effect on the Company's condition if current economic conditions do not improve. As was seen in the quarter ended June 30, 2009, the effect would be lower earnings caused by larger contributions to the loan loss provision arising from a larger impairment in the loan portfolio and a higher level of loan charge-offs. Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. Management will work with customers that are having difficulties meeting their loan payments. The last resort is foreclosure.
As reflected in the $944 thousand increase in nonperforming assets during the first six months of 2009, the quality of the Company's loan portfolio declined. Due to this decline, management has increased the allowance for loan losses to $7.27 million as of June 30, 2009 as compared to a balance of $6.41 million as
of December 31, 2008. As of June 30, 2009, the allowance for loan losses was 45.86% of nonperforming assets and 92.90% of nonperforming loans. The definition of nonperforming loans is nonperforming assets less other real estate owned. The allowance for loan losses was 1.15% of total loans on June 30, 2009 and 1.00% of total loans on December 31, 2008.
Allowance for Loan Losses
The allowance for loan losses is based on several components. In evaluating the adequacy of the allowance, the loan portfolio is divided into several pools of loans:
1. Doubtful under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114)
2. Substandard under SFAS 114
3. Pool-substandard
4. Pool-other assets especially mentioned (rated just above substandard)
5. Pool-pass loans (all other rated loans)
Historical loss rates, adjusted for the current environment, are applied to the
above five pools of loans, except for doubtful and substandard loans under SFAS
114. Historical loss is one of the components of the allowance. The historical
loss is based on the past four years. The historical loss component of the
allowance amounted to $2.09 million as of June 30, 2009.
In addition, nonperforming loans are analyzed for impairment under SFAS 114 and are allocated based on this analysis. Increases in nonperforming loans affect this portion of the adequacy review. Also, management increases its additional qualitative factor component of the allowance for loan losses due to economic factors affecting the loan portfolio.
The Company's nonperforming loans fall in the doubtful pool under SFAS 114, the substandard pool under SFAS 114 or the pool-substandard pool of loans. Therefore, changes in nonperforming loans affect the dollar amount of the allowance. Unless the nonperforming loan is not impaired, increases in nonperforming loans are reflected as an increase in the allowance for loan losses as seen by the increase in the allowance during the first six months of 2009.
The majority of the Company's non performing loans are collateralized by real estate. When reviewing loans for impairment or when the Company takes loan collateral due to loan default, it obtains current appraisals. Any loan balance that is in excess of the appraisal is allocated in the allowance. In the current real estate market, appraisers are having difficulty finding comparable sales, which is causing some appraisals to be very low and in some cases the properties cannot be completed for the amount at which they are being appraised. As a result, the Company is being conservative in its valuation of collateral which results in higher than normal charged off loans and higher than normal increases to the Company's allowance for loan losses. As of June 30, 2009, the impaired loan component of the allowance amounted to $1.33 million and is reflected as a valuation allowance related to impaired loans in Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-Q.
The final component of the allowance consists of qualitative factors and includes items such as the economy, growth trends, concentrations, and legal and regulatory changes. Due to the decline in the overall economy in 2008 and 2009, . . .
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