U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the transition period from to Commission File No. 0-12896 OLD POINT FINANCIAL CORPORATION (Name of issuer in its charter) Virginia 54-1265373 (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 1 West Mellen Street, Hampton, Va. 23663 (Address of principal executive offices) (Zip Code) (804) 722-7451 (Issuer's telephone number) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock ($5.00 par value) (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 11, 1997 there were 1,275,262 shares of common stock outstanding and the aggregate market value of common stock of Old Point Financial Corporation held by nonaffiliates was approximately $40,936,679 based upon the last traded price per share known to Management. DOCUMENTS INCORPORATED BY REFERENCE NONE OLD POINT FINANCIAL CORPORATION Form 10-K INDEX Page PART I Item 1. Description of Business 1 General 1 Statistical Information. 2 Item 2. Description of Properties 12 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 34 PART III Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and Management 39 Item 13. Certain Relationships and Related Transactions 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40 -i- PART I Item 1. Description of Business General Old Point Financial Corporation (the "Company") was incorporated under the laws of Virginia on February 16, 1984, for the purpose of acquiring all the outstanding common stock of The Old Point National Bank of Phoebus (the "Bank"), in connection with the reorganization of the Bank into a one bank holding company structure. At the annual meeting of the stockholders on March 27, 1984, the proposed reorganization was approved by the requisite stockholder vote. At the effective date of the reorganization on October 1, 1984, the Bank merged into a newly formed national bank as a wholly owned subsidiary of the Company, with each outstanding share of common stock of the Bank being converted into five shares of common stock of the Company. The Company has no other subsidiaries and does not engage in any activities other than acting as a holding company for the common stock of the Bank. The principal business of the Company is conducted through the Bank, which continues to conduct its business in substantially the same manner and from the same offices as it had done before the effective date of the reorganization. The Bank, therefore, accounts for substantially all of the consolidated assets and revenues of the Company. The Bank is a national banking association founded in 1922. The Bank has thirteen offices in the cities of Hampton and Newport News, and in James City and York County, Virginia, and provides a full range of banking and related financial services, including checking, savings, certificates of deposit, and other depository services, commercial, industrial, residential real estate and consumer loan services, safekeeping services and trust and estate services. As of December 31, 1996, the Company had assets of $316.3 million, loans of $198.6 million, deposits of $263.5 million, and stockholders' equity of $32.4 million. At year end, the Company and the Bank had a total of 234 employees, 45 of whom were part-time. Based on 1990 census figures, the population of the Bank's trade area, which includes Hampton, Newport News, Williamsburg, and James City and York County was approximately 394,000. This area's economy is heavily influenced by the two largest employers; military installations and shipbuilding and ship repair. These industries are impacted by reductions in defense spending and personnel. Some of our customers are either employed at the various military installations or at the shipyard, or they derive some or all of their business from these two major employers. There are numerous military installations in the area including Fort Monroe, Langley Air Force Base, and Fort Eustis. The consolidation of the Tactical Air Command and the Strategic Air Command into the Air Combat Command at Langley has somewhat mitigated the reduction in military employment in the area. The largest private employer on the Peninsula is the Newport News Shipbuilding and Drydock Company, which currently employees approximately 17,000 people. The banking industry is highly competitive in the Hampton/Newport News/Williamsburg area. There are approximately nine commercial banks actively engaged in business in the area in which the Bank operates, including seven major statewide banking organizations. The Bank encounters competition for deposits and loans from banks, savings and loan associations and credit unions in the communities in which it operates. In addition, the Bank must compete for deposits in some instances with the money market mutual funds which are marketed nationally. The Bank is subject to regulation and examination by the Office of the Comptroller of the Currency, the Federal Reserve Board (the "Board"), and the Federal Deposit Insurance Corporation (the "FDIC"). As a bank holding company within the meaning of the Bank Holding Company Act of 1956, the Company is subject to the ongoing regulation, supervision, and examination by the Federal Reserve Board (the "Board"). The Company is required to file with the Board periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, prior Board approval must be obtained before the Company can acquire (i) ownership or control of any voting shares of another bank if, after such acquisition, it would control more than 5% of such shares, or (ii) all or substantially all of the assets of another bank or merge or consolidate with another bank holding company. A bank holding company is prohibited under the Bank Holding Company Act, with limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks or furnishing services to its subsidiaries. Statistical Information The following statistical information is furnished pursuant to the requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the Securities Act of 1933. I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential The following table presents the distribution of assets, liabilities, and shareholders' equity by major categories with related average yields/rates. In these balance sheets, nonaccrual loans are included in the daily average loans outstanding. <TABLE> TABLE I AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* <CAPTION> For the years ended December 31, 1996 1995 1994 Dollars in thousands Average Average Average Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balance Expense Paid Balance Expense Paid Balance Expense Paid <S> ASSETS <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans (net of unearned income)...............$ 192,940 $17,681 9.16% $180,638 $16,221 8.98% $162,963 $13,917 8.54% Investment securities: Taxable.................................... 78,734 4,736 6.02% 78,411 4,690 5.98% 86,038 4,932 5.73% Tax-exempt................................. 15,194 1,292 8.50% 8,173 759 9.29% 6,315 628 9.94% ------- ------- ------- ------ ------- ------ Total investment securities.............. 93,928 6,028 6.42% 86,584 5,449 6.29% 92,353 5,560 6.02% Federal funds sold........................... 3,981 208 5.22% 4,666 264 5.66% 3,540 131 3.70% ------- ------- ------- ------ ------- ------ Total earning assets....................... 290,849 23,917 8.22% 271,888 21,934 8.07% 258,856 19,608 7.57% Reserve for loan losses...................... (2,240) (2,648) (2,759) ------- ------- ------- 288,609 269,240 256,097 Cash and due from banks...................... 9,805 8,433 8,868 Bank premises and equipment.................. 9,724 8,125 8,275 Other assets................................. 4,874 5,376 5,158 ------- ------- ------- Total assets.................................$313,012 $291,174 $278,398 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Time and savings deposits: Interest-bearing transaction accounts......$ 50,041 $ 1,210 2.42% $ 49,335 $ 1,303 2.64% $ 50,739 $ 1,327 2.62% Money market deposit accounts.............. 21,212 789 3.72% 19,375 765 3.95% 19,526 613 3.14% Savings accounts........................... 26,354 722 2.74% 26,595 730 2.74% 30,070 826 2.75% Certificates of deposit, $100,000 or more.. 17,026 940 5.52% 13,789 760 5.51% 10,979 478 4.35% Other certificates of deposit.............. 103,029 5,642 5.48% 97,431 5,290 5.43% 83,512 3,850 4.61% ------- ------ ------- ------ ------- ------ Total time and savings deposits.......... 217,662 9,303 4.27% 206,525 8,848 4.28% 194,826 7,094 3.64% Federal funds purchased and securities sold under agreement to repurchase.............. 14,688 706 4.81% 11,234 573 5.10% 14,528 503 3.46% Other short term borrowings.................. 1,599 84 5.25% 1,996 110 5.51% 617 28 4.54% ------- ------ ------- ------ ------- ------ Total interest bearing liabilities......... 233,949 10,093 4.31% 219,755 9,531 4.34% 209,971 7,625 3.63% Demand deposits.............................. 46,198 40,843 40,004 Other liabilities............................ 1,532 1,554 1,729 ------- ------- ------- Total liabilities.......................... 281,679 262,152 251,704 Stockholders' equity......................... 31,333 29,022 26,694 ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...$313,012 $291,174 $278,398 ======= ======= ======= Net interest income/yield.................... $13,824 4.75% $12,403 4.56% $11,983 4.63% ======= ====== ====== Total deposits...............................$263,860 $247,368 $234,830 *Computed on a fully taxable equivalent basis using a 34% tax rate. </TABLE> The following table sets forth a summary of changes in interest earned and paid attributable to changes in volume and changes in yields/rates. <TABLE> TABLE II ANALYSIS OF CHANGE IN NET INTEREST INCOME* <CAPTION> Year 1996 over 1995 Year 1995 over 1994 Year 1994 over 1993 Due to change in: Due to change in: Due to change in: Net Net Net Average Average Increase Average Average Increase Average Average Increase Dollars in Thousands Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) INCOME FROM EARNING ASSETS <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans................................... $1,105 $355 $1,460 $1,509 $ 795 $2,304 $ 652 $ (414) $ 238 Investment securities: Taxable.................................. 19 27 46 (437) 195 (242) 472 (395) 77 Tax-exempt............................. 652 (119) 533 185 (54) 131 (185) 20 (165) ----- --- ----- ---- ----- ---- --- --- --- Total investment securities............ 671 (92) 579 (252) 141 (111) 287 (375) (88) Federal funds sold....................... (39) (17) (56) 42 91 133 (123) 25 (98) ----- --- ----- ---- ----- ---- --- --- --- Total income from earning assets....... 1,737 246 1,983 1,299 1,027 2,326 816 (764) 52 INTEREST EXPENSE Time and savings deposits: Interest-bearing transaction accounts.. 19 (112) (93) (37) 13 (24) 206 (96) 110 Money market deposit accounts.......... 73 (49) 24 (5) 157 152 (8) 53 45 Passbook savings accounts.............. (7) (1) (8) (95) (1) (96) (27) (127) (100) Certificates of deposit, $100,000 or more.......................... 178 2 180 122 160 282 34 (14) 20 Other certificates of deposit.......... 304 48 352 642 798 1,440 (74) (203) (277) ----- --- ---- ---- ----- ----- --- --- --- Total time and savings deposits...... 567 (112) 455 627 1,127 1,754 185 (387) (202) Federal funds purchased and securities sold under agreement to repurchase.... 176 (43) 133 (114) 184 70 (25) 91 66 Other short term borrowings.............. (22) (4) (26) 63 19 82 36 (17) 19 ----- --- ---- ---- ----- ----- --- --- --- Total interest bearing liabilities..... 721 (159) 562 576 1,330 1,906 196 (313) (117) CHANGE IN NET INTEREST INCOME........... $1,016 $405 $1,421 $ 723 $ (303) $ 420 $ 620 $ (451) $ 169 * Computed on a fully taxable equivalent basis using a 34% rate </TABLE> Interest Sensitivity The following table reflects the earlier of the maturity or repricing data for various assets and liabilities as of December 31, 1996. <TABLE> TABLE III INTEREST SENSITIVITY ANALYSIS <CAPTION> As of December 31, 1996 Dollars in thousands Within 3 4-12 1-5 Over 5 Uses of Funds months months years years Total <S> <C> <C> <C> <C> Federal funds sold $ 561 $ --- $ --- $ --- $ 561 Investment securities: Taxable 8,324 10,133 49,288 7,017 74,762 Tax-exempt 100 155 1,146 18,893 20,294 ------ ------ ------ ------ ------ TOTAL INVESTMENTS 8,985 10,288 50,434 25,910 95,617 Loans: Commercial 31,065 7,669 17,236 2,216 58,186 Tax-exempt 2,089 45 155 175 2,464 Installment 4,300 11,828 32,569 3,360 52,057 Real estate 18,480 20,052 33,198 12,007 83,737 Other 590 --- --- --- 590 ------ ------ ------ ------ ------ Total loans 56,524 39,594 83,158 17,758 197,034 ------ ------ ------ ------ ------ Total earning assets $ 65,509 $ 49,882 $133,592 $43,668 $292,651 Sources of funds: Interest bearing transaction accounts $ 49,455 $ --- $ --- $ --- $ 49,455 Money market deposit accounts 21,263 --- --- --- 21,263 Savings accounts 25,478 --- --- --- 25,478 Certificates of deposit, $100,000 or more 6,300 7,008 4,118 --- 17,426 Other certificates of deposit 30,790 46,011 25,563 --- 102,364 Federal funds purchased and securities sold under agreements to repurchase 17,135 --- --- --- 17,135 Other borrowings 2,267 --- 34 --- 2,301 ------ ------ ------ ------ ------ Total interest bearing liabilities $152,688 $ 53,019 $ 29,715 $ 0 $235,422 Rate sensitivity gap $(87,179) $ (3,137) $103,877 $43,668 $ 57,229 Cumulative gap $(87,179) $(90,316) $ 13,561 $57,229 </TABLE> The Company was liability sensitive as of December 31, 1996. There were $87.2 million more in liabilities than assets subject to repricing within three months. This generally indicates that net interest income should improve if interest rates fall since liabilities will reprice faster than assets. It should be noted, however, that savings deposits; which consist of interest bearing transactions accounts, money market accounts, and savings accounts; are less interest sensitive than other market driven deposits. In a rising rate environment these deposit rates have historically lagged behind the changes in earning asset rates, thus mitigating somewhat the impact from the liability sensitivity position. II. Investment Portfolio Note 2 of the Notes to Financial Statements found in Item 8. Financial Statements and Supplementary Data of this Report on Form 10K presents the book and market value of investment securities on the dates indicated. The following table shows, by type and maturity, the book value and weighted average yields of investment securities at December 31, 1996. <TABLE> TABLE IV INVESTMENT SECURITY MATURITIES & YIELDS <CAPTION> U.S.Govt/Agency State/Municipal Total Book Weighted Book Weighted Book Weighted Value Average Value Average Value Average Dollars in Thousands Yield Yield Yield December 31, 1996 <S> Maturities: <C> <C> <C> <C> <C> <C> Within 1 year $14,182 4.95% $ 255 9.13% $14,437 5.02% After 1 year, but within 5 years 49,348 6.26% 1,118 9.60% 50,466 6.33% After 5 years, but within 10 years 5,998 7.04% 9,226 8.24% 15,224 7.77% After 10 years 0 0.00% 9,414 7.91% 9,414 7.91% TOTAL $69,528 6.06% $20,013 8.17% $89,541 6.53% December 31, 1995 $74,238 6.02% $12,270 8.66% $86,508 6.39% December 31, 1994 $74,384 5.74% $ 6,736 9.57% $81,120 6.06% </TABLE> Yields are calculated on a fully tax equivalent basis using a 34% rate. The book value of other marketable equity securities with no stated maturity totalled $5.44 million, yielding 5.89%; $5.31 million, yielding 6.03%; and $5.23 million, yielding 4.41%; at December 31, 1996, 1995, and 1994 respectively. III. Loan Portfolio The following table shows a breakdown of total loans by type at December 31 for years 1992 through 1996: <TABLE> TABLE V LOANS <CAPTION> Dollars in thousands As of December 31, 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Commercial and other $ 28,944 $ 20,636 $ 17,806 $ 16,836 $ 17,043 Real Estate Construction 5,213 4,093 1,991 2,353 2,420 Real Estate Mortgage 104,230 109,469 105,703 96,185 105,424 Tax Exempt Loans 2,464 3,003 4,754 5,585 6,987 Installment Loans to Individuals (net of Unearned Income) 57,733 52,154 43,487 29,322 29,640 Total $198,584 $189,355 $173,741 $150,282 $161,514 </TABLE> Based on Standard Industry Code, there are no categories of loans which exceed 10% of total loans other than the categories disclosed in the preceding table. The maturity distribution and rate sensitivity of certain categories of the Bank's loan portfolio at December 31, 1996 is presented below: <TABLE> TABLE VI MATURITY SCHEDULE OF SELECTED LOANS <CAPTION> One year One through Over five December 31, 1996 or less five years years Total Dollars in thousands <S> <C> <C> <C> <C> Commercial and other $10,466 $16,975 $1,503 $28,944 Real estate construction 5,136 77 --- 5,213 ------ ------ ----- ------ Total $20,194 $13,061 $1,503 $34,157 Loans maturing after one year with: Fixed interest rate $ 13,062 $ 891 $ 13,953 Variable interest rate $ 3,990 $ 612 $ 4,602 </TABLE> The following table presents information concerning the aggregate amount of nonaccrual, past due and restructured loans as of December 31 for the years 1992 through 1996. <TABLE> TABLE VII NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS <CAPTION> Dollars in thousands As of December 31, 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Nonaccrual loans $1,550 $2,447 $2,955 $5,328 $4,670 Accruing loans past due 90 days or more 1,342 248 837 458 2,239 Restructured loans none none none none none Interest income which would have been recorded under original loans terms 163 350 470 570 783 Interest income recorded during the period 222 131 188 239 478 </TABLE> Loans are placed in nonaccrual status if principal or interest has been in default for a period of 90 days or more unless the obligation is both well secured and in the process of collection. A debt is "well secured" if it is secured (i) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt in full or (ii) by the guaranty of a financially responsible party. A debt is "in the process of collection" if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status. Potential problem loans consist of loans that, because of potential credit problems of the borrowers, have caused management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. At December 31, 1996 such problem loans, not included in Table VII, amounted to approximately $3.5 million. The potential problem loans included three relationships in excess of $500 thousand. The potential problem loans are generally secured by residential and commercial real estate with appraised values exceeding the principal balance of the loan. IV. Summary of Loan Loss Experience The determination of the balance of the Allowance for Loan Losses is based upon a review and analysis of the loan portfolio and reflects an amount which, in management's judgment, is adequate to provide for possible future losses. Management's review includes monthly analysis of past due and nonaccrual loans and detailed periodic loan by loan analyses. The principal factors considered by management in determining the adequacy of the allowance are the growth and composition of the loan portfolio, historical loss experience, the level of nonperforming loans, economic conditions, the value and adequacy of collateral, and the current level of the allowance. The following table shows an analysis of the Allowance for Loan Losses for the years 1992 through 1996. <TABLE> TABLE VIII ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES <CAPTION> Dollars in thousands For the year ended December 31, 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> Balance at beginning of period $ 2,251 $ 2,647 $ 2,692 $ 3,719 $ 3,233 Charge Offs: Commercial, financial and agricultural 98 1,210 147 1,178 1,610 Real estate construction --- --- --- --- --- Real estate mortgage 2 135 316 230 152 Installment Loans to individuals 825 375 148 179 287 ----- ----- ----- ----- ----- Total charge offs 925 1,720 611 1,587 2,049 Recoveries: Commercial, financial and agricultural 87 296 431 174 80 Real estate construction --- --- --- --- --- Real estate mortgage 14 44 19 7 14 Installment Loans to individuals 303 159 91 129 141 ----- ----- ----- ----- ----- Total recoveries 404 499 541 310 235 ----- ----- ----- ----- ----- Net charge offs 521 1,221 70 1,277 1,814 Additions charged to operations 600 825 25 250 2,300 ----- ----- ----- ----- ----- Balance at end of period $ 2,330 $ 2,251 $ 2,647 $ 2,692 $ 3,719 Selected loan loss statistics Loans (net of unearned income): End of period $198,584 $189,355 $173,741 $150,282 $161,514 Daily average $192,940 $180,638 $160,204 $155,551 $173,172 Net charge offs to average total loans 0.27% 0.68% 0.04% 0.82% 1.05% Provision for loan losses to average total loans 0.31% 0.46% 0.02% 0.16% 1.33% Provision for loan losses to net charge offs 115.16% 67.57% 35.71% 19.58% 126.79% Allowance for loan losses to period end loans 1.17% 1.19% 1.51% 1.79% 2.30% Earnings to loan loss coverage* 10.28 3.25 56.21 2.45 2.43 </TABLE> *Income before income taxes plus provision for loan losses, divided by net charge-offs. The following table shows the amount of the Allowance for Loan Losses allocated to each category at December 31 for the years 1992 through 1996. <TABLE> TABLE IX ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <CAPTION> As of December 31, 1996 1995 1994 1993 1992 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent of Loans of Loans of Loans of Loans of Loans in each in each in each in each in each Dollars in thousands Category Category Category Category Category to Total to Total to Total to Total to Total Loans Loans Loans Loans Loans <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and other $1,238 15.85% $1,241 12.57% $1,334 12.98% $1,779 28.96% $2,713 29.29% Real estate construction 35 2.62% 55 2.18% 21 1.15% 27 1.52% 51 1.50% Real estate mortgage 478 52.49% 564 58.21% 912 60.84% 740 49.81% 709 50.90% Consumer 579 29.04% 391 27.04% 380 25.03% 146 19.71% 246 18.31% ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ Total $2,330 100.00% $2,251 100.00% $2,647 100.00% $2,692 100.00% $3,719 100.00% </TABLE> V. Deposits The following table shows the average balances and average rates paid on deposits for the years ended December 31, 1994, 1995, and 1996. V. Deposits The following table shows the average balances and average rates paid on deposits for the years ended December 31, 1994, 1995, and 1996. <TABLE> TABLE X DEPOSITS <CAPTION> For the year ended December 31, 1996 1995 1994 Average Average Average Average Average Average Dollars in thousands Balance Rate Balance Rate Balance Rate <S> <C> <C> <C> <C> <C> <C> Interest bearing transaction accounts $ 50,041 2.42% $ 49,335 2.64% $ 50,739 2.62% Money market deposit accounts 21,212 3.72% 19,375 3.95% 19,526 3.14% Savings accounts 26,354 2.74% 26,595 2.74% 30,070 2.75% Certificates of deposit, $100,000 or more 17,026 5.52% 13,789 5.51% 10,979 4.35% Other certificates of deposit 103,029 5.48% 97,431 5.43% 83,512 4.61% Total interest bearing deposits 217,662 4.27% 206,525 4.28% $194,826 3.64% Non-interest bearing demand deposits 46,198 40,843 40,004 Total deposits $263,860 $247,368 $234,830 </TABLE> The following table shows certificates of deposit in amounts of $100,000 or more as of December 31, 1996, 1995, and 1994 by time remaining until maturity. TABLE XI CERTIFICATES OF DEPOSIT $100,000 & MORE (Dollars in thousands) 1996 1995 1994 Maturing in 3 months or less $ 3,089 $ 3,392 $ 1,941 3 through 6 months 3,550 3,779 1,464 6 through 12 months 3,774 5,436 5,714 over 12 months 7,013 2,629 3,529 ------ ------ ------ Total $17,426 $15,236 $12,648 VI. Return on Equity and Assets The return on average shareholders' equity and assets, the dividend pay out ratio, and the average equity to average assets ratio for the past three years are presented below. 1996 1995 1994 Return on average assets 1.10% .80% 1.00% Return on average equity 10.99% 8.07% 10.39% Dividend payout ratio 25.88% 33.17% 25.03% Average equity to Average assets 10.01% 9.97% 9.59% VII. Short Term Borrowings The Bank periodically borrowed funds through federal funds from its correspondent banks, through the use of a demand note to the United States Treasury (Treasury Tax and Loan Deposits), and through securities sold under agreements to repurchase. The borrowings matured daily and were based on daily cash flow requirements. The borrowed amounts (in thousands) and their corresponding rates during 1996, 1995, and 1994 are presented below: <TABLE> TABLE XII SHORT TERM BORROWINGS <CAPTION> Balance at December 31, 1996 1995 1994 Dollars in thousands Balance Rate Balance Rate Balance Rate <S> <C> <C> <C> <C> <C> <C> Federal funds purchased $ 2,000 6.28% $ 1,400 5.63% $ 2,930 5.88% Securities sold under agreements to repurchase 15,135 4.58% 14,336 4.33% 10,764 4.54% U.S. treasury demand notes and other borrowed money 2,301 5.03% 560 5.51% 1,162 5.42% ------ ------ ------ Total $19,436 $16,296 $14,789 Average daily balance outstanding: Federal funds purchased $ 575 5.23% $ 96 6.03% $ 932 4.77% Securities sold under agreements to repurchase 14,413 4.76% 11,438 5.01% 13,596 3.37% U.S. treasury demand notes and other borrowed money 1,599 5.23% 1,996 5.46% 617 4.15% ------ ------ ------ Total $16,587 4.85% $13,530 5.09% $15,145 3.50% The maximum amount outstanding at any month end: Federal funds purchased $ 2,700 $ 1,400 $ 4,600 Securities sold under agreements to repurchase $16,046 $14,636 $18,598 U.S. treasury demand notes and other borrowed money $ 4,052 $ 4,066 $ 4,072 </TABLE> Item 2. Description of Property The Bank owns the Main Office, an office building, and seven branches. All of the above properties are owned directly and free of any encumbrances. The land at the Fort Monroe branch is leased by the Bank under an agreement expiring in October 2011. The remaining three branches are leased from unrelated parties under leases with renewal options which expire anywhere from 10-20 years. During 1996 the Company acquired land in the Oyster Point area of Newport News to build a 15,000 square foot office building. When completed in late 1997 or early 1998 the new facility will house the Bank's commercial and real estate lending offices and Trust Services. The total cost of this project will be approximately $2.5 million. For more information concerning the commitments under current leasing agreements, see Note 10. Lease Commitments of the Notes to Financial Statements found in Item 8. Financial Statements and Supplementary Data of this Report on Form 10K. Additional information on Other Real Estate Owned can be found in Note 6. Other Real Estate Owned of the Notes to Financial Statements found in Item 8. Financial Statements and Supplementary Data of this Report on Form 10K. Item 3. Legal Proceedings The Company is not a party to any material pending legal proceedings before any court, administrative agency, or other tribunal. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 1996. Part II Item 5. Market for Common Equity And Related Stockholder Matters The common stock of Old Point Financial Corporation is not listed on an exchange and is not quoted by NASDAQ. The approximate number of shareholders of record as of December 31, 1996 was 1,414. The range of high and low prices and dividends per share of the Company's common stock for each quarter during 1996 and 1995 is presented in Part I. Item 7. of this Annual Report on Form 10-K. Additional information related to stockholder matters can be found in Note 15. Regulatory Matters of the Notes to Financial Statements found in Item 8. Financial Statements and Supplementary Data of this Report on Form 10K. Item 6. Selected Financial Data The following table summarizes the Company's performance for the past five years. <TABLE> SELECTED FINANCIAL DATA Dollars in thousands YEAR ENDED DECEMBER 31, except per share data 1996 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> RESULTS OF OPERATIONS Interest income......................... $ 23,377 $ 21,534 $ 19,234 $ 19,105 $ 20,988 Interest expense........................ 10,093 9,531 7,625 7,743 9,999 ------ ------ ------ ------ ------ Net interest income..................... 13,284 12,003 11,609 11,362 10,989 Provision for loan loss................. 600 825 25 250 2,300 ------ ------ ------ ------ ------ Net interest income after provision for 12,684 11,178 11,584 11,112 8,689 Gains on sales of investment securities. 2 9 407 19 463 Noninterest income...................... 4,134 3,836 3,755 4,003 3,589 Noninterest expenses.................... 12,066 11,884 11,837 12,252 10,627 ------ ------ ------ ------ ------ Income before taxes..................... 4,754 3,139 3,909 2,882 2,114 Applicable income taxes ................ 1,309 797 1,136 667 376 ------ ------ ------ ------ ------ Net income.............................. $ 3,445 $ 2,342 $ 2,773 $ 2,215 $ 1,738 FINANCIAL CONDITION Total assets............................ $316,345 $304,266 $277,680 $273,884 $268,721 Total deposits.......................... 263,519 256,535 235,599 234,171 231,509 Total loans............................. 198,584 189,355 174,881 150,776 161,806 Stockholders' equity.................... 32,400 30,328 26,222 25,836 24,193 Average assets.......................... 313,012 291,174 278,398 270,685 268,917 Average equity.......................... 31,333 29,022 26,694 24,897 23,856 PERTINENT RATIOS Return on average assets................ 1.10% 0.80% 1.00% 0.82% 0.65% Return on average equity................ 10.99% 8.07% 10.39% 8.90% 7.29% Dividends paid as a percent of net income 25.88% 33.17% 25.03% 28.17% 28.40% Average equity as a percent of average assets......................... 10.01% 9.97% 9.59% 9.20% 8.87% PER SHARE DATA Net income.............................. $2.71 $1.84 $2.20 $1.77 $1.41 Cash dividends declared................. 0.70 0.61 0.55 0.50 0.40 Book value.............................. 25.44 23.81 20.75 20.60 19.47 GROWTH RATES Year end assets......................... 3.97% 9.57% 3.33% 1.92% 1.01% Year end deposits....................... 2.72% 8.89% 1.77% 1.15% 1.92% Year end loans.......................... 4.87% 8.28% 8.08% -6.82% -10.20% Year end equity......................... 6.83% 15.66% 8.39% 6.79% 5.50% Average assets.......................... 7.50% 4.59% 3.53% 0.66% 3.96% Average equity.......................... 7.96% 8.72% 11.90% 4.36% 3.74% Net income.............................. 47.10% -15.54% 59.55% 27.45% 18.88% Cash dividends declared................. 14.75% 10.91% 37.50% 25.00% 0.00% Book value.............................. 6.83% 14.78% 6.54% 5.78% 4.73% </TABLE> Item 7. 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 consolidated results of operations and financial condition of the Company. This discussion should be read in conjunction with the financial statements and other financial information contained elsewhere in this report. The analysis attempts to identify trends and material changes which occurred during the period presented. EARNINGS SUMMARY Net income was $3.45 million, or $2.71 per share in 1996 compared to $2.34 million, or $1.84 per share in 1995 and $2.77 million, or $2.20 per share in 1994. Return on average assets was 1.10% in 1996, 0.80% in 1995, and 1.00% in 1994. Return on average equity was 10.99% in 1996, 8.07% in 1995 and 10.39% in 1994. For the past five years return on average assets has averaged 0.87% and return on average equity has averaged 9.13%. Selected Financial Highlights summarizes the Company's performance for the past five years. 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. Net interest income, on a tax equivalent basis, was $13.82 million in 1996, up $1.42 million, or 11% from $12.40 million in 1995 which was up $420 thousand, or 4% from $11.98 million in 1994. Net interest income is affected by variations in interest rates and the volume and mix of earning assets and interest-bearing liabilities. The net interest yield increased to 4.75% in 1996 from 4.56% in 1995 which was down from 4.63% in 1994. Tax equivalent interest income increased $1.98 million, or 9%, in 1996. Average earning assets grew $18.96 million, or 7%. Total average loans increased $12.30 million, or 7%, while average investment securities increased $7.34 million, or 8%. Interest income increased in 1996 by fifteen basis points primarily due to the collection of interest on nonaccrual loans. Interest expense increased $562 thousand, or 6%, in 1996. Interest bearing liabilities also increased 6% in 1996. The cost of funding liabilities decreased three basis points primarily due to the lower cost of federal funds purchased and securities sold under agreements to repurchase. PROVISION/ALLOWANCE FOR LOAN LOSSES 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 loan portfolio. The provision decreased to $600 thousand in 1996 from $825 thousand in 1995 which was up from $25 thousand in 1994. Loans charged off during 1996 totalled $925 thousand compared to $1.72 million in 1995 and $611 thousand in 1994, while recoveries amounted to $404 thousand in 1996, $499 thousand in 1995 and $541 thousand in 1994. Net loans charged off to year-end loans were 0.26% in 1996, 0.64% in 1995, and 0.04% in 1994. The allowance for loan losses, as a percentage of year-end loans, was 1.17% in 1996, 1.19% in 1995, and 1.51% in 1994. As of December 31, 1996 nonperforming assets were $1.90 million, down from $3.40 million at year-end 1995 which was up from $3.17 million at year-end 1994. Nonperforming assets consist of loans in nonaccrual status and other real estate. The 1996 total consisted of other real estate of $354 thousand and $1.55 million in nonaccrual loans. The other real estate consisted of $354 thousand in a commercial property originally acquired as a potential branch site and now held for sale. Nonaccrual loans consisted of $701 thousand in commercial loans, $845 thousand in mortgage loans and $4 thousand in installment loans. The Company has aggressively dealt with these credits and specific action plans have been developed for each of these classified loans to address any deficiencies. Loans still accruing interest but past due 90 days or more increased to $1.34 million as of December 31, 1996 compared to $248 thousand as of December 31, 1995 and $837 thousand as of December 31, 1994. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the required amount of provision for loan losses. A loan-by-loan review is conducted on all significant classified commercial and mortgage loans. Inherent losses on these individual loans are determined and an allocation of the allowance is provided. Smaller nonclassified commercial and mortgage loans and all consumer loans are grouped by homogeneous pools with an allocation assigned to each pool based on an analysis of historical loss and delinquency experience, trends, economic conditions, underwriting standards, and other factors. OTHER INCOME Other income increased $291 thousand, or 8% in 1996 from 1995 compared to an decrease of $317 thousand, or 8% in 1995 from 1994. The 1996 increase was due to higher Trust Department and mortgage brokerage income. The 1995 decrease was due primarily to lower security gains. The 1994 security gains of $407 thousand were the result of the sale of investment securities as an asset/liability strategy to reduce the interest rate risk in the portfolio. OTHER EXPENSES Other expenses increased in 1996 $182 thousand, or 2% in 1996 over 1995 after remaining almost constant in 1995 from 1994. Salaries and employee benefits increased 3% in 1996 due to normal salary increases and increased profit sharing contributions. Occupancy expense increased $54 thousand, or 8% in 1996 primarily due to higher rent expense associated with the opening of the Trust Department's Oyster Point office in Newport News. Equipment expense increased 7% due to higher depreciation expense on the new mainframe computer system. Other operating expenses decreased 6% primarily due to lower FDIC insurance premiums. ASSETS At December 31, 1996, the Company had total assets of $316.3 million, up 4% from $304.3 million at December 31, 1995. Average assets in 1996 were $313.0 million compared to $291.2 million in 1995. The growth in assets in 1996 was due to the increase in average loans, which were up 7%. During 1996 the Company acquired land in the Oyster Point area of Newport News to build a 15,000 square foot office building. When completed in late 1997 or early 1998 the new facility will house to Bank's Trust Department, commercial and real estate lending, and a branch office. The total cost of this project will be approximately $2.5 million. LOANS The Company experienced good loan demand in 1996. Total loans (net of unearned income) as of December 31, 1996 were $198.6 million, up 5% from $189.4 million at December 31, 1995. All categories of loans increased during 1996 except tax exempt loans and real estate mortgages. Footnote 3 of the financial statements details the loan volume by category for the past two years. INVESTMENT SECURITIES At December 31, 1996 total investment securities were $95.1 million, up 3% from $92.6 million on December 31, 1995. 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. DEPOSITS At December 31, 1996, total deposits amounted to $263.5 million, up 3% from $256.5 million on December 31, 1995. Non-interest bearing deposits increased $4.6 million, or 11%, in 1996 over 1995. Savings deposits increased $391 thousand, or 0.4%, in 1996 over 1995. Certificates of Deposit increased $2.0 million, or 2% in 1996 over 1995. STOCKHOLDERS' EQUITY Total stockholders' equity as of December 31, 1996 was $32.4 million, up 7% from $30.3 million on December 31, 1995. The Company is required to maintain minimum amounts of capital under banking regulations. Under the regulations Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholder's 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 for 1996, 1995 and 1994. 1996 Regulatory Requirements 1996 1995 1994 Tier 1 4.00% 15.63% 15.47% 16.32% Total Capital 8.00% 16.76% 16.47% 17.57% Tier 1 Leverage 3.00% 10.21% 9.80% 10.00% Year-end book value was $25.44 in 1996 and $23.81 in 1995. Cash dividends were $891 thousand, or $.70 per share in 1996 and $777 thousand, or $.61 per share in 1995. The common stock of the Company has not been extensively traded. The stock is not listed on an exchange and is not quoted by NASDAQ. Bid and ask prices are not available for the Company. The volume of trading of the stock is therefore limited. The prices below are based upon a limited number of transactions known to Management during the past two years. There were 1,414 stockholders of the Company as of December 31, 1996. This stockholder count does not include stockholders who hold their stock in a nominee registration. The following is a summary of the dividends paid and market price on Old Point Financial Corporation common stock for 1996 and 1995. <TABLE> <CAPTION> 1996 1995 Market Value Market Value Dividend High Low Dividend High Low <S> <C> <C> <C> <C> <C> <C> 1st Quarter $ 0.16 $ 37.50 $ 37.50 $ 0.15 $ 37.50 $ 37.00 2nd Quarter $ 0.16 $ 37.50 $ 37.50 $ 0.15 $ 37.50 $ 37.50 3rd Quarter $ 0.18 $ 37.50 $ 37.50 $ 0.15 $ 37.50 $ 37.50 4th Quarter $ 0.20 $ 41.50 $ 37.50 $ 0.16 $ 37.50 $ 37.50 </TABLE> LIQUIDITY Liquidity is the ability of the Company to meet present and future obligations through the acquisition of additional liabilities or sale of existing assets. Management considers the liquidity of the Company to be adequate. Sufficient assets are maintained on a short-term basis to meet the liquidity demands anticipated by Management. In addition, secondary sources are available through the use of borrowed funds if the need should arise. EFFECTS OF INFLATION Management believes that the key to achieving satisfactory performance in an inflationary environment is its ability to maintain or improve its net interest margin and to generate additional fee income. The Company's policy of investing in and funding with interest-sensitive assets and liabilities is intended to reduce the risks inherent in a volatile inflationary economy. Item 8. Financial Statements and Supplementary Data The consolidated financial statements and related footnotes of the Company are presented below followed by the financial statements of the parent. <TABLE> CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (Dollars in Thousands) <CAPTION> 1996 1995 <S> <C> <C> ASSETS Cash and due from banks $ 10,988 $ 10,932 Investments: Securities available for sale, at market 70,089 77,604 Securities to be held to maturity (Market value $24,820 in 1996 and $15,087 in 1995) 24,967 15,020 Federal funds sold 561 513 Loans, total 198,584 189,355 Less - allowance for loan losses 2,330 2,251 ------- ------- Net loans 196,254 187,104 Premises and equipment 9,403 8,302 Other real estate owned 354 954 Other assets 3,729 3,837 ------- ------- Total assets $316,345 $304,266 LIABILITIES Non interest-bearing deposits $ 47,534 $ 42,902 Savings deposits 96,196 95,805 Certificates of deposit 119,789 117,828 ------- ------- Total deposits 263,519 256,535 Federal funds purchased and securities sold under repurchase agreements 17,135 15,736 Interest bearing demand notes issued to the United States Treasury and other liabilities for borrowed money 2,301 560 Other liabilities 990 1,107 ------- ------- Total liabilities 283,945 273,938 STOCKHOLDERS' EQUITY Common stock, $5 par value, 6,000,000 shares authorized Issued 1,273,546 in 1996 and 1,273,537 in 1995 6,368 6,368 Capital surplus 9,345 9,345 Retained earnings 16,639 14,085 Unrealized gain on securities 48 530 ------ ------ Total stockholders' equity 32,400 30,328 Total liabilities and stockholders' equity $316,345 $304,266 See Notes to Consolidated Financial Statements. </TABLE> <TABLE> CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands except per share amounts) <CAPTION> 1996 1995 1994 <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 17,580 $ 16,079 $ 13,757 Interest on investment securities Taxable 4,736 4,690 4,932 Exempt from income tax 853 501 414 ------ ------ ------ 5,589 5,191 5,346 Interest on trading account securities --- --- --- Interest on federal funds sold 208 264 131 ------ ------ ------ Total interest income 23,377 21,534 19,234 INTEREST EXPENSE Interest on savings deposits 2,721 2,797 2,766 Interest on certificates of deposit 6,582 6,051 4,328 Interest on federal funds purchased and securities sold under repurchase agreements 706 573 503 Interest on demand notes issued to the United States Treasury and other liabilities for borrowed money 84 110 28 ------ ----- ------ Total interest expense 10,093 9,531 7,625 Net interest income 13,284 12,003 11,609 Provision for loan losses 600 825 25 ------ ------ ------- Net interest income after provision for loan losses 12,684 11,178 11,584 OTHER INCOME Income from fiduciary activities 1,667 1,441 1,463 Service charges on deposit accounts 1,887 1,893 1,780 Other service charges, commissions and fees 360 280 290 Security gains, net 2 9 407 Income from trading account --- --- --- Other operating income 220 222 222 ------ ------ ------ Total other income 4,136 3,845 4,162 OTHER EXPENSE Salaries and employee benefits 7,406 7,178 7,050 Occupancy expense 768 714 700 Equipment expense 1,029 959 1,116 Other operating expense 2,863 3,033 2,971 ------ ------ ------ Total other expenses 12,066 11,884 11,837 ------ ------ ------ Income before income taxes 4,754 3,139 3,909 Income taxes 1,309 797 1,136 ------ ------ ------ Net income $ 3,445 $ 2,342 $ 2,773 PER SHARE Average shares outstanding (in thousands) 1,273 1,272 1,260 Net income per share of common stock $ 2.71 $ 1.84 $ 2.20 See Notes to Consolidated Financial Statements. </TABLE> <TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) <CAPTION> 1996 1995 1994 <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,445 $ 2,342 $ 2,773 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 883 768 884 Provision for loan losses 600 825 25 Securities gains net (2) (9) (407) Net amortization and accretion of investment securities 679 1,078 1,340 Loss on sale of equipment 110 --- --- Changes in assets and liabilities: (Increase) decrease in other real estate owned 152 (553) (13) (Increase) decrease in other assets (net of tax effect of FASB 115 adjustment) 357 (8) 384 (Increase) decrease in other liabilities (117) 104 63 ----- ----- ----- Net cash provided by operating activities 6,107 4,547 5,049 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities (30,015) (31,772) (8,902) Proceeds from maturities and calls of investment securities 24,171 25,315 11,928 Proceeds from sales of investment securities 2,003 --- 8,982 Loans made to customers (105,807) (104,681) (120,330) Principal reductions on loans 96,057 88,985 96,155 Purchase of premises and equipment (2,113) (1,991) (178) Proceeds from sales of premises and equipment 20 --- --- Proceeds from sales of other real estate owned 448 167 664 (Increase) decrease in federal funds sold (48) (266) 4,553 ------ ------ ----- Net cash used in investing activities (15,284) (24,243) (7,128) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in non-interest bearing deposits 4,632 5,816 (2,494) Increase (decrease) in savings accounts 391 (1,181) (5,009) Proceeds from sales of certificates of deposit 43,478 66,693 67,378 Payments for maturing certificates of deposit (41,517) (50,392) (58,447) Increase in federal funds purchased and securities sold under repurchase agreements 1,399 2,042 849 Increase (decrease) in interest bearing demand notes and other borrowed money 1,741 (602) 1,070 Proceeds from issuance of common stock --- 88 201 Dividends paid (891) (777) (694) ------ ------ ----- Net cash provided by financing activities 9,233 21,687 2,854 Net increase in cash and due from banks 56 1,991 775 Cash and due from banks at beginning of year 10,932 8,941 8,166 ------ ------ ------ Cash and due from banks at end of year $ 10,988 $ 10,932 $ 8,941 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Net cash paid for: Interest expense $ 10,126 $ 9,286 $ 7,561 Income taxes $ 1,275 $ 830 $ 980 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING TRANSACTIONS Unrealized gain (loss) on investment securities, net of tax $ (482) $ 2,453 $ (1,894) Transfer of property from premises and equipment to other real estate owned $ --- $ 354 $ --- See Notes to Consolidated Financial Statements. </TABLE> <TABLE> CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) <CAPTION> Unrealized Common Gain (Loss) on Total Stock Capital Retained Investment Stockholders' (Par Value) Surplus Earnings Securities Equity <S> <C> <C> <C> <C> <C> YEAR ENDED DECEMBER 31, 1994 Balance, beginning of year $ 6,271 $ 8,738 $ 10,856 $ (29) $ 25,836 Net income --- --- 2,773 --- 2,773 Sale of stock 49 294 (142) --- 201 Increase in unrealized loss on marketable equity securities --- --- --- (1,894) (1,894) Cash dividends paid ($0.55 per share) --- --- (694) --- (694) ----- ----- ------ ----- ------ Balance, end of year $ 6,320 $ 9,032 $ 12,793 $ (1,923) $ 26,222 YEAR ENDED DECEMBER 31, 1995 Balance, beginning of year $ 6,320 $ 9,032 $ 12,793 $ (1,923) $ 26,222 Net income --- --- 2,342 --- 2,342 Sale of stock 48 313 (273) --- 88 Increase in unrealized gain on investment securities --- --- --- 2,453 2,453 Cash dividends paid ($0.61 per share) --- --- (777) --- (777) ----- ----- ------ ----- ------ Balance, end of year $ 6,368 $ 9,345 $ 14,085 $ 530 $ 30,328 YEAR ENDED DECEMBER 31, 1996 Balance, beginning of year $ 6,368 $ 9,345 $ 14,085 $ 530 $ 30,328 Net income --- --- 3,445 --- 3,445 Decrease in unrealized gain on investment securities --- --- --- (482) (482) Cash dividends paid ($0.70 per share) --- --- (891) --- (891) ----- ----- ------ ------ ----- Balance, end of year $ 6,368 $ 9,345 $ 16,639 $ 48 $ 32,400 See Notes to Consolidated Financial Statements. </TABLE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. The accounting and reporting policies of Old Point Financial SIGNIFICANT Corporation and its subsidiary conform to generally accepted ACCOUNTING accounting principles and to general practice within the POLICIES banking industry. The following is a summary of significant accounting and reporting policies: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Old Point Financial Corporation ("the Company") and its subsidiary The Old Point National Bank of Phoebus ("the Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. NATURE OF BUSINESS: Old Point Financial Corporation is a one-bank holding company that conducts substantially all of its operations through its subsidiary The Old Point National Bank of Phoebus. The Bank services individual and commercial customers, the majority of which are on the Virginia Peninsula. The Bank has twelve branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers. Substantially all of the Bank's deposits are interest bearing. The majority of the Bank's loan portfolio is secured by real estate. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The amounts recorded in the financial statements may be affected by those estimates and assumptions. Actual results may vary from those estimates. The Bank uses estimates primarily in developing its allowance for loan losses, in computing deferred tax assets, in determining the estimated useful lives of premises and equipment, and in the valuation of other real estate owned. INVESTMENT SECURITIES: Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: Held-to-maturity - Debt securities for which the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Trading - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading account securities and recorded at their fair values. Unrealized gains and losses on trading account securities are included immediately in income. Available-for-sale - Debt and equity securities not classified as either held-to-maturity securities or trading account securities are classified as available-for-sale securities and recorded at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. INTEREST ON LOANS: Interest is accrued daily on the outstanding loan balances. Accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. LOAN ORIGINATION FEES AND COSTS: Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is generated by direct charges against income and is available to absorb loan losses. The allowance is based upon management's periodic evaluation of changes in the overall credit worthiness of the loan portfolio, economic conditions in general, and the effect of these conditions upon the financial status of specific borrowers and other factors. The Bank is subject to regulation by the Office of the Comptroller of the Currency. They may require that the Bank adjust its allowance for loan losses upon request. OTHER REAL ESTATE OWNED: Other real estate owned is carried at the lower of cost or estimated fair value and consists of foreclosed real property and other property held for sale. The estimated fair value is reviewed periodically by management and any write-downs are charged against current earnings. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on both straight-line and accelerated methods and are charged to expense over the estimated useful lives of the related assets. Costs of maintenance and repairs are charged to expense as incurred. INCOME TAXES: Income taxes are provided based upon income reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities). The income tax effect resulting from timing differences between financial statement pre-tax income and taxable income is deferred to future periods. PENSION PLAN: The Bank has a non-contributory defined benefit pension plan covering substantially all of its employees. Benefits are based on years of service and average earnings during the highest average sixty-month period during the final one hundred and twenty months of employment. The Bank's policy is to fund the maximum amount of contributions allowed for tax purposes. The Bank accrues an amount equal to its actuarially computed obligation under the plan. The net periodic pension expense includes a service cost component, interest on the projected benefit obligation, return on plan assets and the effect of deferring and amortizing certain actuarial gains and losses and the unrecognized net transition asset over fifteen years. TRUST ASSETS AND INCOME: Assets held by the Trust Department are not included in the financial statements, because such items are not assets of the Bank. In accordance with industry practice, trust service income is recognized primarily on the cash basis. Reporting such income on the accrual basis would not materially effect net income. RECLASSIFICATIONS: Certain amounts in the financial statements have been reclassified to conform with classifications adopted in the current year. NOTE 2. At December 31, 1996, the investment securities portfolio is INVESTMENT composed of securities classified as held-to-maturity and SECURITIES available-for-sale, in conjunction with SFAS 115. Investment securities held-to-maturity are carried at cost, adjusted for amortization of premiums and accretions of discounts, and investment securities available-for-sale are carried at market value. The amortized cost and fair value of investment securities held-to-maturity at December 31, 1996 and 1995, were: <TABLE> <CAPTION> Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) <S> <C> <C> <C> <C> Obligations of other United States Government Agencies as of December 31, 1996 $ 24,967 $ 23 $ 170 $ 24,820 Obligations of State and political subdivisions as of December 31, 1995 $ 15,020 $ 67 $ --- $ 15,087 </TABLE> The amortized cost and fair values of investment securities available-for-sale at December 31, 1996 were: <TABLE> <CAPTION> Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) <S> <C> <C> <C> <C> United States Treasury securities $ 36,562 $ 253 $ (240) $ 36,575 Obligations of other United States Government agencies 7,998 16 (134) 7,880 Obligations of state and political subdivisions 20,012 320 (38) 20,294 Other marketable equity securities 4,450 --- (103) 4,347 Federal Reserve Bank stock 85 --- --- 85 Federal Home Loan Bank stock 908 --- --- 908 ------ ------ ----- ------ Total $ 70,015 $ 589 $ (515) $ 70,089 </TABLE> The amortized cost and fair value of investment securities available-for-sale at December 31, 1995 were: <TABLE> <CAPTION> Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) <S> <C> <C> <C> <C> United States Treasury securities $ 53,220 $ 613 $ (178) $ 53,655 Obligations of other United States Government agencies 5,998 46 --- 6,044 Obligations of state and political subdivisions 12,270 446 (3) 12,713 Other marketable equity securities 4,400 --- (121) 4,279 Federal Reserve Bank stock 85 --- --- 85 Federal Home Loan Bank stock 828 --- --- 828 ------ ----- ----- ------ Total $ 76,801 $ 1,105 $ (302) $ 77,604 </TABLE> Investment securities carried at $32.2 million and $29.1 million, at December 31, 1996 and 1995, respectively, were pledged to secure public deposits and securities sold under agreements to repurchase and for other purposes required or permitted by law. The amortized cost and approximate market values of investment securities at December 31, 1996 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> December 31, 1996 Available-For Sale Held-To-Maturity Amortized Market Amortized Market Cost Value Cost Value (Dollars in Thousands) <S> <C> <C> <C> <C> Due in one year or less $ 14,436 $ 14,415 $ --- $ --- Due after one year through five years 28,499 28,467 21,967 21,846 Due after five years through ten years 12,224 12,406 3,000 2,974 Due after ten years 9,413 9,461 --- --- ------ ------ ------ ------ Total debt securities 64,572 64,749 24,967 24,820 Other securities without stated maturity 5,443 5,340 --- --- ------ ------ ------ Total investment securities $ 70,015 $ 70,089 $ 24,967 $ 24,820 </TABLE> The proceeds from the sales and maturities of investment securities, and the related realized gains and losses are shown below: <TABLE> <CAPTION> 1996 1995 1994 (Dollars in Thousands) <S> <C> <C> <C> Proceeds from sales and maturities of investments $ 26,174 $ 25,315 $ 20,910 ====== ====== ====== Realized gains $ 2 $ 9 $ 411 Realized losses --- --- (4) ------ ------ ------ Net gains $ 2 $ 9 $ 407 </TABLE> NOTE 3. At December 31, loans before allowance for loan losses LOANS consisted of: 1996 1995 (Dollars in Thousands) Commercial and other $ 28,944 $ 20,636 Real estate - construction 5,213 4,093 Real estate - mortgage 104,230 109,469 Installment loans to individuals 57,733 52,154 Tax exempt loans 2,464 3,003 ------- ------- Total $ 198,584 $ 189,355 ======= ======= Information concerning loans which are contractually past due or in non-accrual status is as follows: 1996 1995 (Dollars In Thousands) Contractually past due loans - past due 90 days or more and still accruing interest $ 1,342 $ 248 ===== ==== Loans which are in non- accrual status $ 1,550 $ 2,447 ===== ===== The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers, their immediate families, and companies in which they are principal owners (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The aggregate direct and indirect loans of these persons totaled $2.0 million and $1.2 million at December 31, 1996 and 1995, respectively. These totals do not include loans made in the ordinary course of business to other companies where a director or executive officer of the Bank was also a director or officer of such company but not a principal owner. None of the directors or executive officers had direct or indirect loans exceeding 10% of stockholders' equity at December 31, 1996. NOTE 4. Changes in the allowance for loan losses are as follows: ALLOWANCE FOR LOAN LOSSES 1996 1995 1994 (Dollars in Thousands) Balance, beginning of year $ 2,251 $ 2,647 $ 2,692 Recoveries 404 499 541 Provision for loan losses 600 825 25 Loans charged off (925) (1,720) (611) ----- ----- ----- Balance, end of year $ 2,330 $ 2,251 $ 2,647 ===== ===== ===== NOTE 5. At December 31, premises and equipment consisted of: PREMISES AND EQUIPMENT 1996 1995 (Dollars in Thousands) Land $ 2,133 $ 1,514 Buildings 7,110 6,748 Leasehold improvements 855 855 Furniture, fixtures and equipment 8,475 7,869 ------ ------ Total cost 18,573 16,986 Less accumulated depreciation and amortization 9,170 8,684 ------ ------ Net book value $ 9,403 $ 8,302 NOTE 6. Other real estate owned consisted of the following at December 31: OTHER REAL ESTATE OWNED 1996 1995 (Dollars in Thousands) Foreclosed real estate $ --- $ 600 Property held for sale 354 354 ----- ----- Total $ 354 $ 954 NOTE 7. INDEBTEDNESS The Bank's short-term borrowings include federal funds purchased, securities sold under repurchase agreements (including $2.5 million to directors) and United States Treasury Demand Notes. The federal funds purchased and securities sold under repurchase agreements are held under various maturities and interest rates. The United States Treasury Demand Notes are subject to call by the United States Treasury with interest paid monthly at the rate of 25 basis points (1/4%) below federal funds rate. NOTE 8. STOCK OPTION The Company has stock option plans which reserves 59,050 shares of common stock for grants to key employees. The exercise price of each option equals the market price of the Company's common stock on the date of the grant and an option's maximum term is ten years. A summary of the exercisable incentive stock options is presented below: <TABLE> <CAPTION> Outstanding Granted Exercised Expired Outstanding Beginning During During During at End of Year the Year the Year the Year of Year <S> <C> <C> <C> <C> <C> 1994 Shares 33,560 20,285 (8,340) --- 45,505 Weighted average exercise price $ 20.97 $ 36.25 $ 18.76 $ --- $ 28.19 1995 Shares 45,505 2,702 (15,220) (750) 32,237 Weighted average exercise price $ 28.19 $ 37.00 $ 19.54 $ 36.25 $ 32.82 1996 Shares 32,237 14,386 (250) (200) 46,173 Weighted average exercise price $ 32.82 $ 37.50 $ 36.25 $ 36.25 $ 34.25 </TABLE> At December 31, 1996, exercise prices on outstanding options ranged from $25.00 to $37.50 per share and the weighted average remaining contractual life was eight years. The Company accounts for its stock option plans in accordance with ABP Opinion No. 25, Accounting for Stock Issued to Employees, which does not allocate costs to stock options granted at current market values. The Company could, as an alternative, allocate costs to stock options using option pricing models, as provided in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Because of the limited number of options granted and the limited amount of trading activity in the Company's stock, management believes that stock options are best accounted for in accordance with APB Opinion No. 25. However, had the stock options been accounted for in accordance with SAFS No. 123, pro-forma amounts for net earnings and earnings per share would have been as follows for each of the years ending December 31, 1996 1995 1994 Pro-forma net income (in thousands) 3,401 2,313 2,737 ===== ===== ===== Pro-forma earnings per share 2.65 1.81 2.16 ==== ==== ===== Pro-forma amounts were computed using a 6% discount rate over the term of the options and dividend rates which approximate current payments. NOTE 9. The components of income tax expense are as follows: INCOME TAXES 1996 1995 1994 (Dollars in Thousands) Currently payable $1,214 $ 572 $1,039 Deferred 95 225 97 Reported tax expense $1,309 $ 797 $1,136 The items that caused timing differences affecting deferred income taxes are as follows: 1996 1995 1994 (Dollars in Thousands) Provision for loan losses $ (8) $ 222 $ 51 Other writedowns and adjustments --- --- 86 Pension plan expenses 32 15 30 Deferred loan fees, net 21 27 (12) Security gains and losses (7) 3 (2) Interest on certain non-accrual loans 8 (77) (124) Alternative minimum taxes --- --- 51 Depreciation 46 33 --- Other 3 2 17 $ 95 $ 225 $ 97 A reconciliation of the "expected" Federal income tax expense on income before income taxes with the reported income tax expense follows: 1996 1995 1994 (Dollars in Thousands) Expected tax expense (34%) $ 1,616 $ 1,067 $ 1,329 Interest expense on tax exempt assets 38 25 18 Tax exempt interest (352) (263) (240) Alternative minimum tax --- --- 51 Disqualified incentive stock options --- (47) (44) Other, net 7 15 22 Reported tax expense $ 1,309 $ 797 $ 1,136 The components of the net deferred tax asset included in other assets are as follows at December 31: 1996 1995 (Dollars in thousands) Components of Deferred Tax Liability Depreciation $ (110) $ (64) Accretion of discounts on securities (15) (22) Net unrealized (gain) on available-for- sale securities (25) (273) Deferred loan fees and costs (67) (46) Other (2) (4) Deferred tax liability (219) (409) Components of Deferred Tax Asset Allowance for loan losses 366 358 Net unrealized loss on available-for-sale securities --- --- Interest on non-accrual loans 311 319 Deferred compensation 12 18 Pension 25 56 Deferred tax asset, net $ 495 $ 342 NOTE 10. The Bank has noncancellable leases on premises and LEASE equipment expiring at various dates, including COMMITMENTS extensions so the year 2011. Certain leases provide for increased annual payments based on increases in real estate taxes and the Consumer Price Index. The total approximate minimum rental commitment at December 31, 1996, under noncancellable leases is $1.05 million which is due as follows: Year (Dollars in Thousands) 1997 $ 144 1998 139 1999 126 2000 72 2001 72 Remaining term of leases 497 Total $ 1,050 The aggregate rental expense of premises and equipment was $104 thousand, $165 thousand and $178 thousand for 1996, 1995 and 1994, respectively. NOTE 11. The following table sets forth the Pension Plan's funded PENSION status and amounts recognized in the Bank's financial PLAN statements at December 31: 1996 1995 (Dollars in Thousands) Actuarial present value of benefit obligations: Vested benefits $ (1,723) $ (1,533) Accumulated benefit obligation $ (1,840) $ (1,628) Projected benefit obligation$ (2,576) $ (2,289) Plan assets at fair value 2,176 1,661 Projected benefit obligation in excess of plan assets (400) (628) Unrecognized net plan asset (62) (75) Net deferrals 390 537 Pension plan liability included in consolidated balance sheets $ (72) $ (166) Net pension cost includes the following components: Service cost - benefits earned in the current period $ 146 $ 134 Interest cost on projected benefit obligations 168 149 Return on plan assets (131) (98) Recognition of unrecognized net plan asset (12) (12) Amortization of net deferrals 17 31 Net pension cost $ 188 $ 204 Contributions to the Plan $ 282 $ 248 The actuarial present value of benefits and obligations were determined by use of the following assumptions: 1996 1995 Discount rate 7.5% 7.5% Compensation increase 5.0% 5.0% Expected long term rate of return on assets 7.5% 7.5% NOTE 12. The Bank has a defined contribution profit sharing and PROFIT thrift plan covering substantially all of its employees. SHARING The Bank may make profit sharing contributions to the plan as determined by the Board of Directors. In addition, the Bank matches thrift contributions by employees fifty cents for each dollar contributed. Expenses related to the plan totaled $261 thousand and $215 thousand in 1996 and 1995, respectively. NOTE 13. In the normal course of business, the Bank makes various COMMITMENTS commitments and incurs certain contingent liabilities. AND These commitments and contingencies represent off- CONTINGENCIES balance sheet risk for the Bank. To meet the financing needs of its customers, the Bank makes lending commitments under commercial lines of credit, home equity loans and construction and development loans. The Bank also incurs contingent liabilities related to irrevocable letters of credit. At December 31, 1996, the Bank had the following off-balance sheet items (in thousands): Commitments to extend credit: Home equity lines of credit $ 9,442 Construction and development loans committed but not funded 5,228 Other lines of credit (principally commercial) 19,201 ------- $ 33,871 Irrevocable letters of credit $ 1,071 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most guarantees extend for less than two years and expire in decreasing amounts through 1997. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds various collateral supporting those commitments for which collateral is deemed necessary. NOTE 14. The estimated fair values of the Bank's financial instruments FAIR VALUE at December 31, 1996 are as follows: OF FINANCIAL INSTRUMENTS Carrying Fair Amount Value (Dollars in Thousands) Cash and due from banks $ 10,988 $ 10,988 Investment securities, held-to-maturity 24,967 24,820 Investment securities, available-for-sale 70,089 70,089 Federal funds sold 561 561 Loans, net of allowances for loan losses 196,254 195,793 Deposits: Non-interest bearing deposits 47,534 47,534 Savings deposits 96,196 96,196 Certificates of Deposit 119,789 120,018 Securities sold under repurchase agreement and federal funds purchased 17,135 17,135 Interest bearing U.S. Treasury demand notes and other liabilities for borrowed money 2,301 2,301 Commitments to extend credit 33,871 33,871 Irrevocable letters of credit 1,071 1,071 The above presentation of fair values is required by statement on Financial Accounting Standards No. 107 "Disclosures about Market Values of Financial Instruments". The fair values shown do not necessarily represent the amounts which would be received on sale or other disposition of the instruments. The carrying amounts of cash and due from banks, federal funds sold, demand and savings deposit and securities sold under repurchase agreements represent items which do not present significant market risks, are payable on demand or are of such short duration that market value approximates carrying value. Investment securities are valued at the quoted market price for the individual securities held. The fair value of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers. Certificates of deposit are presented at estimated fair value using rates currently offered for deposits of similar remaining maturities. NOTE 15. The Company is required to maintain minimum amounts of REGULARTORY capital to total "risk weighted" assets, as defined by the banking MATTERS regulators. At December 31, 1996, The Company is required to have minimum Tier 1 and Total Capital ratios of 4.00% and 8.00% respectively. The Company's actual ratios at that date were 15.63% and 16.76%, respectively. The Company's leverage ratio at December 31, 1996 was 10.21%. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national banking any calendar year exceeds the bank's net profits for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the banking subsidiary can distribute as dividends to the Company in 1997, without the approval of the Comptroller of the Currency, $4.00 million plus an additional amount equal to the Bank's retained net profits for 1997 up to the date of any dividend declaration. The following are the summarized financial statements of the Company. <TABLE> OLD POINT FINANCIAL CORPORATION PARENT ONLY BALANCE SHEETS <CAPTION> As of December 31, Dollars in thousands 1996 1995 <S> <C> <C> ASSETS Cash in bank $ 143 $ 122 Investment securities 1,676 1,670 Total Loans 50 52 Investment in subsidiary 30,456 28,396 Other real estate owned 0 0 Other assets 75 88 ------ ------ TOTAL ASSETS $32,400 $30,328 LIABILITIES AND STOCKHOLDERS EQUITY Notes payable - bank $ --- $ --- Other liabilities --- --- ------ ------ Total liabilities --- --- ------ ------ Stockholders' equity 32,400 30,328 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,400 $30,328 </TABLE> <TABLE> OLD POINT FINANCIAL CORPORATION PARENT ONLY INCOME STATEMENTS <CAPTION> For the year ended December 31, Dollars in thousands 1996 1995 1994 <S> <C> <C> <C> INCOME Cash dividends from subsidiary $1,000 $1,000 $ 950 Interest and Fees on Loans 4 4 5 Interest income from investment securities 94 96 63 Other income --- --- --- ----- ----- ----- TOTAL INCOME 1,098 1,100 1,018 EXPENSES Interest on borrowed money --- --- --- Other expenses 251 274 244 ----- ----- ----- TOTAL EXPENSES 251 274 244 ----- ----- ----- Income before taxes and undistributed net income of subsidiary 847 826 774 Income tax (52) (59) (60) ----- ----- ----- Net income before undistributed net income of subsidiary 899 885 834 Undistributed net income of subsidiary 2,546 1,457 1,939 ----- ----- ----- NET INCOME $3,445 $2,342 $2,773 ===== ===== ===== </TABLE> <TABLE> OLD POINT FINANCIAL CORPORATION PARENT ONLY STATEMENTS OF CASH FLOWS <CAPTION> For the year ending December 31, 1996 1995 1994 Dollars in thousands <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $3,445 $2,342 $2,773 Adjustment to reconcile net income to net cash provided by operating activities: Equity in undistributed (income) losses of subsidiaries (2,546) (1,457) (1,939) Market write-down on other real estate owned --- --- --- Increase (decrease) in other assets 12 (17) 95 Increase (decrease) in other liabilities --- --- --- ----- ----- ----- Net cash provided by operating activities 911 868 929 CASH FLOWS FROM INVESTING ACTIVITIES (Purchase)/Sales of Investments --- (192) (850) Purchase of Premises and Equipment --- (21) --- (Increase) decrease in other real estate owned --- --- 435 Loans to Customers 2 2 2 ----- ----- ----- Net cash (used in) investing activities 2 (211) (413) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in borrowed money --- --- --- Proceeds from issuance of common stock --- 88 200 Dividends paid (892) (777) (694) ----- ----- ----- Net cash provided by financing activities (892) (689) (494) Net increase in cash and due from banks 21 (32) 22 Cash and due from banks at beginning of period 122 154 132 ------ ----- ----- Cash and due from banks at end of period $ 143 $ 122 $ 154 </TABLE> Accounting Rule Changes None. Regulatory Requirements and Restrictions For the reserve maintenance period in effect at December 31, 1996, 1995 and 1994 the bank was required to maintain with the Federal Reserve Bank of Richmond an average daily balance totalling approximately $5.7 million, $ 4.6 million, and $4.9 million respectively. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The eleven persons named below, all of whom currently serve as directors of the Company will be nominated to serve as directors until the 1998 Annual Meeting, or until their successors have been duly elected and have qualified. <TABLE> <CAPTION> Amount and Nature of Principal Beneficial Ownership Director Occupation For As of March 11, 1997 Name and (Age) Since <F1> Past Five Years (Percent of Class) <F2> <S> <C> <C> <C> Dr. Richard F. Clark (64) 1981 Pathologist 30,589 <F3> Sentara Hampton General Hospital 2.4% Gertrude S. Dixon (83) 1981 Real Estate Management 96,062 <F3> and Ownership 7.5% Russell Smith Evans Jr. (54) 1993 Assistant Treasurer and 725* <F3> Corporate Fleet Manager Ferguson Enterprises G. Royden Goodson, III (41) 1994 President 1,950* Warwick Plumbing & Heating Corp. Dr. Arthur D. Greene (52) 1994 Surgeon - Partner 1,382* Tidewater Orthopaedic Associates Stephen D. Harris (55) 1988 Attorney-at-Law - Partner 4,200* Geddy, Harris & Geddy John Cabot Ishon (50) 1989 President 6,290* <F3> Hampton Stationery Eugene M. Jordan (73) 1964 Attorney-at-Law 13,890 <F3> Cumming, Hatchett & Jordan, P.C. 1.1% John B. Morgan, II (50) 1994 President 1,200* <F3> Morgan-Marrow Insurance Dr. H. Robert Schappert (58) 1996 Veterinarian - Owner 44,870 <F3> Beechmont Veterinary Hospital 3.5% Robert F. Shuford (59) 1965 Chairman of the Board, President & CEO 71,858 <F3> <F4> Old Point Financial Corporation 5.6% Chairman of the Board, President & CEO Old Point National Bank *Represents less than 1.0% of the total outstanding shares. <FN> <F1> Refers to the year in which the individual first became a director of the Bank. Dr. Richard F. Clark, Gertrude S. Dixon, Eugene M. Jordan, and Robert F. Shuford became directors of the Company upon consummation of the Bank's reorganization on October 1, 1984. Russell Smith Evans, Jr. was elected April 27, 1993, G. Royden Goodson, III was elected on August 9, 1994, Dr. Arthur D. Greene was elected on August 9, 1994, John B. Morgan, II was elected on October 11, 1994, Stephen D. Harris was elected October 11, 1988, John Cabot Ishon was elected March 27, 1990, and, Dr. H. Robert Schappert was elected February 13, 1996. All present directors of the Company are directors of the Bank. <F2> For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or she has the right to acquire beneficial ownership of the security within sixty days. <F3> Includes shares held (i) by their close relatives or held jointly with their spouses, (ii) as custodian or trustee for the benefit of their children or others, or (iii) as attorney-in-fact subject to a general power of attorney - Dr. Clark, 54 shares; Mrs. Dixon, 48,740 shares; Mr. Evans, 325 shares; Mr. Ishon, 1,640 shares; Mr. Jordan, 8,485 shares; Mr. Morgan, 1,000 shares; Dr. Schappert, 40,685 shares; and Mr. Shuford, 37,795 shares. <F4> Includes shares that may be acquired within 60 days pursuant to the exercise of stock options granted under the Old Point Stock Option Plans - Mr. Shuford 5,500. </FN> </TABLE> There are two family relationships among the directors and executive officers. Mr. Jordan is the father-in-law of Mr. Ishon. Mr. Shuford and Dr. Schappert are married to sisters. None of the directors serves as a director of any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. There were no delinquent Securities and Exchange Form 4 filings during 1996. In addition to the executive officer included in the preceding list of directors, the persons listed below were executive officers of the Company or its subsidiary as of December 31, 1996. Executive Principal Officer Occupation For Name and (Age) Since (1) Past Five Years John G. Sebrell (49) 1992 Executive Vice President Old Point Financial Corporation Louis G. Morris (42) 1988 Senior Vice President and Treasurer Old Point Financial Corporation Cary B. Epes (48) 1993 Senior Vice President Old Point Financial Corporation W. Rodney Rosser (56) 1989 Senior Vice President and Secretary Old Point Financial Corporation Margaret P. Causby (46) 1992 Senior Vice President Old Point National Bank Patricia A. Orendorff (50) 1994 Senior Vice President and Cashier Old Point National Bank Each of these executive officers owns less than 1% of the stock of the Company. (1) Prior to employment with the Company, John G. Sebrell was Senior Vice President and Senior Credit Policy Officer at NationsBank. Cary B. Epes was Vice President and Commercial Account Manager at Crestar Bank. All other executive officers served in virtually the same capacity with the Company and/or the Bank prior to appointment as an executive officer. Item 11. Executive Compensation Cash Compensation The following table presents all compensation paid or accrued by the Company and the Bank to the Company's Chief Executive Officer and each executive officer whose salary and bonus for 1996 exceeded $100,000. Mr. Shuford is compensated by the Company and Mr. Sebrell is compensated by the Bank. <TABLE> SUMMARY COMPENSATION TABLE <CAPTION> Annual Compensation Other Name Annual All Other and Compen- Compen- Principal Salary Bonus sation sation Position Year ($) ($) ($) ($) <S> <C> <C> <C> <C> <C> Robert F. Shuford 1996 $147,900 <F1> $10,000 <F2> $ 3,500 $ 8,715 <F3> Holding Company 1995 $147,900 <F1> $ 0 $ 2,891 $55,053 <F3> Chairman, President 1994 $143,400 <F1> $ 6,000 <F2> $ 2,941 $42,610 <F3> & CEO John G. Sebrell 1996 $113,900 <F1> $ 0 $ 9,271 $ 7,172 <F4> Bank 1995 $113,900 <F1> $ 0 $ 8,047 $ 6,369 <F4> President & CEO 1994 $110,400 <F1> $12,244 <F2> $ 8,631 $ 5,682 <F4> <FN> <F1> Salary includes directors' fees as follows: Mr. Shuford - 1996 of $3,900, 1995 of $3,900, and 1994 of $5,400; Mr. Sebrell - 1996 of $3,900 - 1995 of $3,900, and 1994 of $5,400. <F2> Beginning in 1994, bonus consideration for Mr. Shuford and Mr. Sebrell was deferred until January of the following year so that year end results could be evaluated by the Compensation Committee. <F3> Mr. Shuford has received other compensation as follows: 1996 1995 1994 Profit Sharing $4,395 $ 3,233 $ 3,001 401(k) Matching Plan 4,320 4,320 4,149 Split Dollar Life Insurance * 0 24,750 1,460 Sale of ISO ** 0 22,750 34,000 $8,715 $55,053 $42,610 * The Split Dollar policy was awarded to Mr. Shuford in 1995. When this occurs the gain must be treated as compensation to the employee. ** When an incentive stock option (ISO) share is sold prior to a one year vesting period, the gain on the sale is treated as compensation to the employee. <F4> Mr. Sebrell has received other compensation as follows: 1996 1995 1994 Profit Sharing $ 3,357 $ 2,469 $ 2,285 401(k) Matching Plan 3,300 3,300 3,159 Split Dollar Life Insurance 515 600 238 ----- ----- ----- $ 7,172 $ 6,369 $ 5,682 </FN> </TABLE> Item 12. Security Ownership of Certain Beneficial Owners and Management Security ownership of certain beneficial owners and management is detailed in Part III, Item 10. of this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions Some of the Company directors, executive officers, and members of their immediate families, and corporations, partnerships and other entities of which such persons are officers, directors, partners, trustees, executors or beneficiaries, are customers of the Bank. As of December 31, 1996, borrowing by all policy making officers and directors amounted to $2.05 million. This amount represented 6.0% of the total equity capital accounts of the Company as of December 31, 1996. All loans and commitments to lend included in such transactions were made in the ordinary course of business, upon substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. It is the policy of the Bank to provide loans to officers who are not executive officers and to employees at more favorable rates than those prevailing at the time for comparable transactions with other persons. These loans do not involve more than the normal risk of collectibility or present other unfavorable features. The Bank expects to have in the future similar banking transactions with directors, officers, principal stockholders and their associates. The law firm of Cumming, Hatchett and Jordan, P.C. serves as legal counsel to the Bank. Mr. Eugene M. Jordan is a member of the firm. During 1996, the firm received from the Bank a retainer and fees totalling $63,180. Hampton Stationery, of which John Cabot Ishon is the owner, provided furniture and supplies to the Bank for which it paid $72,244 during 1996. In addition, Morgan-Marrow Company, of which John B. Morgan, II is President, provided insurance to the Bank during 1996. Geddy, Harris & Geddy, of which Stephen D. Harris is a partner, also provided legal services to the Bank during 1996. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K A.1 Financial Statements: The following audited financial statements are included in Part II, Item 8, of this Annual Report on Form 10-K. Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements Auditor's Report A.2 Financial Statement Schedules: Schedule Location Average Balance Sheets, Net Interest Income and Rates Part I, Item 1 Analysis of Change in Net Interest Income Part I, Item 1 Interest Sensitivity Analysis Part I, Item 1 Investment Securities Part I, Item 1 Investment Security Maturities & Yields Part I, Item 1 Loans Part I, Item 1 Maturity Schedule of Selected Loans Part I, Item 1 Nonaccrual, Past Due and Restructured Loans Part I, Item 1 Analysis of the Allowance for Loan Losses Part I, Item 1 Allocation of the Allowance for Loan Losses Part I, Item 1 Deposits Part I, Item 1 Certificates of Deposit of $100,000 and more Part I, Item 1 Return on Average Equity Part I, Item 1 Short Term Borrowings Part I, Item 1 Lease Commitments Part I, Item 1 Other Real Estate Owned Part I, Item 1 Selected Financial Data Part II, Item 6 Capital Ratios Part II, Item 7 Dividends Paid and Market Price of Common Stock Part II, Item 7 Proceeds from sales and maturities of securities Part II, Item 8 Premises and Equipment Part II, Item 8 Stock Option Plan Part II, Item 8 Components of Income Tax Expense Part II, Item 8 Reconciliation of Expected and Reported Income Tax Expense Part II, Item 8 Pension Plan Part II, Item 8 Commitments and Contingencies Part II, Item 8 Fair Value of Financial Instruments Part II, Item 8 Directors and Executive Officer Part III, Item 10 Executive Compensation Part III, Item 11 A.3 Exhibits: 3 Articles of Incorporation and Bylaws 4 Not Applicable 9 Not Applicable 10 Not Applicable 11 Not Applicable 12 Not Applicable 13 Not Applicable 18 Not Applicable 19 Not Applicable 22 Subsidiaries of the Registrant 23 Not Applicable 24 Consent of Independent Certified Public Accountants 25 Powers of Attorney 27 Financial Data Schedule 28 Not Applicable 29 Not Applicable B. Reports on Form 8-K: No Reports on Form 8-K were filed during the fourth quarter of 1996. Signatures Pursuant to the requirements of Section 13 or 15(d) 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 on the 28th day of March, 1997. OLD POINT FINANCIAL CORPORATION /s/Robert F. Shuford Robert F. Shuford, President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in their capacities on the 28th day of March, 1997. Signature Title /s/Robert F. Shuford President and Director Robert F. Shuford Principal Executive Officer /s/Louis G. Morris Senior Vice President and Treasurer Louis G. Morris Principal Financial & Accounting Officer /s/Richard F. Clark * Director /s/Gertrude S. Dixon * Director /s/Russell S. Evans, Jr. * Director /s/G. Royden Goodson, III Director /s/Dr. Arthur D. Greene Director /s/Steven D. Harris * Director /s/John Cabot Ishon * Director /s/Eugene M. Jordan * Director /s/John B. Morgan * Director /s/Dr. H. Robert Schappert * Director