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 9-Aug-2013All 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


9-Aug-2013

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 deemed to be a forward-looking statement. These forward-looking statements may include, but are not limited to, statements regarding profitability including the focus on reducing time deposits, the net interest margin, strategies for managing the net interest margin and the expected impact of such efforts, liquidity, the loan portfolio and expected trends in the quality of the loan portfolio, the allowance and provision 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), the cost of expanding a current office building, noninterest income (and components of noninterest income), income taxes, expected impact of efforts to restructure the balance sheet, expected yields on the loan and securities portfolios, expected rates on interest-bearing liabilities, market risk, expected effects of the federal government's automatic spending cuts (commonly known as sequestration), business and growth strategies, investment 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. These 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 conditions, the effects of the sequestration on the Company's service area and the allowance for loan losses, the quality or composition of the loan or investment portfolios, the effects of management's investment strategy and strategy to manage the net interest margin, the adequacy of the Company's credit quality review processes, 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, FDIC premiums and/or assessments, demand for loan and other banking products, levels of noninterest income and expense, deposit flows, competition, adequacy of the allowance for loan losses and changes in 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 and policies of the Office of the Comptroller of the Currency, U.S. Treasury and the Federal Reserve Board.

The Company experienced reduced earnings during and following the recent recession. Earnings and the size of the loan portfolio are generally down compared to pre-recession levels. However, net income in the second quarter and the six months ended June 30, 2013 has improved compared to the same periods in 2012, and in the second quarter of 2013, the loan portfolio increased compared to the March 31, 2013 level. Management believes that, if the economy continues to improve, both earnings and the size of the loan portfolio will generally continue to improve, although improvements may be gradual and may not follow a consistent pattern.

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 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 2012 annual report on Form 10-K, 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.

- 30 -

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 20 branch offices. In the first quarter of 2013 the Bank completed its combination of two of its branches located in Williamsburg. Trust is a wealth management services provider.

Critical Accounting Policies and Estimates As of June 30, 2013, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in the Company's 2012 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
Net income for the second quarter of 2013 was $1.0 million or $0.21 per diluted share as compared to net income of $638 thousand or $0.13 per diluted share for the second quarter of 2012. Lower provision for loan losses and lower noninterest expense contributed to the improved profitability.

For the six months ended June 30, 2013, net income was $1.9 million, 11.63% higher than net income for the first six months of 2012. When comparing the first six months of 2013 to the same period in 2012, the reduction in interest and fees on loans and the loss on sale of available-for sale securities were more than offset by higher income from fiduciary activities, lower interest expense, lower provision for loan losses and lower noninterest expense.

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. Although both total interest and dividend income and total interest expense decreased during the three and six months ended June 30, 2013, as compared to the same periods in 2012, total interest and dividend income decreased more than total interest expense, causing net interest income to decrease for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012.

Net interest income, on a fully tax-equivalent basis, was $6.5 million in the second quarter of 2013, a decrease of $449 thousand from the second quarter of 2012. Net interest income, on a fully tax-equivalent basis, was $13.0 million for the first six months of 2013, a decrease of $911 thousand from the same period in 2012.

The net interest margin was 3.20% in the second quarter of 2013, 28 basis points lower than the 3.48% net interest margin in the equivalent period in 2012. The year-to-date interest margin for 2013 was 3.19%, down 34 basis points from 3.53% for the first half of 2012. While the average rate on liabilities continues to decrease, the rate of change continues to slow as most longer-term deposits have already re-priced. During 2013, management has focused on increasing lower-cost deposits and has allowed the higher-cost time deposits to decrease. During 2013, management has focused on increasing lower-cost deposits primarily through sales efforts by employees and has allowed higher-cost time deposits to decrease through attrition. This focus can be seen by the fact that average money market and savings deposits increased by $27.2 million and average time deposits decreased by $12.4 million when comparing the second quarter 2013 to the second quarter 2012. The focus on lower-cost deposits has contributed to the continued reduction in the average rate on liabilities. Management expects to continue the strategy to manage the net interest margin through the reduction in higher-cost time deposits until loan demand recovers significantly.

In addition, the average yield on loans decreased from 5.62% for the second quarter of 2012 to 5.10% for the second quarter of 2013, and from 5.67% for the first six months of 2012 to 5.15% for the same period in 2013, 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, 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 continues to negatively impact the Company's net interest margin in 2013. Due to the growth in loans between March 31, 2013 and June 30, 2013, management expects the decrease in average loans to level off and begin increasing in the near future.

- 31 -

Index
Tax-equivalent interest income decreased by $770 thousand in the second quarter of 2013 and by $1.5 million for the first six months of 2013 compared to the same periods of 2012. Average earning assets increased $13.5 million for the second quarter of 2013 and increased $26.8 million for the first six months of 2013 compared to the same periods in 2012. Interest expense decreased $321 thousand for the second quarter of 2013 and decreased $577 thousand for the first six months of 2013 as compared to the second quarter and first six months of 2012. The decrease in interest expense is primarily a result of the 21 basis-point decrease in the average rate on interest-bearing liabilities for the first six months of 2013 compared to the same period in 2012.

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 June 30, 2013. 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 re-priced. Management also believes that the average yield 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.

- 32 -

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 June 30,
                                         2013                                        2012
                                       Interest                                    Interest
                         Average       Income/         Yield/        Average       Income/         Yield/
                         Balance       Expense         Rate**        Balance       Expense         Rate**
                                                      (dollars in thousands)
ASSETS
Loans*                  $ 462,256     $    5,899           5.10 %   $ 481,072     $    6,765           5.62 %
Investment
securities:
Taxable                   265,181          1,253           1.89 %     261,492          1,380           2.11 %
Tax-exempt*                45,720            435           3.81 %      21,918            224           4.09 %
Total investment          310,901          1,688           2.17 %     283,410          1,604           2.26 %
securities
Interest-bearing due       28,995             19           0.26 %      23,474              9           0.15 %
from banks
Federal funds sold          1,784              1           0.22 %       1,732              1           0.23 %
Other investments           3,411             26           3.05 %       4,174             24           2.30 %
Total earning assets      807,347     $    7,633           3.78 %     793,862     $    8,403           4.23 %
Allowance for loan         (7,417 )                                    (7,723 )
losses
Other nonearning           85,479                                      78,764
assets
Total assets            $ 885,409                                   $ 864,903

LIABILITIES AND
STOCKHOLDERS' EQUITY
Time and savings
deposits:
Interest-bearing        $  11,700     $        1           0.03 %   $  11,834     $        2           0.07 %
transaction accounts
Money market deposit      194,811             53           0.11 %     176,465             79           0.18 %
accounts
Savings accounts           61,731             15           0.10 %      52,924             13           0.10 %
Time deposits,            128,465            369           1.15 %     127,708            415           1.30 %
$100,000 or more
Other time deposits       160,595            427           1.06 %     173,708            548           1.26 %
Total time and            557,302            865           0.62 %     542,639          1,057           0.78 %
savings deposits
Federal funds              30,860              7           0.09 %      30,339             16           0.21 %
purchased, repurchase
agreements and other
borrowings
Federal Home Loan          25,000            305           4.88 %      35,000            425           4.86 %
Bank advances
Total                     613,162          1,177           0.77 %     607,978          1,498           0.99 %
interest-bearing
liabilities
Demand deposits           180,838                                     167,452
Other liabilities           3,095                                       2,149
Stockholders' equity       88,314                                      87,324
Total liabilities and   $ 885,409                                   $ 864,903
stockholders' equity
Net interest margin                   $    6,456           3.20 %                 $    6,905           3.48 %

* Computed on a fully tax-equivalent basis using a 34% rate

** Annualized


                                     - 33 -
--------------------------------------------------------------------------------
  Index
                                                 For the six months ended June 30,
                                         2013                                        2012
                                       Interest                                    Interest
                         Average       Income/         Yield/        Average       Income/         Yield/
                         Balance       Expense         Rate**        Balance       Expense         Rate**
                                                      (dollars in thousands)
ASSETS
Loans*                  $ 462,759     $   11,916           5.15 %   $ 488,346     $   13,855           5.67 %
Investment
securities:
Taxable                   275,152          2,577           1.87 %     246,091          2,601           2.11 %
Tax-exempt*                42,919            836           3.90 %      17,923            367           4.10 %
Total investment          318,071          3,413           2.15 %     264,014          2,968           2.25 %
securities
Interest-bearing due       26,467             33           0.25 %      27,382             26           0.19 %
from banks
Federal funds sold          1,857              1           0.11 %       1,843              1           0.11 %
Other investments           3,492             44           2.52 %       4,273             45           2.11 %
Total earning assets      812,646     $   15,407           3.79 %     785,858     $   16,895           4.30 %
Allowance for loan         (7,414 )                                    (8,159 )
losses
Other nonearning           84,136                                      79,787
assets
Total assets            $ 889,368                                   $ 857,486

LIABILITIES AND
STOCKHOLDERS' EQUITY
Time and savings
deposits:
Interest-bearing        $  11,370     $        3           0.05 %   $  11,498     $        4           0.07 %
transaction accounts
Money market deposit      194,956            124           0.13 %     174,434            158           0.18 %
accounts
Savings accounts           59,885             29           0.10 %      52,010             26           0.10 %
Time deposits,            131,712            765           1.16 %     126,551            830           1.31 %
$100,000 or more
Other time deposits       164,847            885           1.07 %     172,205          1,109           1.29 %
Total time and            562,770          1,806           0.64 %     536,698          2,127           0.79 %
savings deposits
Federal funds              31,628             19           0.12 %      31,551             32           0.20 %
purchased, repurchase
agreements and other
borrowings
Federal Home Loan          25,000            607           4.86 %      35,000            850           4.86 %
Bank advances
Total                     619,398          2,432           0.79 %     603,249          3,009           1.00 %
interest-bearing
liabilities
Demand deposits           178,556                                     165,373
Other liabilities           2,993                                       2,023
Stockholders' equity       88,421                                      86,841
Total liabilities and   $ 889,368                                   $ 857,486
stockholders' equity
Net interest margin                   $   12,975           3.19 %                 $   13,886           3.53 %

* 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 $300 thousand in the second quarter of 2013, as compared to $1.0 million in the second quarter of 2012 and was $500 thousand for the first half of 2013, as compared to $1.2 million in the first half of 2012. Management concluded that the provision was appropriate based on its analysis of the adequacy of the allowance for loan losses. The lower provision in the second quarter of 2013, as compared to the provision for the second quarter of 2012, was due to lower charge-offs and a reduction in total loans from $476.5 million at June 30, 2012 to $469.5 million at June 30, 2013. While the provision for loan losses was lower in the second quarter of 2013 than in the second quarter of 2012, it was $100,000 higher in the second quarter of 2013 compared to the first quarter of 2013, due primarily to management's concerns regarding the possible negative consequences of sequestration.

- 34 -

Index
Net loans charged off were $528 thousand for the first six months of 2013 as compared to $2.0 million for the first six months of 2012. On an annualized basis, net loan charge-offs were 0.22% of total loans for the first six months of 2013 compared with 0.85% for the same period in 2012. Net loans charged off for the first six months of 2013 were relatively low as compared to net charge-offs of the past few years. Management anticipates that net charge-offs for the third quarter of 2013 will be below the elevated level of net charge-offs that occurred in 2010, 2011, and 2012 due to stabilization of the economy and housing prices. If, however, sequestration has negative consequences that are more severe than those currently expected by management, borrowers may be less likely to repay loans, net charge-offs may increase, and higher contributions to the allowance for loan losses in the form of increased provisions may be necessary.

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.

- 35 -

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

                                    NONPERFORMING ASSETS
                                               June 30,       December 31,        Increase
                                                 2013             2012           (Decrease)
                                                     (in thousands)
Nonaccrual loans
Commercial                                    $        0     $           97     $        (97 )
Real estate-construction                           2,880              3,065             (185 )
Real estate-mortgage (1)                           6,363              7,470           (1,107 )
Total nonaccrual loans                        $    9,243     $       10,632     $     (1,389 )
Loans past due 90 days or more and accruing interest
Commercial                                    $        0     $           25     $        (25 )
Real estate-mortgage (1)                             278                408             (130 )
Consumer loans                                        13                 11                2
Other                                                  5                  3                2
Total loans past due 90 days or more and      $      296     $          447     $       (151 )
accruing interest
Restructured loans
Real estate-mortgage (1)                      $    9,577     $        8,810     $        767
Consumer loans                                        16                 16                0
Total restructured loans                      $    9,593     $        8,826     $        767
Less nonaccrual restructured loans                 1,843              1,908              (65 )
(included above)
Less restructured loans currently in               7,750              6,918              832
compliance (2)
Net nonperforming, accruing restructured      $        0     $            0     $          0
loans

Foreclosed assets
Construction, land development, and other     $    3,752              3,804     $        (52 )
land
1-4 family residential properties                    521                676             (155 )
Nonfarm nonresidential properties                  1,780              2,094             (314 )
Former branch site                                   506                  0              506
                                              $    6,559     $        6,574     $        (15 )

Total nonperforming assets                    $   16,098     $       17,653     $     (1,555 )

(1) The real estate-mortgage segment includes residential 1 - 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) As of June 30, 2013 and December 31, 2012, all of the Company's restructured accruing loans were performing in compliance with their modified terms.

Nonperforming assets as of June 30, 2013 were $16.1 million, $1.6 million lower than nonperforming assets as of December 31, 2012. The nonperforming assets category of nonaccrual loans decreased $1.4 million and foreclosed assets decreased by $15 thousand, when comparing the balances as of June 30, 2013 to December 31, 2012. The $15 thousand decrease in foreclosed assets occurred despite an addition of $506 thousand due to the closing of one of the Company's branches. The former branch site was transferred to foreclosed assets.

The majority of the balance of nonaccrual loans at June 30, 2013 was related to a few large credit relationships. Of the $9.2 million of nonaccrual loans at June 30, 2013, $7.5 million or approximately 81.14% was comprised of three . . .

  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.