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, 1998 [ ] 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 (I.R.S. Employer Identification No.) of incorporation or organization) 1 West Mellen Street, Hampton, Va. 23663 (Address of principal executive offices) (Zip Code) (757) 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 16, 1999 there were 2,576,244 shares of common stock outstanding and the aggregate market value of common stock of Old Point Financial Corporation held by nonaffiliates was approximately $57,855,999 based upon the weighted average price per share for the last 5 trading days. DOCUMENTS INCORPORATED BY REFERENCE NONE
OLD POINT FINANCIAL CORPORATION Form 10-K INDEX PART I..............................................................1 Item 1. Description of Business....................................1 General............................................................1 Statistical Information............................................2 Item 2. Description of Property...................................13 Item 3. Legal Proceedings.........................................13 Item 4. Submission of Matters to a Vote of Security Holders.......13 PART II............................................................13 Item 5. Market for Common Equity And Related Stockholder Matters..13 Item 6. Selected Financial Data...................................13 Item 7 Management's Discussion and Analysis of Financial Condition Condition and Results of Operations.........................15 Item 8. Financial Statements and Supplementary Data................19 Item 9. Changes in and Disagreements With Accountants on and Financial Disclosure Accounting.......................35 PART III. .........................................................36 Item 10. Directors and Executive Officers of the Registrant........36 Item 11. Executive Compensation....................................38 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................40 Item 13. Certain Relationships and Related Transactions............40 PART IV. ..........................................................41 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8.................................................41 -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 1in 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, 1998, the Company had assets of $404.1 million, loans of $235.9 million, deposits of $343.4 million, and stockholders' equity of $40.0 million. At year end, the Company and the Bank had a total of 223 employees, 34 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 16,000 2people. The banking industry is highly competitive in the Hampton/Newport News/Williamsburg area. There are approximately twelve commercial and savings banks actively engaged in business in the area in which the Bank operates, including six 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"). 1
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. The following table sets forth a summary of changes in interest earned and paid attributable to changes in volume and changes in yields/rates. 2
<TABLE> TABLE I AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* For the years ended December 31, Dollars in thousands <CAPTION> 1998 1997 1996 -------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------- ASSETS <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans $226,908 $20,255 8.93% $210,934 $19,288 9.14% $192,940 $17,681 9.16% Investment securities: Taxable 87,112 5,285 6.07% 72,064 4,473 6.21% 78,734 4,736 6.02% Tax-exempt 34,317 2,665 7.77% 24,129 1,954 8.10% 15,194 1,292 8.50% -------------------- ------------------- ------------------- Total investment securities 121,429 7,950 6.55% 96,193 6,427 6.68% 93,928 6,028 6.42% Federal funds sold 10,305 572 5.55% 4,981 276 5.54% 3,981 208 5.22% -------------------- ------------------- ------------------- Total earning assets 358,642 28,777 8.02% 312,108 25,991 8.33% 290,849 23,917 8.22% Reserve for loan losses (2,628) (2,366) (2,240) --------- --------- --------- 356,014 309,742 288,609 Cash and due from banks 8,933 8,753 9,805 Bank premises and equipment 11,931 10,036 9,724 Other assets 3,878 3,624 4,874 --------- --------- --------- Total assets $380,756 $332,155 $313,012 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Time and savings deposits: Interest-bearing transaction accounts $ 15,929 $346 2.17% $ 24,376 $ 537 2.20% $ 50,041 $ 1,210 2.42% Money market deposit accounts 71,199 $ 2,326 3.27% 49,302 1,528 3.10% 21,212 789 3.72% Savings accounts 26,211 718 2.74% 25,822 708 2.74% 26,354 722 2.74% Certificates of deposit, $100,000 or more 26,084 1,462 5.60% 19,122 1,135 5.94% 17,026 940 5.52% Other certificates of deposit 121,676 6,740 5.54% 108,665 5,813 5.35% 103,029 5,642 5.48% ------------------- ------------------ ------------------ Total time and savings deposits 261,099 11,592 4.44% 227,287 9,721 4.28% 217,662 9,303 4.27% Federal funds purchased and securities sold under agreement to repurchase 21,713 1,013 4.67% 17,767 861 4.85% 14,688 706 4.81% Other short term borrowings 1,776 96 5.41% 1,857 99 5.33% 1,599 84 5.25% -------------------- ------------------- ------------------- Total interest bearing liabilities 284,588 12,701 4.46% 246,911 10,681 4.33% 233,949 10,093 4.31% Demand deposits 56,001 49,432 46,198 Other liabilities 1,641 1,394 1,532 --------- --------- --------- Total liabilities 342,230 297,737 281,679 Stockholders' equity 38,526 34,418 31,333 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $380,756 $332,155 $313,012 ======== ======== ======== Net interest income/yield $16,076 4.48% $15,310 4.91% $13,824 4.75% ======= ======= ======= Total deposits $317,100 $276,719 $263,860 ======== ======== ======== * Computed on a fully taxable equivalent basis using a 34% rate </TABLE> 3
<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. <CAPTION> TABLE II ANALYSIS OF CHANGE IN NET INTEREST INCOME * - --------------------------------------------------------------------------------------------------------------------------------- Year 1998 over 1997 Year 1997 over 1996 Year 1996 over 1995 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 $1,461 $ (494) $ 967 $ 1,649 $ (42) $ 1,607 $ 1,105 $ $355 $ 1,460 Investment Securities: Taxable 934 (122) 812 (401) 138 (263) 19 27 46 Tax-exempt 825 (114) 711 760 (98) 662 652 (119) 533 ------- -------- --------- --------- ------- --------- -------- -------- --------- Total investment securities 1,759 (236) 1,523 359 40 399 671 (92) 579 Federal funds sold 295 1 296 52 16 68 (39) (17) (56) ------- -------- --------- --------- ------- --------- -------- -------- --------- 3,515 (729) 2,786 2,060 14 2,074 1,737 246 1,983 INTEREST EXPENSE Interest bearing transaction accounts (186) (5) (191) (621) (52) (673) 19 (112) (93) Money market deposit accounts 679 119 798 1,045 (306) 739 73 (49) 24 Savings accounts 11 (1) 10 (15) 1 (14) (7) (1) (8) Certificate of deposits, $100,000 or more 413 (86) 327 116 79 195 178 2 180 Other certificates of deposit 696 231 927 309 (138) 171 304 48 352 ------- -------- --------- --------- ------- --------- -------- -------- ---------- Total time and savings deposits 1,613 258 1,871 834 (416) 418 567 (112) 455 Federal funds purchased and securities sold under agreement to repurchase 191 (39) 152 148 7 155 176 (43) 133 Other short-term borrowings (4) 1 (3) 14 1 15 (22) (4) (26) ------- -------- --------- --------- ------- --------- -------- -------- ---------- Total expense for interest bearing liabilities 1,800 220 2,020 996 (408) 588 721 (159) 562 Change in Net Interest Income $1,714 $ (948) $ 766 $ 1,064 $ 422 $ 1,486 $ 1,016 $ 405 $ 1,421 * Computed on a fully taxable equvilent basis using a 34% rate. </TABLE> 4
<TABLE> Interest Sensitivity The following table reflects the earlier of the maturity or repricing data for various assets and liabilities as of Decmber 31, 1998. - ---------------------------------------------------------------------------------------------------------- TABLE III INTEREST SENSITIVITY ANALYSIS - ---------------------------------------------------------------------------------------------------------- <CAPTION> As of December 31, 1998 Within 4-12 1-5 Over 5 Dollars in thousands 3 Months Months Years Years Total Uses of funds <S> <C> <C> <C> <C> <C> Federal funds sold 6,578 -- -- -- 6,578 Taxable investments 9,421 3,544 51,916 22,849 87,730 Tax-exempt investments 0 0 1,678 48,079 49,757 -------- -------- ------- ------ ------- Total investments 15,999 3,544 53,594 70,928 144,065 Loans: Commercial 18,927 2,946 38,567 3,883 64,323 Tax-exempt 825 37 270 270 1,402 Installment 2,918 3,392 49,254 3,053 58,617 Real estate 21,641 7,778 59,739 21,546 110,704 Other 819 -- 0 0 819 -------- -------- ------- ------ ------- Total loans 45,130 14,153 147,830 28,752 235,865 -------- -------- ------- ------ ------- Total earning assets 61,129 17,697 201,424 99,680 379,930 Sources of funds Interest checking deposits 4,387 -- -- -- 4,387 Money market deposit accounts 90,954 -- -- -- 90,954 Regular savings accounts 26,341 -- -- -- 26,341 Certificates of deposit $100,000 or more 5,939 11,814 10,452 -- 28,205 Other time deposits 32,029 50,726 45,435 -- 128,190 Federal funds purchased and securities sold under agreements to repurchase 19,128 -- -- -- 19,128 Other borrowed money 333 -- 15 -- 348 ------- -------- ------- ------ ------- Total interest bearing liabilities 179,111 62,540 55,902 0 297,553 Rate sensitivity GAP (117,982) (44,843) 145,522 99,680 82,377 Cumulative GAP (117,982) (162,825) (17,303) 82,377 </TABLE> 5
The Company was liability sensitive as of December 31, 1998. There were $118.0 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, 1998. <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 ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> December 31, 1998 Maturities: Within 1 year $ 7,526 5.43% $ 0 0.00% $ 7,526 5.43% After 1 year, but within 5 years 51,445 6.20% 1,600 9.60% 53,045 6.30% After 5 years, but within 10 years 23,084 6.14% 19,354 8.24% 42,438 7.10% After 10 years 0 0.00% 27,641 7.91% 27,641 7.91% TOTAL $82,055 6.11% $48,595 8.10% $130,650 6.85% December 31, 1997 $62,126 6.33% $27,843 8.18% $89,969 6.90% December 31, 1996 $69,528 6.06% $20,015 8.17% $89,541 6.53% </TABLE> Yields are calculated on a fully tax equivalent basis using a 34% rate. At December 31, 1998, the book value of other marketable equity securities with no stated maturity totaled $5.58 million with an weighted average yield of 5.45%. These securities consisted of an adjustable rate mortgage fund of $4.4 million yielding 5.01%, Federal Home Loan Bank stock of $1.0 million yielding 7.50%, Federal Reserve stock of $85 thousand yielding 6.00% and other securities of $50 thousand. The book value of other marketable securities with no stated maturity totaled $5.48 million, yielding 6.13%; and $5.44 million, yielding 5.89%; at December 31, 1997, and 1996 respectively. 6
III. Loan Portfolio The following table shows a breakdown of total loans by type at December 31 for years 1994 through 1998: <TABLE> TABLE V LOANS <CAPTION> - ------------------------------------------------------------------------------- As of December 31, 1998 1997 1996 1995 1994 Dollars in thousands - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Commercial and other $ 65,143 $ 45,059 $ 28,944 $ 20,636 $ 17,806 Real Estate Construction 5,418 3,836 5,213 4,093 1,991 Real Estate Mortgage 105,285 104,141 104,230 109,469 105,703 Tax Exempt 1,401 2,093 2,464 3,003 4,754 Installment Loans to Individuals 58,618 66,615 57,733 52,154 43,487 ---------------------------------------------------- Total $235,865 $221,744 $198,584 $189,355 $173,741 ==================================================== </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, 1998 is presented below: <TABLE> TABLE VI MATURITY SCHEDULE OF SELECTED LOANS <CAPTION> - --------------------------------------------------------------------------------------- December 31, 1998 One year One through Over five Dollars in thousands or less five years years Total - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Commercial and other $19,680 $41,441 $4,022 $65,143 Real estate construction 5,010 408 0 5,418 ------- ------- ------ ------- Total $24,690 $41,849 $4,022 70,561 Loans maturing after one year with: Fixed interest rate $37,115 $3,782 $40,897 Variable interest rate $4,734 $240 $4,974 </TABLE> 7
The following table presents information concerning the aggregate amount of nonaccrual, past due and restructured loans as of December 31 for the years 1994 through 1998. <TABLE> TABLE VII NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS <CAPTION> - ----------------------------------------------------------------------------- As of December 31, 1998 1997 1996 1995 1994 Dollars in thousands - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Nonaccrual loans $253 $660 $1,550 $2,447 $2,955 Accruing loans past due 90 days or more 641 455 1,342 248 837 Restructured loans none none none none none Interest income which would have been recorded under original loan terms 52 205 163 350 470 Interest income recorded during the period 123 485 222 131 188 </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, 1998 such problem loans, not included in Table VII, amounted to approximately $1.2 million. The potential problem loans included one 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. 8
The following table shows an analysis of the Allowance for Loan Losses for the years 1994 through 1998. <TABLE> TABLE VIII ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES <CAPTION> - --------------------------------------------------------------------------------------------- For the year ended December 31, 1998 1997 1996 1995 1994 Dollars in thousands - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at beginning of period $ 2,671 $ 2,330 $ 2,251 $ 2,647 $ 2,692 Charge Offs: Commercial, financial and agricultural 296 84 98 1,210 147 Real estate construction 0 0 0 0 0 Real estate mortgage 87 67 2 135 316 Installment Loans to individuals 564 717 825 375 148 ---------------------------------------------------- Total charge offs 947 868 925 1,720 611 Recoveries: Commercial, financial and agricultural 139 239 87 296 431 Real estate construction 0 0 0 0 0 Real estate mortgage 25 1 14 44 19 Installment Loans to individuals 317 369 303 159 91 ---------------------------------------------------- Total recoveries 481 609 404 499 541 Net charge offs 466 259 521 1,221 70 Additions charged to operations 650 600 600 825 25 ---------------------------------------------------- Balance at end of period $ 2,855 $ 2,671 $ 2,330 $ 2,251 $ 2,647 Selected loan loss statistics Loans (net of unearned income): End of period $235,865 $221,744 $198,584 $189,355 $173,741 Daily average $226,908 $210,934 $192,940 $180,638 $160,204 Net charge offs to average total loans 0.21% 0.12% 0.27% 0.68% 0.04% Provision for loan losses to average total loans 0.29% 0.28% 0.31% 0.46% 0.02% Provision for loan losses to net charge offs 139.48% 231.66% 115.16% 67.57% 35.71% Allowance for loan losses to period end loans 1.21% 1.20% 1.17% 1.19% 1.51% Earnings to loan loss coverage* 14.64 23.67 10.28 3.25 56.21 * Income before taxes plus provision for loan losses, divided by net charge-offs. </TABLE> 9
The following table shows the amount of the Allowance for Loan Losses allocated to each category at December 31 for the years 1994 through 1998. <TABLE> - ---------------------------------------------------------------------------------------------------------------------------- TABLE IX ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - ---------------------------------------------------------------------------------------------------------------------------- <CAPTION> As of December 31, 1998 1997 1996 1995 1994 Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in Each in Each in Each in Each in Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and other $ 656 27.92% $ 575 21.26% $ 835 15.85% $ 843 12.57% $1,417 12.98% Real Estate Construction 17 2.30% 14 1.73% 23 2.62% 18 2.18% 20 1.15% Real Estate Mortgage 203 44.64% 240 46.97% 322 52.49% 370 58.21% 739 60.84% Consumer 370 25.14% 412 30.04% 391 29.04% 247 27.04% 135 25.03% Unallocated 1,609 0 1,430 0 759 0 773 0 381 0 --------------- --------------- --------------- --------------- --------------- Total $2,855 100.00% $2,671 100.00% $2,330 100.00% $2,251 100.00% $2,647 100.00% </TABLE> 10
V. Deposits The following table shows the average balances and average rates paid on deposits for the years ended December 31, 1996, 1997, and 1998. <TABLE> TABLE X DEPOSITS <CAPTION> -------------------------------------------------------------------------------------- For the year ended December 31, 1998 1997 1996 Average Average Average Average Average Average Dollars in thousands Balance Rate Balance Rate Balance Rate -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest bearing transaction <C> accounts $ 15,929 2.17% $ 24,376 2.20% $ 50,041 2.42% Money market deposit accounts 71,199 3.27% 49,302 3.10% 21,212 3.72% Savings accounts 26,211 2.74% 25,822 2.74% 26,354 2.74% Certificate of deposit, $100,000 26,084 5.60% 19,122 5.94% 17,026 5.52% Other certificate of deposit 121,676 5.54% 108,665 5.35% 103,029 5.48% ----------------- ----------------- ----------------- Total interest bearing deposits 261,099 4.44% 227,287 4.28% 217,662 4.27% Non-interest bearing demand deposits 56,001 49,432 46,198 ----------------- ----------------- ----------------- Total deposits $317,100 $276,719 $263,860 </TABLE> 10
The following table shows certificates of deposit in amounts of $100,000 or more as of December 31, 1998, 1997, and 1996 by time remaining until maturity. <TABLE> TABLE XI CERTIFICATE OF DEPOSIT $100,000 & MORE <CAPTION> - --------------------------------------------------------- Dollars in thousands 1998 1997 1996 Maturing in - --------------------------------------------------------- <S> <C> <C> <C> 3 months or less $ 3,592 $ 5,449 $ 3,089 3 through 6 months 6,353 3,087 3,550 6 through 12 months 7,345 5,843 3,774 over 12 months 10,915 9,467 7,013 ------- ------- ------- $28,205 $23,846 $17,426 </TABLE> 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. 1998 1997 1996 Return on average assets 1.22% 1.23% 1.10% Return on average equity 12.03% 11.88% 10.99% Dividend payout ratio 26.62% 25.68% 25.88% Average equity to average assets 10.15% 10.36% 10.01% 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 1998, 1997, and 1996 are presented in the following table. 11
<TABLE> TABLE XII SHORT TERM BORROWINGS <CAPTION> - ---------------------------------------------------------------------------------- 1998 1997 1996 Dollars in thousands Balance Rate Balance Rate Balance Rate - ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, Federal funds purchased $ 0 $ 0 $ 2,000 6.28% Securities sold under agreement to repurchase 19,128 4.25% 20,165 4.81% 15,135 4.58% U. S. treasury demand notes and other borrowed money 348 4.89% 4,025 5.27% 2,301 5.03% ------- ------- ------- Total $19,476 $24,190 $19,436 Average daily balance outstanding: Federal funds purchased $ 13 5.86% $ 271 5.54% $ 575 5.23% Securities sold under agreement to repurchase 21,700 4.66% 17,496 4.84% 14,413 4.76% U. S. treasury demand notes and other borrowed money 1,776 5.35% 1,857 5.33% 1,599 5.23% ------- ------- ------- Total $23,489 4.72% $19,624 4.89% $16,587 4.85% The maximum amount outstanding at any month end: Federal funds purchased $ 0 $ 0 $ 2,700 Securities sold under agreement to repurchase $26,094 $23,121 $16,046 U. S. treasury demand notes and other borrowed money $ 4,024 $ 4,033 $ 4,052 </TABLE> 12
Item 2. Description of Property The Bank owns the Main Office, three office buildings4, and seven branches5. 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 6leased from unrelated parties under leases with renewal options which expire anywhere from 10-15 years. The Company is building a branch in Norge VA and expects to be open in the third quarter of 1999. 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, 1998. Part II Item 5. Market for Common Equity And Related Stockholder Matters Beginning in 1998 the common stock of Old Point Financial Corporation was quoted on the OTC Bulletin Board under the symbol "OPOF". The approximate number of shareholders of record as of December 31, 1998 was 1,480. The range of high and low prices and dividends per share of the Company's common stock for each quarter during 1998 and 1997 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. 13
<TABLE> TABLE XIII SELECTED FINANCIAL HIGHLIGHTS <CAPTION> - --------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- (Dollars in Thousands except per share data) RESULTS OF OPERATIONS <S> <C> <C> <C> <C> <C> Interest income.......................... $ 27,805 $ 25,242 $ 23,377 $ 21,534 $ 19,234 Interest expense......................... 12,700 10,681 10,093 9,531 7,625 -------------------------------------------------- Net interest income...................... 15,105 14,561 13,284 12,003 11,609 Provision for loan loss.................. 650 600 600 825 25 -------------------------------------------------- Net interest income after provision for loss................................ 14,455 13,961 12,684 11,178 11,584 Gains (losses) on sales of investment securities................... 0 (1) 2 9 407 Noninterest income....................... 4,911 4,275 4,134 3,836 3,755 Noninterest expenses..................... 13,193 12,704 12,066 11,884 11,837 --------------------------------------------------- Income before taxes...................... 6,173 5,531 4,754 3,139 3,909 Income taxes ............................ 1,537 1,441 1,309 797 1,136 ---------------------------------------------------- Net income............................... $ 4,636 $ 4,090 $ 3,445 $ 2,342 $ 2,773 FINANCIAL CONDITION Total assets............................. $404,118 $348,671 $316,345 $304,266 $277,680 Total deposits........................... 343,413 287,100 263,519 256,535 235,599 Total loans.............................. 235,865 221,744 198,584 189,355 174,881 Stockholders' equity..................... 40,013 36,332 32,400 30,328 26,222 Average assets........................... 380,756 332,155 313,012 291,174 278,398 Average equity........................... 38,526 34,418 31,333 29,022 26,694 PERTINENT RATIOS Return on average assets................. 1.22% 1.23% 1.10% 0.80% 1.00% Return on average equity................. 12.03% 11.88% 10.99% 8.07% 10.39% Dividends paid as a percent of net income 26.62% 25.68% 25.88% 33.17% 25.03% Average equity as a percent of average asssets......................... 10.12% 10.36% 10.01% 9.97% 9.59% PER SHARE DATA Basic EPS................................ $1.80 $1.60 $1.35 $0.92 $1.10 Cash dividends declared.................. 0.48 0.41 0.35 0.305 0.275 Book value............................... 15.54 14.16 12.72 11.91 10.37 GROWTH RATES Year end assets.......................... 15.90% 10.22% 3.97% 9.57% 3.33% Year end deposits........................ 19.61% 8.95% 2.72% 8.89% 1.77% Year end loans........................... 6.37% 11.66% 4.87% 8.28% 8.08% Year end equity.......................... 10.13% 12.14% 6.83% 15.66% 8.39% Average assets........................... 14.63% 6.12% 7.50% 4.59% 3.53% Average equity........................... 11.94% 9.85% 7.96% 8.72% 11.90% Net income............................... 13.35% 18.72% 47.10% -15.54% 59.55% Cash dividends declared.................. 17.07% 17.14% 14.75% 10.91% 37.50% Book value............................... 9.74% 11.30% 6.83% 14.78% 6.54% </TABLE> 14
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 $4.64 million, or $1.80 per share in 1998 compared to $4.09 million, or $1.60 per share in 1997 and $3.45 million, or $1.35 per share in 1996. Return on average assets was 1.22% in 1998, 1.23% in 1997 and 1.10% in 1996. Return on average equity was 12.03% in 1998, 11.88% in 1997 and 10.99% in 1996. For the past five years return on average assets has averaged 1.07% and return on average equity has averaged 10.67%. 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 $16.08 million in 1998, up $766 thousand, or 5% from $15.30 million in 1997 which was up $1.49 million, or 11% from $13.82 million in 1996. 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 decreased to 4.48% in 1998 from 4.91% in 1997 which was up from 4.75% in 1996. Tax equivalent interest income increased $2.79 million, or 11%, in 1998. Average earning assets grew $46.53 million, or 15%. Total average loans increased $15.97 million, or 8%, while average investment securities increased $25.24 million, or 26%. The yield on earning assets decreased in 1998 by thirty-one basis points primarily due to lower interest rates. The prime rate which is a major influence on rates, declined seventy-five basis points in 1998. Interest expense increased $2.02 million or 19%, in 1998. Interest bearing liabilities increased 15% in 1998. The cost of funding liabilities increased thirteen basis points due to an increase in money market accounts and certificates of deposits paying a higher interest rate. The bank offered these attractively priced products to gain market share in 1998. 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 increased to $650 thousand in 1998 from $600 thousand in 1997 and 1996. Loans charged off during 1998 totaled $947 thousand compared to $868 thousand in 1997 and $925 thousand in 1996, while recoveries amounted to $481 thousand in 1998, $609 thousand in 1997 and $404 thousand in 1996. During 1996 a large portion of the loans charged off were in the indirect dealer installment portfolio. These higher charge offs were due in large part to an increase in personal bankruptcies. As a result of these losses the underwriting standards were raised for indirect dealer loans. The composition of installment loans has shifted from 60% in dealer loans in 1996 to 51% in 1997 to 46% in 1998. Indirect dealer loans charged off net of recoveries were reduced by $186 thousand, or 44%, in 1997 from 1996, and $132 thousand, or 55%, in 1998 from 1997. In addition, there was a commercial loan charged off due to bankruptcy as well as deficiencies on foreclosed real estate recorded during 1998. 15
The Company's net loans charged off to year-end loans were 0.20% in 1998, 0.12% in 1997, and 0.26% in 1996. The allowance for loan losses, as a percentage of year-end loans, was 1.21% in 1998, 1.20% in 1997, and 1.17% in 1996. As of December 31, 1998, nonperforming assets were $737 thousand, down from $1.43 million at year-end 1997 which was down from $1.90 million at year-end 1996. Nonperforming assets consist of loans in nonaccrual status and other real estate. The 1998 total consisted of other real estate of $484 thousand and $253 thousand 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 and $130 thousand in foreclosed real estate. Nonaccrual loans consisted of $101 thousand in commercial loans and $152 thousand in mortgage 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 $641 thousand as of December 31, 1998 compared to $455 thousand as of December 31, 1997, which decreased from $1.34 million as of December 31, 1996. 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 $637 thousand, or 15% in 1998 from 1997 compared to an increase of $138 thousand, or 3% in 1997 from 1996. The 1998 increase was due to higher Trust Services fees and service charges on deposit accounts. The bank experienced excellent growth in transaction deposit accounts in 1998. The 1997 increase was due primarily to Trust Services fees and other service charge income. OTHER EXPENSES Other expenses increased $489 thousand or 4% in 1998 over 1997 after increasing 5% in 1997 from 1996. Due to a one-time insurance rebate in 1998 salaries and employee benefits increased by only $127 thousand or 2% in 1998. Occupancy expense increased $94 thousand, or 11% in 1998 primarily due to costs associated with the opening of a new office building in Newport News VA which is home to Trust and Financial Services and a Commercial Loan office. Equipment expense increased $75 thousand or 7% due to higher depreciation expense on new computer systems and related service contracts and equipment repairs. Other operating expenses increased $193 thousand or 6%. Expenses contributing to the increase were marketing and customer development costs which helped provide for the loan and deposit growth. Due to the extensive loan growth, loan expenses associated with originating those loans increased sharply in 1998. ASSETS At December 31, 1998, the Company had total assets of $404.1 million, up 16% from $348.7 million at December 31, 1997. Average assets in 1998 were $380.8 million compared to $332.2 million in 1997. The growth in assets in 1998 was due to the increase in deposits which were up 20% in 1998. These deposits funded an increase of 42% in investment securities. The Company has purchased a branch site in Norge, VA. The Company is building a new branch of approximately 2,500 square feet. The branch will provide full service banking including consumer and business services. 16
LOANS Total loans as of December 31, 1998 were $235.9 million, up 6% from $221.7 million at December 31, 1997. Commercial loans as well as real estate construction loans accounted for the growth in the loan portfolio growing 45% and 41%, respectively. Installment loans to individuals decreased from 1997 due primarily to a reduction in the indirect dealer loan portfolio. Footnote 3 of the financial statements details the loan volume by category for the past two years. INVESTMENT SECURITIES At December 31, 1998 total investment securities were $137.5 million, up 42% from $96.5 million on December 31, 1997. 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, 1998, total deposits amounted to $343.4 million, up 20% from $287.1 million on December 31, 1997. Non-interest bearing deposits increased $13.0 million, or 25%, in 1998 over 1997. Savings deposits increased $21.7 million, or 22%, in 1998 over 1997. Certificates of Deposit increased $21.6 million or 16% in 1998 over 1997. STOCKHOLDERS' EQUITY Total stockholders' equity as of December 31, 1998 was $40.0 million, up 10% from $36.3 million on December 31, 1997. 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 stockholders' equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses. The following is a summary of the Company's capital ratios for 1998, 1997 and 1996. 1998 1998 1997 1996 Regulatory Requirements Tier 1 4.00% 14.89% 15.06% 15.63% Total Capital 8.00% 15.98% 16.19% 16.76% Tier 1 Leverage 3.00% 10.26% 10.32% 10.21% Year-end book value was $15.54 in 1998 and $14.16 in 1997. Cash dividends were $1.2 million, or $.48 per share in 1998 and $1.0 million, or $.41 per share in 1997. The common stock of the Company has not been extensively traded. The table below shows the high and low prices for each quarter of 1998 and 1997. During 1997 the stock was not listed on an exchange and was not quoted by NASDQ. Bid and ask prices were not available and the trading of stock was limited. The 1997 prices were based on a limited number of transactions known to Management in 1997. Beginning in 1998 the stock was quoted on the OTC Bulletin Board under the symbol "OPOF" and the prices below are based on trades through the OTC Bulletin Board. There were 1480 stockholders of the Company as of December 31, 1998. 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 1998 and 1997. 17
1998 1997 Market Value Market Value Dividend High Low Dividend High Low 1st Quarter $0.11 $39.00 $25.50 $0.10 $20.75 $20.75 2nd Quarter $0.11 $44.00 $37.00 $0.10 $21.00 $20.75 3rd Quarter $0.13 $43.00 $38.00 $0.10 $21.25 $20.75 4th Quarter $0.13 $40.50 $30.00 $0.11 $25.00 $21.00 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. Year 2000 The "Year 2000" problem relates to the fact that many computer programs use two digits to define a year and assume that the century is 1900. Therefore, these programs will not recognize the turn of the century. The Company has a five-step plan to identify, correct, upgrade and test all of its hardware and software. The five phases of the plan are awareness, assessment, renovation, validation, and implementation. This plan conforms to the standard established by the Federal Financial Institutions Examination Council (FFIEC). The Company is on schedule to meet the regulatory deadlines established by the FFIEC. A Year 2000 project team has been assembled which meets on a monthly basis to monitor progress and address any new issues that might arise. The Company has identified and cataloged all of its hardware and software. Software and hardware that is not Year 2000 compliant has been identified and is being upgraded and/or replaced. Additionally, the Company's major vendors and customers are being contacted to determine their Year 2000 efforts. These vendors and customers have indicated that they are Year 2000 compliant or are on schedule to become compliant. The Company is dependent on public utility companies to supply electricity, gas, water, sewage, and telecommunications. These utility companies have provided Old Point with some information regarding their status in becoming Year 2000 compliant. The Year 2000 project team continues to monitor their progress. The Company has reviewed its non-information technology hardware and has determined that there are no material systems that have imbedded microchips which would be affected by the Year 2000 date problem. The worst case scenario for Year 2000 would be a systemic failure of electric power and communications between our branch offices, main office, and third party providers of services such as ATM's and electronic transactions. Old Point is developing a plan to provide a process that will enable the Company to stabilize operations at minimum acceptable levels. This business resumption contingency plan entails the manual processing of transactions that impact customer accounts. The Company has installed a diesel generator at the Main Office location to provide electricity in the event of a power failure. A minimal level of service to our customers can be maintained at the Main Office until the power is restored. 18
The Company purchased its core application software which processes loans, deposits and general ledger from Fiserv. Fiserv performed extensive testing of its software and has stated that it is Year 2000 compliant under their test conditions. The Company has successfully tested the core applications for Year 2000 compliance. In addition, other software that interfaces with the core application is also being tested. This testing is expected to be complete by the first quarter of 1999. The Company continues to upgrade other hardware and software as needed. The Company plans to complete the five phases of its Year 2000 plan for existing hardware and software by June 30, 1999. Any hardware or software purchased subsequently will also be tested for Year 2000 compliance. The Office of the Comptroller of the Currency (OCC) is responsible for examining the Bank for compliance to the regulatory standard. In addition, the internal audit department has completed an audit verifying and validating the processes the Company uses to test the applications. Operating and capital budgets incorporate projected expenditures necessary to ensure that all systems are Year 2000 compliant. Through December 31, 1998 the Company has spent approximately $550 thousand in capital expenditures to upgrade its computer hardware and software to be Year 2000 compliant. In addition, the Company has spent approximately $125 thousand in operating expenses to test its software applications and hardware for Year 2000 compliance. An additional $250 thousand in capital expenditures is budgeted for the remainder of 1999 for Year 2000 hardware and software upgrades as well as another $75 thousand for operating expenses to complete the testing for Year 2000 compliance. At this time management does not believe that Year 2000 related expenditures will have an adverse material effect on the Company. 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. The following are the summarized financial statements of the Company. 19
Independent Auditors' Report To the Board of Directors Old Point Financial Corporation Hampton, Virginia We have audited the accompanying consolidated balance sheets of Old Point Financial Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Old Point Financial Corporation and subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Eggleston Smith P.C. Eggleston Smith P.C. January 15, 1999 Newport News, Virginia 20
<TABLE> CONSOLIDATED BALANCE SHEETS <CAPTION> - ----------------------------------------------------------------------------------------- December 31, 1998 1997 - ----------------------------------------------------------------------------------------- (Dollars in Thousands) <S> ASSETS <C> <C> Cash and due from banks $ 10,311 $ 12,208 Investments: Securities available-for-sale, at market 82,568 67,546 Securities to be held-to-maturity (Market value $55,424 in 1998 and $29,096 in 1997) 54,919 28,980 Federal funds sold 6,578 6,977 Loans, total 235,865 221,744 Less - allowance for loan losses 2,855 2,671 -------- -------- Net loans 233,010 219,073 Premises and equipment 12,052 9,742 Other real estate owned 484 774 Other assets 4,196 3,371 -------- -------- Total assets $404,118 $348,671 ======== ======== LIABILITIES Non interest-bearing deposits $ 65,336 $ 52,360 Savings deposits 121,682 99,991 Certificates of deposit 156,395 134,749 -------- -------- Total deposits 343,413 287,100 Federal funds purchased and securities sold under repurchase agreements 19,128 20,165 Interest bearing demand notes issued to the United States Treasury and other liabilities for borrowed money 348 4,025 Other liabilities 1,216 1,049 -------- -------- Total Liabilities 364,105 312,339 STOCKHOLDERS' EQUITY Common stock, $5 par value, 6,000,000 shares authorized Issued 2,575,444 in 1998 and 2,566,172 in 1997 12,877 12,831 Capital surplus 10,020 9,693 Retained earnings 16,285 13,098 Accumulated other comprehensive income 831 710 -------- -------- Total stockholders' equity 40,013 36,332 -------- -------- Total liabilities and stockholders' equity $404,118 $348,671 ======== ======== See Notes to Consolidated Financial Statements </TABLE> 21
<TABLE> CONSOLIDATED STATEMENTS OF INCOME <CAPTION> - ----------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- (Dollars in Thousands except per share amounts) <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 20,190 $ 19,203 $ 17,580 Interest on investment securities Taxable 5,284 4,473 4,736 Exempt from income tax 1,759 1,290 853 --------- --------- --------- 7,043 5,763 5,589 Interest on trading account securities 0 0 0 Interest on federal funds sold 572 276 208 --------- --------- --------- Total interest income 27,805 25,242 23,377 INTEREST EXPENSE Interest on savings deposits 3,390 2,773 2,721 Interest on certificates of deposit 8,201 6,948 6,582 Interest on federal funds purchased and securities sold under repurchase agreements 1,013 861 706 Interest on demand notes issued to the United States Treasury and other liabilities for borrowed money 96 99 84 --------- --------- --------- Total interest expense 12,700 10,681 10,093 --------- --------- --------- Net interest income 15,105 14,561 13,284 Provision for loan losses 650 600 600 --------- --------- --------- Net interest income after provision for loan losses 14,455 13,961 12,684 OTHER INCOME Income from fiduciary activities 1,930 1,750 1,667 Service charges on deposit accounts 1,986 1,723 1,887 Other service charges, commissions and fees 642 573 360 Security gains (losses), net 0 (1) 2 Income from trading account 0 0 0 Other operating income 353 229 220 --------- --------- --------- Total other income 4,911 4,274 4,136 OTHER EXPENSE Salaries and employee benefits 7,797 7,670 7,406 Occupancy expense 940 846 768 Equipment expense 1,169 1,094 1,029 Other operating expense 3,287 3,094 2,863 --------- --------- --------- Total other expenses 13,193 12,704 12,066 --------- --------- --------- Income before income taxes 6,173 5,531 4,754 Income taxes 1,537 1,441 1,309 --------- --------- --------- Net income $ 4,636 $ 4,090 $ 3,445 ========= ========= ========= Basic Earnings per Share Average shares outstanding (in thousands) 2,571 2,561 2,547 Net income per share of common stock $1.80 $1.60 $1.35 Diluted Earnings per Share Average shares outstanding (in thousands) 2,595 2,575 2,563 Net income per share of common stock $1.79 $1.59 $1.34 See Notes to Consolidated Financial Statements </TABLE> 22
<TABLE> Consolidated Statements of Cash Flows <CAPTION> ----------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................. $ 4,636 $ 4,090 $ 3,445 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 990 941 883 Provision for loan losses................................ 650 600 600 (Gains) losses on sale of investment securities, net..... 0 1 (2) Net amortization & accretion of securities............... 169 368 679 Net (increase) decrease in trading account............... 0 0 0 Loss on sale of equipment................................ 0 0 110 (Increase) decrease in other real estate owned............ (297) (613) 152 (Increase) decrease in other assets (net of tax effect of FASB 115 adjustment)............. (887) 16 357 Increase (decrease) in other liabilities................. 167 59 (117) --------- --------- --------- Net cash provided by operating activities.............. 5,428 5,462 6,107 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities ...................... (77,059) (31,001) (30,015) Proceeds from maturities & calls of securities .......... 36,111 23,949 24,171 Proceeds from sales of available - for - sale securities 0 6,218 2,003 Proceeds from sales of held - to - maturity securities 0 0 0 Loans made to customers.................................. (147,183) (123,513) (105,807) Principal payments received on loans..................... 132,596 100,094 96,057 Purchases of premises and equipment...................... (3,303) (1,304) (2,113) Proceeds from sales of premises and equipment............ 4 23 20 Proceeds from sales of other real estate owned........... 587 193 448 (Increase) decrease in federal funds sold................ 399 (6,416) (48) --------- --------- --------- Net cash provided by (used in) investing activities.... (57,848) (31,757) (15,284) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in non-interest bearing deposits..... 12,976 4,826 4,632 Increase (decrease) in savings deposits.................. 21,691 3,794 391 Proceeds from the sale of certificates of deposit........ 57,762 59,771 43,478 Payments for maturing certificates of deposit............ (36,116) (44,810) (41,517) Increase (decrease) in federal funds purchased & repurchase agreements................................... (1,037) 3,030 1,399 Increase (decrease) in interest bearing demand notes and other borrowed money................... (3,677) 1,724 1,741 Proceeds from issuance of common stock................... 158 230 0 Dividends paid........................................... (1,234) (1,050) (891) --------- --------- --------- Net cash provided by financing activities.............. 50,523 27,515 9,233 Net increase (decrease) in cash and due from banks..... (1,897) 1,220 56 Cash and due from banks at beginning of period......... 12,208 10,988 10,932 --------- --------- --------- Cash and due from banks at end of period............... $ 10,311 $ 12,208 $ 10,988 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest............................................... $ 12,533 $ 10,587 $ 10,126 Income taxes........................................... 1,600 1,475 1,275 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING TRANSACTIONS Unrealized gain (loss) on investment securities, net of tax................................. $ 121 $ 662 ($482) See Notes to Consolidated Financial Statements. </TABLE> 23
<TABLE> CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <CAPTION> ---------------------------------------------------------------------------------------------------------- Accumulated Common Other Total Stock Capital Retained Comprehensive Stockholders' (Par Value) Surplus Earnings Income(Loss) Equity ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands) YEAR ENDED DECEMBER 31, 1996 <S> <C> <C> <C> <C> <C> Balance, beginning of year $ 6,368 $ 9,345 $14,085 $ 530 $30,328 Comprehensive income Net income 0 0 3,445 0 3,445 (Decrease) Increase in unrealized gain on investment securities 0 0 0 (482) (482) ------- ------- ------- ------- ------- Total Comprehensive income 0 0 3,445 (482) 2,963 Sale of stock 0 0 0 0 0 Cash dividends paid 0 0 (891) 0 (891) ------- ------- ------- ------- ------- Balance, end of year $ 6,368 $ 9,345 $16,639 $ 48 $32,400 ======= ======= ======= ======= ======= YEAR ENDED DECEMBER 31, 1997 Balance, beginning of year $ 6,368 $ 9,345 $16,639 $ 48 $32,400 Comprehensive income Net income 0 0 4,090 0 4,090 (Decrease) Increase in unrealized gain on investment securities 0 0 0 662 662 ------- ------- ------- ------- ------- Total Comprehensive income 0 0 4,090 662 4,752 Sale of stock 48 348 (166) 0 230 Stock dividend declared on common stock 6,415 0 (6,415) 0 0 Cash dividends paid 0 0 (1,050) 0 (1,050) ------- ------- ------- ------- ------- Balance, end of year $12,831 $ 9,693 $13,098 $ 710 $36,332 ======= ======= ======= ======= ======= YEAR ENDED DECEMBER 31, 1998 Balance, beginning of year $12,831 $ 9,693 $13,098 $ 710 $36,332 Comprehensive income Net income 0 0 4,636 0 4,636 (Decrease) Increase in unrealized gain on investment securities 0 0 0 121 121 ------- ------- ------- ------- ------- Total Comprehensive income 0 0 4,636 121 4,757 Sale of stock 46 327 (215) 0 158 Cash dividends paid 0 0 (1,234) 0 (1,234) -------- ------- ------- ------- ------- Balance, end of year $12,877 $10,020 $16,285 $ 831 $40,013 ======== ======= ======= ======= ======= See Notes to Consolidated Financial Statements </TABLE> 24
NOTE 2, Investment Securities At December 31, 1998, the investment securities portfolio is composed of securities classified as held-to-maturity and 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, 1998 and 1997, were: -------------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) Obligations of other United States Government Agencies as of December 31, 1998 $54,919 $505 $0 $55,424 ======= ==== ==== ======= Obligations of other United States Government Agencies as of December 31, 1997 $28,980 $128 ($12) $29,096 ======= ==== ==== ======= The amortized cost and fair values of investment securities available-for-sale at December 31, 1998 were: -------------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) United States Treasury securities $ 7,526 $ 30 $ 0 $ 7,556 Obligations of other United States Government agencies 19,611 261 (24) 19,848 Obligations of state and political subdivisions 48,596 1,395 (235) 49,756 Adjustable Rate Mortgage Fund 4,400 0 (161) 4,239 Federal Home Loan Bank Stock 1,042 0 0 1,042 Federal Reserve Bank stock 85 0 0 85 Other marketable equity securities 50 0 (8) 42 ------- ------ ------ ------- Total $81,310 $1,686 ($428) $82,568 ======= ====== ====== ======= The amortized cost and fair values of investment securities available-for-sale at December 31, 1997 were: ----------------------------------------------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value (Dollars in Thousands) United States Treasury Securities $22,189 $ 93 ($63) $22,219 Obligations of other United States Government agencies 10,957 121 (28) 11,050 Obligations of State and Political subdivisions 27,844 1,052 0 28,896 Adjustable Rate Mortgage Fund 4,400 0 (99) 4,301 Federal Home Loan Bank Stock 945 0 0 945 Federal Reserve Bank stock 85 0 0 85 Other marketable equity Securities 50 0 0 50 ------- ------ ----- ------- Total $66,470 $1,266 ($190) $67,546 ======= ====== ===== ======= 25
NOTE 2, Investment Securities (Continued) Investment securities carried at $37.8 million and $36.4 million at December 31, 1998 and 1997, 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, 1998 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, 1998 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 $ 7,526 $ 7,556 $ 0 $ 0 Due after one year through five years 16,287 16,530 36,483 36,813 Due after five years through ten years 24,002 24,804 18,436 18,611 Due after ten years 27,917 28,270 0 0 ------- ------- ------- ------- Total debt securities 75,732 77,160 54,919 55,424 Other securities without stated maturities 5,578 5,408 0 0 ------- ------- ------- ------- Total investment securities $81,310 $82,568 $54,919 $55,424 ======= ======= ======= ======= </TABLE> The proceeds from the sale and maturities of investment securities, and the related realized gains and losses are shown below: 1998 1997 1996 ----- ---- ----- (Dollars in Thousands) Proceeds from sales and maturities of investments $36,111 $30,167 $26,174 ======= ======= ======= Realized gains $ 0 $ 3 $ 2 Realized losses 0 4 0 ------- ------- ------- Net gains (losses) $ 0 $ (1) $ 2 ======= ======= ======= 26
NOTE 3, Loans At December 31, loans before allowance for loan losses consisted of: 1998 1997 ---- ---- (Dollars in Thousands) Commercial and other $ 65,143 $ 45,059 Real estate - construction 5,418 3,836 Real estate - mortgage 105,285 104,141 Installment loans to individuals 58,618 66,615 Tax exempt loans 1,401 2,093 -------- -------- Total $235,865 $221,744 ======== ======== Information concerning loans which are contractually past due or in non-accrual status is as follows: 1998 1997 ---- ---- (Dollars in Thousands) Contractually past due loans - past due 90 days or more and still accruing interest $641 $455 ==== ==== Loans which are in non-accrual status $253 $660 ==== ==== 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 aggrgate direct and indirect loans of these persons totaled $1.8 million and $1.9 million at December 31, 1998 and 1997, 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, 1998. The bank does not account for any of its loans under the provisions of Statement of Financial Accounting Standards No. 114 or 118 related to impaired loans. NOTE 4, Allowance for Loan Losses Changes in the allowance for loan losses are as follows: 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Balance, beginning of year $2,671 $2,330 $2,251 Recoveries 481 609 404 Provision for loan losses 650 600 600 Loans charged off (947) (868) (925) ------ ------ ------ Balance, end of year $2,855 $2,671 $2,330 ====== ====== ====== 27
NOTE 5, Premises and Equipment At December 31, premises and equipment consisted of: 1998 1997 ---- ---- (Dollars in Thousands) Land $ 2,458 $ 2,133 Buildings 9,879 7,806 Leasehold improvements 882 855 Furniture, fixtures and equipment 9,925 9,051 ------- ------- Total cost 23,144 19,845 Less accumulated depreciation and amortization 11,092 10,103 ------- ------- Net book value $12,052 $ 9,742 ======= ======= NOTE 6, Other Real Estate Owned Other real estate consisted of the following at December 31: 1998 1997 ---- ---- (Dollars in Thousands) Foreclosed real estate $130 $420 Property held for sale 354 354 ---- ---- Total $484 $774 ==== ==== NOTE 7, Indebtedness The Bank's short-term borrowings include federal funds purchased, securities sold under repurchase agreements (including $1.4 million to directors in 1998 and $4.0 million in 1997) 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 the federal funds rate. NOTE 8, Stock Option Plan The Company has stock option plans which reserve 143,634 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> 1996 Shares 64,474 28,772 (500) (400) 92,346 Weighted average exercisable price $16.41 $18.75 $18.13 $18.13 $17.13 <CAPTION> <S> <C> <C> <C> <C> <C> 1997 Shares 92,346 25,754 (22,280) (11,286) 84,534 Weighted average exercisable price $17.13 $20.75 $13.12 $18.60 $19.09 <CAPTION> <S> <C> <C> <C> <C> <C> 1998 Shares 84,534 64,500 (5,400) 0 143,634 Weighted average exercisable price $19.09 $41.86 $18.54 $ 0 $29.33 </TABLE> At December 31, 1998, exercise prices on outstanding options ranged from $18.13 to $41.86 per share and the weighted average remaining contractual life was 8 years. 28
NOTE 8, Stock Option Plan (Continued) The Company accounts for its stock option plans in accordance with APB 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 SFAS 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: 1998 1997 1996 ---- ----- ---- Pro-forma net income (in thousands) $4,565 $4,041 $3,401 ------ ------ ------ Pro-forma earnings per share $1.76 $1.57 $1.33 ----- ----- ----- Pro-forma amounts were computed using a 6% risk free interest rate over a 10 year term using an annual dividend rate of between 1.33% and 1.74% and a .01% volatility rate. The pro-forma effect of the potential exercise of stock options on basic earnings per share would be to increase the number of weighted average number of outstanding shares by approximately 24,000 in 1998, 14,000 in 1997, and 16,000 in 1996. The Company also has an Employee Stock Purchase Plan which reserves 66,260 shares of common stock for eligible employees. The purchase price is 95% of the lesser of (1) the common stock's fair market value at July 1 or (2) the common stock's fair market value at the following June 30. During 1998, 4,780 shares of common stock were purchased by employees. NOTE 9, Income Taxes The components of income tax expense are as follows: 1998 1997 1996 ---- ----- ----- (Dollars in Thousands) Currently payable $1,564 $1,458 $1,214 Deferred (27) (17) 95 ------ ------ ------ Reported tax expense $1,537 $1,441 $1,309 ------ ------ ------ The items that caused timing differences affecting deferred income taxes are as follows: 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Provision for loan losses $ (156) $ (186) $ (8) Pension plan expenses 46 17 32 Deferred loan fees, net (22) 24 21 Security gains and losses 0 (4) (7) Interest on certain non-accrual loans 68 95 8 Depreciation 31 37 46 Other 6 0 3 ------ ----- ------ Total $ (27) $ (17) $ 95 ===== ===== ====== A reconciliation of the "expected" Federal income tax expense on income before income taxes with the reported income tax expense follows: 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Expected tax expense (34%) $2,099 $1,880 $1,616 Interest expense on tax exempt assets 82 57 38 Tax exempt interest (640) (494) (352) Disqualified incentive stock options (10) (2) 0 Other, net 6 0 7 ------ ------ ------ Reported tax expense $1,537 $1,441 $1,309 ====== ====== ====== 29
NOTE 9, Income Taxes (Continued) The components of the net deferred tax asset included in other assets are as follows at December 31: 1998 1997 -------------------- (Dollars in Thousands) Components of Deferred Tax Liability: Depreciation $ (179) $ (147) Accretion of discounts on securities (9) (9) Net unrealized (gain) on available-for-sale securities (428) (366) Deferred loan fees and costs (70) (91) Pension (38) 0 ------ ----- Deferred tax liability (724) (613) Components of Deferred Tax Asset: Allowance for loan losses 709 552 Net unrealized loss on available-for-sale securities 0 0 Interest on non-accrual loans 147 216 Deferred compensation 5 8 Pension 0 8 ------ ------ Deferred tax asset, net $ 137 $ 171 ====== ====== NOTE 10, Lease Commitments The Bank has noncancellable leases on premises and equipment expiring at various dates, including extensions to 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, 1998, under noncancellable leases is $922 thousand which is due as follows: Year (Dollars in Thousands) ------ 1999 $170 2000 109 2001 109 2002 108 2003 68 Remaining term of leases 358 ------ Total $922 ====== The aggregate rental expense of premises and equipment was $220 thousand, $208 thousand and $191 thousand for 1998, 1997, and 1996 respectively. 30
NOTE 11, Pension Plan The following tables set forth the Pension Plan's changes in benefit obligation, plan assets, funded status, assumptions and the components of net periodic benefit cost recognized in the Bank's financial statements at December 31: Pension Benefits 1998 1997 ---- ---- (Dollars in Thousands) Change in benefit obligation Benefit obligation at beginning of year $2,445 $2,261 Service cost 148 142 Interest cost 193 179 Actuarial gain 0 32 Benefits paid (151) (169) ------ --------- Benefit obligation at end of year $2,635 $2,445 ====== ========= Change in plan assets Fair value of plan assets at beginning of year $2,341 $2,003 Actual return on plan assets 329 302 Employer contribution 288 206 Benefits paid (151) (169) ----- --------- Fair value of plan assets at end of year $2,807 $2,342 ====== ========= Funded status $(172) $103 Unrecognized prior service cost (36) (43) Unrecognized transition obligation 38 50 Unrecognized actuarial gains (loss) 55 (88) ----- --------- Prepaid (accrued) benefit cost $(115) $22 ===== ========= Weighted-average assumptions as of December 31: 1998 1997 ---- ---- Discount rate 8.00% 8.00% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 5.00% 5.00% 1998 1997 1996 ---- ----- ---- Components of net periodic benefit cost (Dollars in Thousands) Service Cost $148 $141 $146 Interest cost 193 179 168 Expected return on plan assets (185) (158) (131) Amortization of prior service cost 7 6 17 Amortization of transition obligation (12) (12) (12) ---- ---- ---- Net periodic benefit cost $151 $156 $188 NOTE 12, Profit Sharing The Bank has a defined contribution profit sharing and thrift plan covering substantially all of its employees. 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 $283 thousand and $ 258 thousand in 1998 and 1997 respectively. 31
NOTE 13, Commitments and Contingencies In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities. These commitments and contingencies represent off-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. Off- balance sheet items at December 31 are as follows: 1998 1997 (Dollars in Thousands) -------------------------------------------------------------- Commitments to extend credit: Home equity lines of credit $10,463 $ 9,748 Construction and development loans committed but not funded 9,168 7,124 Other lines of credit (principally commercial) 32,514 19,556 ------- ------- Total $52,145 $36,428 ======= ======= Irrevocable letters of credit $646 $822 ==== ==== 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 extensions 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 agreements. Most guarantees extend for less than two years and expire in decreasing amounts through 1999. 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. 32
NOTE 14, Fair Value of Financial Instruments The estimated fair value of the Bank's financial instruments at December 31 are as follows: <TABLE> <CAPTION> 1998 1997 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value (Dollars in Thousands) (Dollars in Thousands) <S> <C> <C> <C> <C> Cash and due from banks $ 10,311 $ 10,311 $ 12,208 $ 12,208 Investment securities, held-to-maturity 54,919 55,424 28,980 29,096 Investment securities, available-for-sale 82,568 82,568 67,546 67,546 Federal funds sold 6,578 6,578 6,977 6,977 Loans, net of allowances for loan losses 233,010 234,072 219,073 217,913 Deposits: Non-interest bearing deposits 65,336 65,336 52,360 52,360 Savings deposits 121,682 121,682 99,991 99,991 Certificates of Deposit 156,395 157,322 134,749 134,330 Securities sold under repurchase agreement and federal funds purchased 19,128 19,128 20,165 20,165 Interest bearing U.S. Treasury demand notes and other liabilities for borrowed money 348 348 4,025 4,025 Commitments to extend credit 52,145 52,145 36,428 36,428 Irrevocable letters of credit 646 646 822 822 </TABLE> The above presentation of fair values is required by the Statement of 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 instrument. The carrying amounts of cash and due from banks, federal funds sold, demand and savings deposits 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 the market value approximates carrying value. Investment securities are valued at the quoted market price for individual securities held. The fair value of loans is estimated by discounting future cash flows using 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, Regulatory Matters The Company is required to maintain minimum amounts of capital to "risk weighted" assets, as defined by the banking regulators. At December 31, 1998, 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 14.89% and 15.98%. The Company's leverage ratio at December 31, 1998 was 10.26%. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in 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 1999, without approval of the Comptroller of the Currency, $6.3 million plus an additional amount equal to the Bank's retained net profits for 1999 up to the date of any dividend declaration. 33
OLD POINT FINANCIAL CORPORATION PARENT ONLY BALANCE SHEETS -------------------------------------------- As of December 31, Dollars in thousands 1998 1997 -------------------------------------------- ASSETS Cash in bank $ 294 $ 289 Investment securities 2,107 1,877 Total Loans 0 0 Investment in subsidiary 37,598 34,171 Other real estate owned 0 0 Other assets 14 8 ------- ------- TOTAL ASSETS $40,013 $36,345 ======= ======= LIABILITIES AND STOCKHOLDERS EQUITY Notes payable - bank $ 0 $ 0 Other liabilities 0 13 ------- ------- Total liabilities 0 13 Stockholders' equity 40,013 36,332 ------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,013 $36,345 ======= ======= OLD POINT FINANCIAL CORPORATION PARENT ONLY INCOME STATEMENTS ------------------------------------------------------------------- For the year ended December 31, Dollars in thousands 1998 1997 1996 ------------------------------------------------------------------- INCOME Cash dividends from subsidiary $1,300 $1,000 $1,000 Interest and Fees on Loans 0 1 4 Interest income from investment securities 106 105 94 Other income 0 0 0 ---------------------------- TOTAL INCOME 1,406 1,106 1,098 EXPENSES Interest on borrowed money 0 0 0 Other expenses 41 50 251 ---------------------------- TOTAL EXPENSES 41 50 251 Income before taxes and undistributed net income of subsidiary 1365 1056 847 Income tax 22 19 (52) ---------------------------- Net income before undistributed net income of subsidiary 1,343 1,037 899 Undistributed net income of subsidiary 3,293 3,053 2,546 ---------------------------- NET INCOME $4,636 $4,090 $3,445 34
<TABLE> OLD POINT FINANCIAL CORPORATION PARENT ONLY STATEMENT OF CASH FLOWS <CAPTION> ------------------------------------------------------------------------------------------- For the year ending December 31, 1998 1997 1996 Dollars in thousands ------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> <C> Net income (Loss) $4,636 $4,090 $3,445 Adjustments to Reconcile Net Income to Net Cash Provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries (3,293) (3,053) (2,546) Market write-down on other real estate owned 0 0 0 Increase (decrease) in other assets 0 53 12 Increase (decrease) in other liabilities (12) 11 0 --------------------------- Net cash provided (used) by operating activities 1,331 1,101 911 CASH FLOWS FROM INVESTING ACTIVITIES (Purchase)/Sales of Investments (250) (200) 0 Sale or repayment of investments in and advances to subsidiaries 0 0 0 (Purchase)/Sale of Premises and Equipment 0 16 0 Loans to customers 0 48 2 --------------------------- Net cash provided (used) by investing activities (250) (136) 2 CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in borrowed money 0 0 0 Proceeds from issuance of common stock 158 231 0 Dividends paid (1,234) (1,050) (892) Other, net 0 0 0 --------------------------- Net cash provided (used) by financing activities (1,076) (819) (892) Net increase in cash and due from banks 5 146 21 Cash and due from banks at beginning of period 289 143 122 --------------------------- Cash and due from banks at end of period $ 294 $ 289 $ 143 </TABLE> Accounting Rule Changes None. Regulatory Requirements and Restrictions For the reserve maintenance period in effect at December 31, 1998, 1997 and 1996 the bank was required to maintain with the Federal Reserve Bank of Richmond an average daily balance totaling approximately $350 thousand, $400 thousand and $5.7 million respectively. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 35
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 2000 Annual Meeting, or until their successors have been duly elected and have qualified. Amount and Nature of Principal Beneficial Ownership Director Occupation For As of March 17, 1998 Name and (Age) Since (1) Past Five Years (Percent of Class) (2)(3) Dr. Richard F. Clark (66) 1981 Pathologist(retired) 62,533 Sentara Hampton General Hospital 2.4% Gertrude S. Dixon (85) 1981 Real Estate Management 190,779 and Ownership 7.4% Russell Smith Evans Jr. (56) 1993 Assistant Treasurer and 1,650 * Corporate Fleet Manager Ferguson Enterprises G. Royden Goodson, III (43) 1994 President 4,862 * Warwick Plumbing & Heating Corp. Dr. Arthur D. Greene (54) 1994 Surgeon - Partner 3,914 * Tidewater Orthopaedic Associates Stephen D. Harris (57) 1988 Attorney-at-Law -Partner 9,000 * Geddy, Harris & Geddy John Cabot Ishon (52) 1989 President 12,780 * Hampton Stationery Eugene M. Jordan (75) 1964 Attorney-at-Law 28,000 Cumming, Hatchett & Jordan, P.C. 1.1% John B. Morgan, II (52) 1994 President 2,600 * Morgan-Marrow Insurance Dr. H. Robert Schappert (60) 1996 Veterinarian - Owner 89,740 Beechmont Veterinary Hospital 3.5% Robert F. Shuford (61) 1965 Chairman of the Board, 154,510(4) President & CEO Old Point 5.9% Financial Corporation Chairman of the Board, President & CEO Old Point National Bank *Represents less than 1.0% of the total outstanding shares. 36
(1) 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. All present directors of the Company are directors of the Bank. (2) 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. (3) 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, 200 shares; Mr. Evans, 650 shares; Dr. Greene, 1,968 shares; Mr. Harris, 400 shares, Mr. Ishon, 3,480 shares; Mr. Jordan, 14,000 shares; Mr. Morgan, 2,200 shares; Dr. Schappert, 81,370 shares; and Mr. Shuford, 75,590 shares. (4) Includes shares that may be acquired within 60 days pursuant to the exercise of stock options granted under the 1989 Old Point Stock Option Plan - Mr. Shuford 21,794. 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 serve 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 1998. 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, 1998. Executive Principal Officer Occupation For Name and (Age) Since (1) Past Five Years Louis G. Morris (44) 1988 Senior Vice President and Treasurer Old Point Financial Corporation Cary B. Epes (50) 1993 Senior Vice President Old Point Financial Corporation W. Rodney Rosser (58) 1989 Senior Vice President and Secretary Old Point Financial Corporation Margaret P. Causby (48) 1992 Senior Vice President Old Point Financial Corporation Each of these executive officers owns less than 1% of the stock of the Company. (1) 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. 37
Item 11. Executive Compensation Cash Compensation The following table presents a three-year summary of 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 1998 exceeded $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal All Other Position Year Salary(1) Bonus(2) Compensation(3)(4) Robert F. Shuford 1998 $151,200 $34,560 $17,765 Chairman, President 1997 $148,500 $26,000 $16,092 & CEO 1996 $147,900 $10,000 $10,857 W. Rodney Rosser 1998 $ 93,267 $21,600 $10,099 EVP & Trust Officer 1997 $ 86,100 $14,400 $ 8,499 & Secretary 1996 $ 85,500 $ 8,000 $ 6,136 Louis G. Morris 1998 $ 90,247 $21,600 $ 9,051 EVP/CFO 1997 $ 83,000 $14,400 $ 7,636 1996 $ 83,000 $ 8,000 $ 5,262 Cary B. Epes 1998 $ 89,167 $21,600 $ 9,440 EVP/CCO 1997 $ 82,000 $14,400 $ 7,708 1996 $ 82,000 $ 7,500 $ 5,359 Margaret P. Causby 1998 $ 88,167 $21,600 $ 9,035 EVP 1997 $ 78,483 $14,400 $ 7,372 1996 $ 73,387 $ 8,000 $ 4,756 (1) Salary includes directors' fees as follows: Mr. Shuford - 1998, $4,200, 1997, $4,500, and 1996, $3,900. (2) Bonus consideration for Mr. Shuford is paid in January of each year following the year in which earned so that year end results could be evaluated by the Compensation Committee. Bonus consideration for Mr. Rosser, Mr. Morris, Mr. Epes and Mrs. Causby is paid in the year in which earned. 38
(3) Mr. Shuford has received other compensation as follows: 1998 1997 1996 ------ ------ ------ Deferred Profit Sharing $ 5,090 $ 4,342 $ 4,395 Cash Profit Sharing 4,811 4,088 0 401(k) Matching Plan 4,410 4,320 4,320 Group Term Insurance 3,454 3,342 2,142 ------ ------ ------ Total $17,765 $16,092 $10,857 (4) Mr. Rosser has received other compensation as follows: 1998 1997 1996 ------ ------ ------ Deferred Profit Sharing $ 3,156 $ 2,532 $ 2,564 Cash Profit Sharing 2,984 2,385 0 401(k) Matching Plan 2,735 2,520 2,510 Group Term Insurance 1,224 1,062 1,062 ------ ------ ------ Total $10,099 $ 8,499 $ 6,136 Mr. Morris has received other compensation as follows: 1998 1997 1996 ------ ------ ------ Deferred Profit Sharing $ 3,122 $ 2,551 $ 2,533 Cash Profit Sharing 2,951 2,356 0 401(k) Matching Plan 2,705 2,490 2,490 Group Term Insurance 273 239 239 ------ ------ ------ Total $ 9,051 $ 7,636 $ 5,262 Mr. Epes has received other compensation as follows: 1998 1997 1996 ------ ------ ------ Deferred Profit Sharing $ 3,087 $ 2,520 $ 2,502 Cash Profit Sharing 2,918 2,328 0 401(k) Matching Plan 2,675 2,460 2,460 Group Term Insurance 760 400 397 ------ ------ ------ Total $ 9,440 $ 7,708 $ 5,359 Mrs. Causby has received other compensation as follows: 1998 1997 1996 ------ ------ ------ Deferred Profit Sharing $ 3,053 $ 2,408 $ 2,228 Cash Profit Sharing 2,885 2,224 0 401(k) Matching Plan 2,645 2,350 2,190 Group Term Insurance 452 390 338 ------ ------ ------ Total $ 9,035 $ 7,372 $ 4,756 39
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, 1998, borrowing by all policy making officers and directors amounted to $1.8 million. This amount represented 4.5% of the total equity capital accounts of the Company as of December 31, 1998. 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 1998, the firm received from the Bank a retainer and fees totaling $76,223. Morgan Marrow Company of which John B. Morgan, II is President, provided insurance for which the Bank paid $268,610 during 1998. The 1998 amount paid includes $218,042 in three year prepaid premiums for coverage through May 2001. Hampton Stationery, of which John Cabot Ishon is the owner provided office furniture and supplies for which the bank paid $104,216. Geddy, Harris & Geddy, of which Stephen D. Harris is a partner, and Warwick Plumbing & Heating Corp. of which G. Royden Goodson, III is President provided products and services to the Bank during 1998. 40
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8 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, 1998 and 1997 Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 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 41
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 1998. 42
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 26th day of March, 1999. OLD POINT FINANCIAL CORPORATION 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 26th day of March, 1999. /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