Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
OPOF > SEC Filings for OPOF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for OLD POINT FINANCIAL CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OLD POINT FINANCIAL CORP


14-Nov-2012

Quarterly Report


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 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 a forward-looking statement. These forward-looking statements may include, but are not limited to, statements regarding expected trends in rates paid on interest-bearing liabilities and on earning assets, profitability, liquidity, the loan portfolio, the allowance for loan losses, the securities portfolio, interest-rate sensitivity, asset quality, levels of net loan charge-offs and nonperforming assets, noninterest expense (and components of noninterest expense), noninterest income (and components of noninterest income), income taxes, expected impact of efforts to restructure the balance sheet, market risk, growth strategy, investment strategy, credit quality review processes, product and service offerings 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, including the effects of the Company's efforts to restructure the investment portfolio, the success of the Company's expanded product and service offerings, the size of the provision for loan losses, the adequacy of the allowance for loan losses, the level of nonperforming assets, impaired loans and charge-offs, the local real estate market, results of internal assessments and external bank regulatory examinations, the value of collateral securing loans, the value of and the Company's ability to sell foreclosed assets, the cost to expand a current branch office and to combine two other branch offices, the adequacy of the Company's credit quality review processes, 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 and other products, deposit flows, competition, and accounting principles, policies and guidelines. The Company could also be adversely affected by monetary and fiscal policies of the U.S. Government, as well as any regulations or programs implemented pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) or other legislation or policies of the Office of the Comptroller of the Currency (OCC), U.S. Treasury and the Federal Reserve Board.

The Company has experienced reduced earnings compared to pre-recession levels due to changes in the current economic climate. Dramatic declines in the residential and commercial real estate markets in the past few years 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 future economic conditions and financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit and reduction of business activity.

In July 2010, the President signed into law the Dodd-Frank Act, which implements far-reaching changes across the financial regulatory landscape. It is not clear what other impacts the Dodd-Frank Act, regulations promulgated thereunder and other regulatory initiatives of the U.S. Treasury and other bank regulatory agencies will have on the financial markets and the financial services industry.

These risks and uncertainties, in addition to the risks and uncertainties identified in the Company's annual report on Form 10-K for the year ended December 31, 2011, 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.

- 29 -

Index

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 21 branch offices, but is in the process of combining two of its branches located in Williamsburg, which is expected to be completed in the first quarter of 2013. Trust is a wealth management services provider.

Critical Accounting Policies and Estimates As of September 30, 2012, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in the Company's 2011 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. For a discussion of the Company's policies for calculating the allowance for loan losses, see Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q.

Earnings Summary
In the third quarter of 2012, net income increased slightly to $1.1 million or $0.22 per diluted share as compared to net income of $1.0 million, or $0.21 per diluted share for the third quarter of 2011. Although net income between the two quarters was very similar, the composition of income and expenses shifted considerably in certain areas. Net interest income after the provision for loan losses was down $979 thousand between the two quarters, mainly due to lower interest income on loans in 2012. In contrast, noninterest income was up $905 thousand as a result of higher net gains on sales of available-for-sale securities and higher income from bank-owned life insurance policies in 2012.

Net income for the nine months ended September 30, 2012 was $2.8 million, or $0.56 per diluted share, an increase of $367 thousand over the same period in 2011. The increase in net income was primarily due to an increase in net gains on sales of available-for-sale securities, from $437 thousand in the nine months ended September 30, 2011 to $1.7 million in the same period in 2012. A reduction in the provision for loan losses, from $2.9 million to $2.0 million when comparing the first nine months of 2011 and 2012, also contributed significantly to the increase in net income between the two periods. Decreases in loans and net charge-offs between the two periods allowed management to reduce the provision.

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. Although both total interest and dividend income and total interest expense decreased during the three and nine months ended September 30, 2012, as compared to the same periods in 2011, total interest and dividend income decreased more than total interest expense, causing net interest income to decrease for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011.

Net interest income, on a fully tax-equivalent basis, was $6.7 million in the third quarter of 2012, a decrease of $745 thousand from the third quarter of 2011. Net interest income, on a fully tax-equivalent basis, was $20.5 million for the first nine months of 2012, a decrease of $1.9 million from the same period in 2011.

The net interest margin for the third quarter of 2012 was 3.33%, down 54 basis points from the third quarter of 2011. The year-to-date net interest margin for 2012 was 3.47%, down 36 basis points from 3.83% for the first nine months of 2011. Until recently, the Company's net interest margin had improved as higher-cost time deposits repriced to the current, lower market rates. While the average rate on liabilities continued to decrease, the rate of change slowed over the last year as most longer-term deposits had already repriced. In addition, the average yield on loans decreased from 5.95% for the third quarter of 2011 to 5.54% for the third quarter of 2012, as higher-yielding loans paid off or were renewed at current, lower rates. More significantly, the composition of earning assets has shifted: as average total loans have decreased from a lack of quality loan demand, a larger percent of earning assets have been invested in lower-yielding investment securities. Because investment securities typically yield less than loans, this shift to lower-yielding investment securities has negatively impacted the Company's net interest margin in 2012.

- 30 -

Index

Tax-equivalent interest income decreased by $950 thousand in the third quarter of 2012 and $2.6 million in the first nine months of 2012, compared to the same periods of 2011. Average earning assets for the third quarter of 2012 increased $34.3 million and increased $8.8 million for the first nine months of 2012 compared to the same periods in 2011. Interest expense decreased for the third quarter and first nine months of 2012 as compared to those periods in 2011. The decrease in interest expense is primarily a result of the 15 basis-point and the 14 basis-point decreases in the average rate on interest-bearing liabilities in the third quarter and first nine months of 2012, respectively, compared to the same periods in 2011.

The yield on average earning assets and cost of average interest-bearing liabilities both decreased due to 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%. The FOMC has kept the Federal Funds Target Rate unchanged through September 30, 2012. As higher-yielding earning assets and higher-cost interest-bearing liabilities that were opened prior to 2008 mature, they are being replaced with lower-yielding earning assets and lower-cost interest-bearing liabilities. Assuming that the FOMC keeps interest rates at current levels, management believes that the decrease of the average rate on interest-bearing liabilities will continue to slow as a high percentage of the Company's interest-bearing liabilities have already repriced. Management also believes that the average rate on loans will continue to decline due to increased competition for loans in the Company's markets, and as loans are renewed or refinanced at lower current market rates.

- 31 -

Index

The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.

                           AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*
                                  For the quarter ended September 30,
                                          2012                                         2011
                                         Interest                                    Interest
                          Average        Income/         Yield/        Average       Income/         Yield/
                          Balance        Expense         Rate**        Balance       Expense         Rate**
                                                     (in thousands)
ASSETS
Loans*                  $   469,487     $    6,508           5.54 %   $ 533,960     $    7,940           5.95 %
Investment
securities:
Taxable                     263,325          1,229           1.87 %     201,208          1,010           2.01 %
Tax-exempt*                  29,382            306           4.17 %       2,684             49           7.30 %
Total investment
securities                  292,707          1,535           2.10 %     203,892          1,059           2.08 %
Interest-bearing due
from banks                   32,203             17           0.21 %       4,243              3           0.28 %
Federal funds sold            1,581              0           0.00 %      18,863              7           0.15 %
Other investments             3,757             16           1.70 %       4,472             17           1.52 %
Total earning assets        799,735     $    8,076           4.04 %     765,430     $    9,026           4.72 %
Allowance for loan
losses                       (7,378 )                                   (10,163 )
Other nonearning
assets                       79,293                                      85,484
Total assets            $   871,650                                   $ 840,751

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings
deposits:
Interest-bearing
transaction accounts    $    11,852     $        1           0.03 %   $  10,941     $        1           0.04 %
Money market deposit
accounts                    181,677             80           0.18 %     169,873             88           0.21 %
Savings accounts             53,398             14           0.10 %      48,473             12           0.10 %
Time deposits,
$100,000 or more            134,959            441           1.31 %     126,433            437           1.38 %
Other time deposits         174,072            534           1.23 %     175,187            634           1.45 %
Total time and
savings deposits            555,958          1,070           0.77 %     530,907          1,172           0.88 %
Federal funds
purchased, repurchase
agreements and other
borrowings                   25,269              6           0.09 %      33,925             17           0.20 %
Federal Home Loan
Bank advances                27,391            338           4.94 %      35,000            430           4.91 %
Total
interest-bearing
liabilities                 608,618          1,414           0.93 %     599,832          1,619           1.08 %
Demand deposits             172,308                                     154,338
Noninterest-bearing
repurchase agreements             0                                           0
Other liabilities             2,346                                       1,934
Stockholders' equity         88,378                                      84,647
Total liabilities and
stockholders' equity    $   871,650                                   $ 840,751
Net interest
income/yield                            $    6,662           3.33 %                 $    7,407           3.87 %

- 32 -

Index

                                              For the nine months ended September 30,
                                         2012                                        2011
                                       Interest                                    Interest
                         Average       Income/         Yield/        Average       Income/         Yield/
                         Balance       Expense         Rate**        Balance       Expense         Rate**
                                                 (dollars in thousands)
ASSETS
Loans*                  $ 482,014     $   20,363           5.63 %   $ 552,864     $   24,566           5.92 %
Investment
securities:
Taxable                   251,878          3,830           2.03 %     201,845          2,809           1.86 %
Tax-exempt*                21,771            673           4.12 %       3,031            166           7.30 %
Total investment
securities                273,649          4,503           2.19 %     204,876          2,975           1.94 %
Interest-bearing due
from banks                 29,001             43           0.20 %       2,153              4           0.25 %
Federal funds sold          1,755              1           0.08 %      17,171             21           0.16 %
Other investments           4,100             61           1.98 %       4,637             49           1.41 %
Total earning assets      790,519     $   24,971           4.21 %     781,701     $   27,615           4.71 %
Allowance for loan
losses                     (7,897 )                                   (10,828 )
Other nonearning
assets                     79,620                                      85,098
Total assets            $ 862,242                                   $ 855,971

LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings
deposits:
Interest-bearing
transaction accounts    $  11,617     $        5           0.06 %   $  11,541     $        5           0.06 %
Money market deposit
accounts                  176,865            238           0.18 %     169,650            268           0.21 %
Savings accounts           52,476             40           0.10 %      47,753             36           0.10 %
Time deposits,
$100,000 or more          129,353          1,271           1.31 %     130,749          1,440           1.47 %
Other time deposits       172,853          1,644           1.27 %     179,489          2,041           1.52 %
Total time and
savings deposits          543,164          3,198           0.79 %     539,182          3,790           0.94 %

Federal funds
purchased, repurchase
agreements and other
borrowings                 29,442             37           0.17 %      42,927             88           0.27 %
Federal Home Loan
Bank advances              32,445          1,188           4.88 %      35,000          1,275           4.86 %
Total
interest-bearing
liabilities               605,051          4,423           0.97 %     617,109          5,153           1.11 %
Demand deposits           167,701                                     142,208
Noninterest-bearing
repurchase agreements           0                                      12,265
Other liabilities           2,133                                       1,703
Stockholders' equity       87,357                                      82,686
Total liabilities and
stockholders' equity    $ 862,242                                   $ 855,971
Net interest
income/yield                          $   20,548           3.47 %                 $   22,462           3.83 %

*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. This expense is 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.

The provision for loan losses was $750 thousand in the third quarter of 2012, as compared to $600 thousand in the third quarter of 2011 and was $2.0 million for the first nine months of 2012, as compared to $2.9 million in the first nine months of 2011. Management concluded that the provision was appropriate based on its analysis of the adequacy of the allowance for loan losses. The higher provision in the third quarter of 2012 as compared to the third quarter of 2011 was due to increased net charge-offs. The lower provision for the first nine months of 2012, as compared to the provision for the first nine months of 2011, was due to a reduction in total loans from $527.0 million at September 30, 2011 to $463.5 million at September 30, 2012 and a reduction in year-to-date net charge-offs.

Net loans charged off were $1.1 million for the third quarter of 2012 as compared to $822 thousand for the third quarter of 2011. For the first nine months of 2012, net loans charged off were $3.1 million, or $3.2 million less than net loans charged off in the first nine months of 2011. On an annualized basis, net loan charge-offs were 0.91% of total loans for the first nine months of 2012 compared with 1.61% for the same period in 2011. Net loans charged off for the first nine months of 2012 were relatively low as compared to net charge-offs of the past few years. Management anticipates that net charge-offs for the fourth quarter of 2012 will be below the elevated level of net charge-offs that occurred in 2010 and 2011 due to stabilization of the economy and housing prices.

- 33 -

Index

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and foreclosed assets. See Note 3 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for an explanation of these categories. Foreclosed assets consist of real estate from foreclosures on loan collateral. The majority of the loans 90 days or more past due but still accruing interest are classified as substandard. Substandard loans are a component of the allowance for loan losses. When a loan changes from "past due 90 days or more and accruing interest" status to "nonaccrual" status, the loan is reviewed for impairment. In most cases, 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 or is in negotiations with the borrower or other parties that may affect the value of the collateral, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at that time. In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower's ability to repay the modified loan.

- 34 -

The following table presents information on nonperforming assets, as of the dates indicated:

                              NONPERFORMING ASSETS
                                                      September 30,       December 31,        Increase
                                                          2012                2011           (Decrease)
                                                               (in thousands)
Nonaccrual loans
Commercial                                           $           100     $          129     $        (29 )
Real estate-construction                                       3,116                  0            3,116
Real estate-mortgage (1)                                       7,680              8,334             (654 )
Consumer loans                                                     5                 12               (7 )
Total nonaccrual loans                               $        10,901     $        8,475     $      2,426
Loans past due 90 days or more and accruing
interest
Real estate-mortgage (1)                             $           239     $          510             (271 )
Consumer loans                                                    15                  2               13
Other                                                              3                  5               (2 )
Total loans past due 90 days or more and accruing
interest                                             $           257     $          517     $       (260 )
Restructured loans
Real estate-mortgage (1)                             $         6,905     $        4,326     $      2,579
Consumer loans                                                    17                 18               (1 )
Total restructured loans                             $         6,922     $        4,344     $      2,578
Less nonaccrual restructured loans (included
above)                                                         1,118              2,756           (1,638 )
Less restructured loans currently in compliance
(2)                                                            5,551              1,588            3,963
Net nonperforming, accruing restructured loans       $           253     $            0     $        253

Foreclosed assets                                    $         6,842     $        9,390     $     (2,548 )

Total nonperforming assets                           $        18,253     $       18,382     $       (129 )

(1) The real estate-mortgage segment includes residential 1 - 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) As of December 31, 2011, all of the Company's restructured accruing loans were performing in compliance with their modified terms.

Nonperforming assets as of September 30, 2012 were $18.3 million, $129 thousand lower than nonperforming assets as of December 31, 2011. The nonperforming assets category of nonaccrual loans increased $2.4 million while foreclosed assets decreased by $2.5 million, when comparing the balances as of September 30, 2012 to December 31, 2011.

The majority of the balance of nonaccrual loans at September 30, 2012 was related to a few large credit relationships. Of the $10.9 million of nonaccrual loans at September 30, 2012, $8.8 million or approximately 80.73% was comprised of four credit relationships: $2.9 million, $2.9 million, $1.9 million, and $1.1 million. One of the credit relationships of $2.9 million was the majority of the increase in real estate construction loans in nonaccrual between December 31, 2011 and September 30, 2012. The loans that make up the nonaccrual balance have been written down to their net realizable value, or the Company is in the process of obtaining new appraisals to determine if any charge-offs need to be recorded during the fourth quarter of 2012 for such loans. As shown in the table above, the majority of the nonaccrual loans were collateralized by real estate . . .

  Add OPOF to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for OPOF - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.