UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-12896
OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
54-1265373
(IRS Employer Identification No.)
1 West Mellen Street, Hampton, Virginia 23663
(Address of principal executive offices) (Zip Code)
(757) 728-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 par value
(Title of each class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File req uired to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not 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.
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging Growth Company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2017 was $116,156,427 based on the closing sales
price on the NASDAQ Capital Market of $32.88.
There were 5,019,703 shares of common stock outstanding as of March 13, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company's Annual Meeting of Stockholders to be held on May 22, 2018, are incorporated by reference in Part III of this
report.
OLD POINT FINANCIAL CORPORATION
FORM 10-K
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Index to Consolidated Financial Statements
Index to Exhibits
Form 10-K Summary
Signatures
- i -
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Page
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INDEX
Item 1.
Business
GENERAL
Part I
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 completed a spin-off of its trust department as of April 1, 1999. The organization is chartered as Old Point Trust & Financial Services, N.A. (Trust).
Trust is a nationally chartered trust company. The purpose of the spin-off was to have a corporate structure more ready to compete in the field of wealth
management. Trust is a wholly-owned subsidiary of the Company.
The Bank is a national banking association that was founded in 1922. As of the end of 2017, the Bank had 18 branch offices serving the Hampton Roads localities
of Hampton, Newport News, Norfolk, Virginia Beach, Chesapeake, Williamsburg/James City County, York County and Isle of Wight County. The Bank offers a
complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial
customers.
The Company's primary activity is as a holding company for the common stock of the Bank and Trust. The principal business of the Company is conducted
through its subsidiaries, which continue to conduct business in substantially the same manner as before the reorganization and spin-off.
As of December 31, 2017, the Company had assets of $981.8 million, gross loans of $738.5 million, deposits of $783.6 million, and stockholders' equity of $96.4
million. At year-end, the Company and its subsidiaries had a total of 301 employees, 15 of whom were part-time.
STRATEGIC ACQUISITION
On October 27, 2017, Citizens National Bank ("Citizens National") entered into an agreement and plan of reorganization (the merger agreement) with the
Company and the Bank that provides for the merger of Citizens National into the Bank, with the Bank surviving, in a stock and cash transaction for total
consideration valued at approximately $7.9 million. The shareholders of Citizens National approved the merger on March 13, 2018, and the transaction is expected
to be completed in the second quarter of 2018, subject to customary regulatory approvals and other closing conditions. Under the terms of the merger agreement,
Citizens National shareholders will receive 0.1041 shares of Old Point common stock and $2.19 in cash for each Citizens National common share outstanding.
MARKET AREA AND COMPETITION
The Company's market area is located in Hampton Roads, situated in the southeastern corner of Virginia and boasting the world's largest natural deepwater harbor.
The Hampton Roads Metropolitan Statistical Area (MSA) is the 37th most populous MSA in the United States according to the U.S. Census Bureau's 2010 census
and the third largest deposit market in Virginia, after Richmond and the Washington Metropolitan area, according to the Federal Deposit Insurance Corporation
(FDIC). Hampton Roads includes the cities of Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg,
and the counties of Isle of Wight, Gloucester, James City, Mathews, York and Surry. The market area is serviced by 60 banks, savings institutions and credit
unions and, in addition, branches of virtually every major brokerage house serve the Company's market area.
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The banking business in Virginia, and in the Company's primary service areas in the Hampton Roads MSA, is highly competitive and dominated by a relatively
small number of large banks with many offices operating over a wide geographic area. Among the advantages such large banks have over the Company is their
ability to finance wide-ranging advertising campaigns, and by virtue of their greater total capitalization, to have substantially higher lending limits than the
Company. Factors such as interest rates offered, the number and location of branches and the types of products offered, as well as the reputation of the institution
affect competition for deposits and loans. The Company competes by emphasizing customer service and technology, establishing long-term customer relationships
and building customer loyalty, and providing products and services to address the specific needs of the Company's customers. The Company targets individual and
small-to-medium size business customers.
Since adding a corporate banking group and expanding its business product offerings in 2009, the Company continues to build a stronger presence in the business
banking market, where greater opportunities for fee-based revenues and cross-selling exist. In 2017, the Company purchased full ownership of Old Point Mortgage
and launched Old Point Insurance, LLC. Through these business banking capabilities and new lines of business, the Company is able to service a highly lucrative
market that offers increased opportunities to identify new revenue streams and cross sell additional products.
Personal assets held by non-banks are difficult to track at a local level, so research relies on deposits reported by governmental agencies to measure market share.
In 2017, the Company held tenth place with 2.58% market share of all Hampton Roads deposits, as compared to 2.60% market share in 2016. On the Peninsula, the
Company retains first place in Hampton with 26.83% market share and saw an increase in deposits from 2016 of $17.2 million. The Company also saw deposit
growth from 2016 for all other Peninsula markets, with an increase of $5.1 million in James City County, $4.4 million in Williamsburg, $1.8 million in Newport
News, and $1.4 million in York County.
In Southside Hampton Roads, the Company increased deposit share in Virginia Beach by $14.5 million, in Chesapeake by $7.2 million, and in Norfolk by $4.9
million from 2016. In the Isle of Wight County market, however, deposits decreased from 2016 by $6.0 million. In late 2017, the Company announced an
agreement to acquire Citizens National Bank, which has one location in the town of Windsor, Virginia. Upon its expected completion in 2018, this will expand the
Company's footprint and market share in Isle of Wight County. Combined with heightened marketing efforts, the staff in the Company's newer locations continues
to work diligently to increase the Company's name recognition in their respective regions of the Hampton Roads MSA.
The Company also faces competitive pressure from credit unions. The three largest credit unions headquartered in the Hampton Roads MSA are Langley Federal
Credit Union, Chartway Federal Credit Union, and Newport News Shipbuilding Employees' Credit Union with deposits totaling approximately $2.0 billion, $2.0
billion and $1.3 billion respectively, all of which posted a positive growth rate for 2017.
AVAILABLE INFORMATION
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy
statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company's Internet address shall
not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or other SEC filings. The
information available at the Company's Internet address is not part of this Form 10-K or any other report filed by the Company with the SEC. The public may read
and copy any documents the Company files at the SEC's Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company's SEC filings can also be obtained on the SEC's website on
the Internet at www.sec.gov.
REGULATION AND SUPERVISION
Set forth below is a brief description of some of the material laws and regulations that affect the Company. The description of these statutes and regulations is only
a summary and is not a complete discussion or analysis. This discussion is qualified in its entirety by reference to the statutes and regulations summarized below.
No assurance can be given that these statutes or regulations will not change in the future.
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General.
The Company continues to experience a period of rapidly changing regulations and an environment of constant regulatory reform. These regulatory
changes have had and will continue to have a significant impact on how the Company conducts its business. The most significant of these laws is the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), adopted on July 21, 2010, to implement significant structural reforms to the financial
services industry. The full extent of the Dodd-Frank Act and other potential regulatory reforms cannot yet be fully determined and will depend to a large extent on
regulations that will be adopted in the future.
As a public company, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act),
which include, but are not limited to, the filing of annual, quarterly and other reports with the SEC. The Company is also required to comply with other laws and
regulations of the SEC applicable to public companies.
The Company is also a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the BHCA) and is registered as such with, and
subject to the supervision of, the Board of Governors of the Federal Reserve System (the FRB). Generally, a bank holding company is required to obtain the
approval of the FRB before acquiring direct or indirect ownership or control of more than five percent of the voting shares of a bank or engaging in an activity
considered to be a non-banking activity, either directly or through a subsidiary. Bank holding companies and their subsidiaries are also subject to restrictions on
transactions with insiders and affiliates.
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As a national bank, the Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency (the Comptroller). The
prior approval of the Comptroller or other appropriate bank regulatory authority is required for a national bank to merge with another bank or purchase the assets or
assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will
consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the constituent organizations and the combined
organization, the risks to the stability of the U.S. banking or financial system, the applicant's performance record under the Community Reinvestment Act (the
CRA) and fair housing initiatives, the data security and cybersecurity infrastructure of the constituent organizations and the combined organization, and the
effectiveness of the subject organizations in combating money laundering activities. Each depositor's account with the Bank is insured by the FDIC to the
maximum amount permitted by law. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as
they do not conflict with or are not preempted by federal banking law.
As a non-depository national banking association, Trust is subject to regulation, supervision and regular examination by the Comptroller. Trust's exercise of
fiduciary powers must comply with Regulation 9 promulgated by the Comptroller and with Virginia law.
The regulations of the FRB, the Comptroller and the FDIC govern most aspects of the Company's business, including deposit reserve requirements, investments,
loans, certain check clearing activities, issuance of securities, payment of dividends, branching, and numerous other matters. Further, the federal bank regulatory
agencies have adopted guidelines and released interpretive materials that establish operational and managerial standards to promote the safe and sound operation of
banks and bank holding companies. These standards relate to the institution's key operating functions, including but not limited to internal controls, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation of management, information systems,
data security and cybersecurity, and risk management. As a consequence of the extensive regulation of commercial banking activities in the United States, the
Company's business is particularly susceptible to changes in state and federal legislation and regulations, which may have the effect of increasing the cost of doing
business, limiting permissible activities or increasing competition.
The
Bank
Holding
Company
Act.
As a bank holding company, the Company is subject to the BHCA and regulation and supervision by the FRB. A bank holding
company is required to obtain the approval of the FRB before making certain acquisitions or engaging in certain activities. Bank holding companies and their
subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
A bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may
acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5
percent of the voting shares of such bank. The approval of the FRB is also required for the merger or consolidation of bank holding companies.
Pursuant to the BHCA, the FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial
soundness, safety or stability of any bank subsidiary of the bank holding company.
The Company is required to file periodic reports with the FRB and provide any additional information the FRB may require. The FRB also has the authority to
examine the Company and its subsidiaries, as well as any arrangements between the Company and its subsidiaries, with the cost of any such examinations to be
borne by the Company. Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their
holding companies and other affiliates.
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The
Dodd-Frank
Act.
The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including changes that will affect all bank
holding companies and banks, including the Company and the Bank. Among other provisions, the Dodd-Frank Act:
·
·
·
·
·
·
·
·
·
changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital. The Dodd-Frank
Act also made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation
protection from $100,000 to $250,000;
repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business
transaction and other accounts;
created and centralized significant aspects of consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (CFPB),
which is discussed in more detail below;
imposed limits for debit card interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees
collected by financial institutions with less than $10 billion in assets;
restricted the preemption of state law by federal law and disallowed subsidiaries and affiliates of national banks from availing themselves of such
preemption;
imposed comprehensive regulation of the over-the-counter derivatives market subject to significant rulemaking processes, to include certain provisions that
would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself;
required loan originators to retain 5 percent of any loan sold or securitized, unless it is a "qualified residential mortgage", subject to certain restrictions;
prohibited banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (the
Volcker Rule); and
implemented corporate governance revisions that apply to all public companies, not just financial institutions.
Some of the rules that have been adopted or proposed to comply with Dodd-Frank Act mandates are discussed in more detail below.
Capital
Requirements
and
Prompt
Corrective
Action.
The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy guidelines for bank
holding companies and banks pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and the Basel III Capital Accords. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources" in Item 7 of this report on Form 10-K.
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The federal banking agencies have broad powers to take prompt corrective action to resolve problems of insured depository institutions. Under the FDICIA, there
are five capital categories applicable to bank holding companies and insured institutions, each with specific regulatory consequences. The extent of the agencies'
powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." These terms are defined under uniform regulations issued by each of the federal banking agencies. If the appropriate federal banking
agency determines that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to a lower capital category (other than critically
undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject the Company and its
subsidiaries to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business. In
addition, an institution may not make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the
institution if following such a distribution the institution would be undercapitalized. Thus, if the making of such dividend would cause the Bank to become
undercapitalized, it could not pay a dividend to the Company.
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Basel
III
Capital
Framework.
The federal bank regulatory agencies have adopted rules to implement the Basel III capital framework as outlined by the Basel
Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the Basel III Final
Rules). For purposes of these capital rules, (i) common equity Tier 1 capital (CET1) consists principally of common stock (including surplus) and retained
earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred
stock and trust preferred securities; and (iii) Tier 2 capital consists principally of Tier 1 capital plus qualifying subordinated debt and preferred stock, and limited
amounts of an institution's allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the
Basel III Final Rules. The Basel III Final Rules also establish risk weightings that are applied to many classes of assets held by community banks, including,
importantly, applying higher risk weightings to certain commercial real estate loans.
The Basel III Final Rules were effective on January 1, 2015, and the Basel III Final Rules' capital conservation buffer (as described below) is being phased in
beginning January 1, 2016 through 2019. When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted
assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon
full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer
(which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation)
and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as
the average for each quarter of the month-end ratios for the quarter).
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, and primarily to CET1, including deductions and adjustments
that were not applied to reduce CET1 under historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets dependent upon future
taxable income and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds
10% of CET1 or all such categories in the aggregate exceed 15% of CET1. These deductions from and adjustments to regulatory capital are generally subject to a
phase in period, which began in 2015 and will continue through 2018.
The Basel III Final Rules also implement a "countercyclical capital buffer," generally designed to absorb losses during periods of economic stress and to be
imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. This buffer is a CET1 add-on
to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).
Insurance
of
Accounts,
Assessments
and
Regulation
by
the
FDIC.
The Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund (DIF) of
the FDIC. The basic limit on FDIC deposit insurance coverage is $250,000 per depositor.
Under the Federal Deposit Insurance Act (FDIA), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes.
The DIF is funded by assessments on banks and other depository institutions calculated based on average consolidated total assets minus average tangible equity
(defined as Tier 1 capital). As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target "designated reserve
ratio" (described in more detail below) of 2 percent for the DIF, and established a lower assessment rate schedule when the reserve ratio reaches 1.15 percent and,
in lieu of dividends, provides for a lower assessment rate schedule, when the reserve ratio reaches 2 percent and 2.5 percent.
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An institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three year period, which considers
the institution's weighted average CAMELS component rating, and is subject to further adjustments including related to levels of unsecured debt and brokered
deposits (not applicable to banks with less than $10 billion in assets). At December 31, 2016, total base assessment rates institutions that have been insured for at
least five years range from 1.5 to 40 basis points, with rates of 1.5 to 30 basis points applying to banks with less than $10 billion in assets.
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The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the "designated reserve
ratio." Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35 percent and removed the upper limit on the designated
reserve ratio, (ii) requires that the designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions with
total consolidated assets of less than $10 billion of raising the designated reserve ratio from 1.15 percent to 1.35 percent – which requirement was met through
rules adopted by the FDIC during 2016. On June 30, 2016, the designated reserve ratio rose to 1.17 percent, which triggered three major changes to deposit
insurance assessments for the third quarter of 2016: (i) the range of initial assessment rates for all institutions declined from 5 to 35 basis points to 3 to 30 basis
points (which are included in the total base assessment rates in the above paragraph); (ii) surcharges equal to an annual rate of 4.5 basis points began for insured
depository institutions with total consolidated assets of $10 billion or more; and (iii) the revised assessment method described above was implemented. The FDIA
requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. The FDIC has adopted a DIF restoration plan to
ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act.
Incentive
Compensation.
The FRB, the Comptroller and the FDIC have issued regulatory guidance intended to ensure that the incentive compensation policies of
banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The FRB will review, as part of the
regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex
banking organizations." The findings will be included in reports of examination, and deficiencies will be incorporated into the organization's supervisory ratings.
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, in 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and
banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons
(consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material
financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an
incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes
minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately
balance risk and reward. The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions
and impose additional record-keeping requirements. The comment period for these proposed rules has closed and a final rule has not yet been published.
Community
Reinvestment
Act.
The Company is subject to the requirements of the CRA, which imposes on financial institutions an affirmative and ongoing
obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. A financial institution's efforts in meeting community credit needs are currently assessed based on specified factors. These factors also are
considered in evaluating mergers, acquisitions and applications to open a branch or facility.
Confidentiality
and
Required
Disclosures
of
Consumer
Information.
The Company is subject to various laws and regulations that address the privacy of
nonpublic personal financial information of consumers. The Gramm-Leach-Bliley Act and certain regulations issued thereunder protect against the transfer and use
by financial institutions of consumer nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. These
privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless the
institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure. In 2016, the
CFPB proposed rules that provide an exception to the requirement to deliver an annual privacy notice if a financial institution only provides nonpublic personal
information to unaffiliated third parties under limited exceptions under the Gramm-Leach-Bliley Act and related regulations, and has not changed its policies and
practices regarding disclosure of nonpublic personal financial information from those disclosed in the most recent privacy notice provided to the customer.
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The Company is also subject to various laws and regulations that attempt to combat money laundering and terrorist financing. The Bank Secrecy Act requires all
financial institutions to, among other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes
recordkeeping and reporting requirements. The USA Patriot Act facilitates information sharing among governmental entities and financial institutions for the
purpose of combating terrorism and money laundering, and requires financial institutions to establish anti-money laundering programs. The Office of Foreign
Assets Control (OFAC), which is a division of the U.S. Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in
transactions with "enemies" of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds a name of an "enemy" of the
United States on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into a blocked account, file
a suspicious activity report with the Treasury and notify the FBI.
Consumer
Laws
and
Regulations.
The Company is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions
with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The Company must comply with the
applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
The CFPB is the federal regulatory agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws for
institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. The CFPB supervises and regulates providers of consumer financial
products and services and has rulemaking authority in connection with numerous federal consumer financial protection laws (for example, but not limited to, the
Truth in Lending Act and the Real Estate Settlement Procedures Act). As a smaller institution (i.e., with assets of $10 billion or less), most consumer protection
aspects of the Dodd-Frank Act will continue to be applied to the Company by the FRB and to the Bank and Trust by the Comptroller. However, the CFPB may
include its own examiners in regulatory examinations by a smaller institution's prudential regulators and may require smaller institutions to comply with certain
CFPB reporting requirements. In addition, regulatory positions taken by the CFPB and administrative and legal precedents established by CFPB enforcement
activities, including in connection with supervision of larger bank holding companies and banks, could influence how the FRB and Comptroller apply consumer
protection laws and regulations to financial institutions that are not directly supervised by the CFPB. The precise effect of the CFPB's consumer protection
activities on the Company cannot be forecast.
Mortgage
Banking
Regulation
. In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish
standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some
cases, restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and
settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information
regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank's mortgage origination activities
are subject to the Equal Credit Opportunity Act, Truth in Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and Home
Ownership Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws, regulations and rules.
The Bank's mortgage origination activities are also subject to Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z
require mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a
mortgage loan has a reasonable ability to repay the loan according to its terms. Alternatively, a mortgage lender can originate "qualified mortgages", which are
generally defined as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30 years, and points and fees paid
by a consumer equal to or less than 3% of the total loan amount. Higher-priced qualified mortgages (e.g., subprime loans) receive a rebuttable presumption of
compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules. The Bank does not
originate first mortgage lo ans at this time, and the first mortgages it purchases comply with Regulation Z's "qualified mortgage" rules. The Bank does originate
second mortgages, or equity loans, and these loans do not conform to the qualified mortgage criteria but comply with applicable ability-to-repay rules.
10
INDEX
Volcker
Rule
. The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited
circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the Volcker Rule). The Company believes that its financial
condition and its operations are not and will not be significantly impacted by the Volcker Rule or its implementing regulations. Smaller banks, with total
consolidated assets of $10 billion or less, engaged in modest proprietary trading activities for their own accounts are subject to a simplified compliance program
under the final rules. Several portions of the Volcker Rule remain subject to regulatory rulemaking and legislative activity, including to further delay effectiveness
of some provisions of the Volcker Rule. The Company does not expect that any delays in the effectiveness of a portion of the Volcker Rule will significantly
impact its financial condition.
Item 1A. Risk Factors
U.S.
and
international
economic
conditions
and
credit
markets
pose
challenges
for
the
Company
and
could
adversely
affect
the
results
of
operations,
liquidity
and
financial
condition.
In recent years, economic growth and business activity in the Company's local markets as well as in the broader national and international
economies, has been modest. In addition, uncertainty regarding oil prices, ongoing federal budget negotiations, the implementation of the employer mandate under
the Patient Protection and Affordable Care Act, and the level of U.S. debt may present challenges to businesses and have a destabilizing effect on financial
markets. Unfavorable or uncertain economic conditions generally could cause a decline in the value of the Company's securities portfolio, and could increase the
regulatory scrutiny of financial institutions. Another deterioration of local economic conditions could again lead to declines in real estate values and home sales
and increases in the financial stress on borrowers and unemployment rates, all of which could lead to increases in loan delinquencies, problem assets and
foreclosures and reductions in loan collateral value. Such a deterioration of local economic conditions could cause the level of loan losses to exceed the level the
Company has provided in its allowance for loan losses which, in turn, would reduce the Company's earnings.
Global credit market conditions could return to being disrupted and volatile. Although the Company remains well capitalized and has not suffered any liquidity
issues, the cost and availability of funds may be adversely affected by illiquid credit markets. Any future turbulence in the U.S. and international markets and
economy may adversely affect the Company's liquidity, financial condition and profitability.
The
Company
is
subject
to
interest
rate
risk
and
variations
in
interest
rates
may
negatively
affect
its
financial
performance.
The Company's profitability
depends in substantial part on its net interest margin, which is the difference between the rates received on loans and investments and the rates paid for deposits and
other sources of funds. The net interest margin depends on many factors that are partly or completely outside of the Company's control, including competition;
federal economic, monetary and fiscal policies; and economic conditions. Because of the differences in the maturities and repricing characteristics of interest-
earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Company's net interest margin and, in turn, its
profitability.
The Company generally seeks to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that it may
reasonably maintain its net interest margin; however, interest rate fluctuations, loan prepayments, loan production, deposit flows, and competitive pressures are
constantly changing and influence the ability to maintain a neutral position. Generally, the Company's earnings will be more sensitive to fluctuations in interest
rates depending upon the variance in volume of assets and liabilities that mature and re-price in any period. The extent and duration of the sensitivity will depend
on the cumulative variance over time, the velocity and direction of changes in interest rates, shape and slope of the yield curve, and whether the Company is more
asset sensitive or liability sensitive. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company's net interest
margin may be affected. For additional details, See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest
Sensitivity" in Item 7 of this report on Form 10-K.
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INDEX
In addition, any substantial and prolonged increase in market interest rates could reduce the Company's customers' desire to borrow money or adversely affect their
ability to repay their outstanding loans by increasing their credit costs. Interest rate changes could also affect the fair value of the Company's financial assets and
liabilities. Accordingly, changes in levels of market interest rates could materially and adversely affect the Company's net interest margin, asset quality, loan
origination volume, business, financial condition, results of operations and cash flows.
Integrating
Citizens
National
into
the
Company's
operations
may
be
more
difficult,
costly
or
time-consuming
than
expected,
and,
if
the
Company
does
not
successfully
combine
Citizens
National's
business
into
its
business,
the
Company's
results
of
operations
would
be
adversely
affected.
The Company's future
success will depend, in part, on its ability to realize the anticipated benefits and cost savings from combining the businesses of the Company and Citizens National
and to combine those businesses in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the legacy customer
relationships of Citizens National or the Company or decreasing revenues due to loss of customers. However, to realize these anticipated benefits and cost savings,
the Company must successfully combine the businesses of the Company and Citizens National. If the Company is not able to achieve these objectives, the
anticipated benefits and cost savings of the merger of the Company and Citizens National may not be realized fully, or at all, or may take longer to realize than
expected.
12
INDEX
System
failures,
interruptions,
breaches
of
security,
or
the
failure
of
a
third-party
provider
to
perform
its
obligations
could
adversely
impact
the
Company's
business
operations
and
financial
condition.
Communications and information systems are essential to the conduct of the Company's businesses, as such systems
are used to manage customer relationships, general ledger, deposits and loans. While the Company has established policies and procedures to prevent or limit the
impact of systems failures, interruptions and security breaches, the Company's information, security, and other systems may stop operating properly or become
disabled or damaged as a result of a number of factors, including events beyond the Company's control, such as sudden increases in customer transaction volume,
electrical or telecommunications outages, natural disasters, and cyber-attacks. Information security risks have increased in recent years and hackers, activists and
other external parties have become more technically sophisticated and well-resourced. These parties use a variety of methods to attempt to breach security systems
and access the data of financial services institutions and their customers. The Company may not have the resources or technical sophistication to anticipate or
prevent rapidly evolving types of cyber-attacks. In addition, any compromise of the security systems could deter customers from using the Bank's website and
online banking service, both of which involve the transmission of confidential information. The security and authentication precautions imposed by the Company
and the Bank may not protect the systems from compromises or breaches of security, which would adversely affect the Company's results of operations and
financial condition.
In addition, the Company outsources certain data processing to certain third-party providers. Accordingly, the Company's operations are exposed to risk that these
third-party providers will not perform in accordance with the contracted arrangements under service agreements. If the third-party providers encounter difficulties,
or if the Company has difficulty in communicating with them, the Company's ability to adequately process and account for customer transactions could be affected,
and the Company's business operations could be adversely impacted. Further, a breach of a third-party provider's technology may cause loss to the Company's
customers. Replacing these third-party providers could also create significant delay and expense. Threats to information security also exist in the processing of
customer information through various other vendors and their personnel.
The occurrence of any systems failure, interruption or breach of security, or the failure of a third-party provider to perform its obligations, could expose the
Company to risks of data loss or data misuse, could result in violations of applicable privacy and other laws, could damage the Company's reputation and result in a
loss of customers and business, could subject it to additional regulatory scrutiny or could expose it to civil litigation, possible financial liability and costly response
measures. Any of these occurrences could have a material adverse effect on the Company's financial condition and results of operations.
The
Company's
accounting
estimates
and
risk
management
processes
rely
on
analytical
and
forecasting
models.
Processes that management uses to measure
the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's
earnings performance and liquidity, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate,
particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models may prove to be inadequate or
inaccurate because of other flaws in their design or their implementation.
If the models that management uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses
upon changes in market interest rates or other market measures and may be unable to maintain sufficient liquidity. If the models that management uses to measure
the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the
Company could realize upon sale or settlement of such financial instruments. Any such failure in management's analytical or forecasting models could have a
material adverse effect on the Company's business, financial condition and results of operations.
13
INDEX
Weaknesses
in
the
commercial
real
estate
markets
could
negatively
affect
the
Company's
financial
performance
due
to
the
Company's
concentration
in
commercial
real
estate
loans.
At December 31, 2017, the Company had $317.2 million, or 42.95%, of total loans concentrated in commercial real estate, which
includes, for purposes of this concentration, all construction loans, loans secured by multifamily residential properties, loans secured by farmland and loans secured
by nonfarm, nonresidential properties. Commercial real estate loans expose the Company to a greater risk of loss than residential real estate and consumer loans.
Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans.
Consequently, an adverse development with respect to one commercial real estate loan or credit relationship exposes the Company to a significantly greater risk of
loss compared to an adverse development with respect to one residential real estate loan. Commercial real estate loans carry risks associated with the successful
operation of a business if the properties are owner occupied. If the properties are non-owner occupied, the repayment of these loans may be dependent upon the
profitability and cash flow from rent receipts. Repayment of commercial real estate loans may, to a greater extent than residential real estate loans, be subject to
adverse conditions in the real estate market or economy. Weak economic or market conditions may impair a borrower's business operations, slow the execution of
new leases and lead to turnover in existing leases. The combination of these factors could result in deterioration in value of some of the Company's loans. The
deterioration of one or more of the Company's significant commercial real estate loans could cause a significant increase in nonaccrual loans. An increase in
nonaccrual loans could result in a loss of interest income from those loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of
which could have a material adverse effect on the Company's financial performance.
The
Company's
profitability
depends
significantly
on
local
economic
conditions
and
changes
in
the
federal
government's
military
or
defense
spending
may
negatively
affect
the
local
economy.
The Company's success depends primarily on the general economic conditions of the markets in which the Company operates.
Unlike larger financial institutions that are more geographically diversified, the Company provides banking and financial services to customers primarily in the
Hampton Roads MSA. The local economic conditions in this area have a significant impact on the demand for loans, the ability of the borrowers to repay these
loans and the value of the collateral securing these loans. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an
outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond the Company's control could impact these local
economic conditions.
In addition, Hampton Roads is home to one of the largest military installations in the world and one of the largest concentrations of Department of Defense
personnel in the United States. Some of the Company's customers may be particularly sensitive to the level of federal government spending on the military or on
defense-related products. Federal spending is affected by numerous factors, including macroeconomic conditions, presidential administration priorities, and the
ability of the federal government to enact relevant appropriations bills and other legislation. Any of these factors could result in future cuts to military or defense
spending or increased uncertainty about federal spending, which could have a severe negative impact on individuals and businesses in the Company's primary
service area. Any related increase in unemployment rates or reduction in business development activities in the Company's primary service area could lead to
reductions in loan demand, increases in loan delinquencies, problem assets and foreclosures and reductions in loan collateral value, which could have a material
adverse effect on the Company's operating results and financial condition.
The
Company
is
subject
to
losses
resulting
from
fraudulent
and
negligent
acts
on
the
part
of
loan
applicants,
correspondents
or
other
third
parties.
The
Company relies heavily upon information supplied by third parties, including the information contained in credit applications, employment and income
documentation, property appraisals, title information, and equipment pricing and valuation, in deciding which loans to originate, as well as in establishing the terms
of those loans. If any of the information upon which the Company relies during the loan approval process is misrepresented, either fraudulently or inadvertently,
and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, the Company may fund a loan that
it would not have otherwise funded or the Company may fund a loan on terms that it would not have otherwise extended. Whether a misrepresentation is made by
the applicant or by another third party, the Company generally bears the risk of loss associated with the misrepresentation. In addition, a loan subject to a material
misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentation are
often difficult to locate, and it may be difficult to recover any monetary loss the Company may suffer.
14
INDEX
Declines
in
loans
outstanding
could
have
a
material
adverse
impact
on
the
Company's
operating
results
and
financial
condition.
Growing and diversifying the
loan portfolio is part of the Company's strategic initiative. If quality loan demand does not continue to increase and the Company's loan portfolio begins to decline,
the Company expects that excess liquidity will be invested in marketable securities. Because loans typically yield higher returns than the Company's securities
portfolio, a shift towards investments in the Company's asset mix would likely result in an overall reduction in net interest income and the net interest margin. The
principal source of earnings for the Company is net interest income, and as discussed above, the Company's net interest margin is a major determinant of the
Company's profitability. The effects of a reduction in net interest income and the net interest margin may be exacerbated by the intense competition for quality
loans in the Company's primary service area and by rate reductions on loans currently held in the portfolio. As a result, a reduction in loans could have a material
adverse effect on the Company's operating results and financial condition.
The
Company's
substantial
dependence
on
dividends
from
its
subsidiaries
may
prevent
it
from
paying
dividends
to
its
stockholders
and
adversely
affect
its
business,
results
of
operations
or
financial
condition.
The Company is a separate legal entity from its subsidiaries and does not have significant operations or
revenues of its own. The Company substantially depends on dividends from its subsidiaries to pay dividends to stockholders and to pay its operating expenses. The
availability of dividends from the subsidiaries is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Company
and other factors, that the Comptroller could assert that payment of dividends by the subsidiaries is an unsafe or unsound practice. In the event the subsidiaries are
unable to pay dividends to the Company, the Company may not be able to pay dividends on the Company's common stock, service debt or pay operating expenses.
Consequently, the inability to receive dividends from the subsidiaries could adversely affect the Company's financial condition, results of operations, cash flows
and limit stockholders' return, if any, to capital appreciation.
The
small-to-medium
size
businesses
the
Company
targets
may
have
fewer
financial
resources
to
weather
a
downturn
in
the
economy,
which
could
materially
harm
operating
results.
The Company targets individual and small-to-medium size business customers. Small-to-medium size businesses frequently have smaller
market shares than their competitors, may be more vulnerable to economic downturns, often need substantial additional capital to expand and compete and may
experience significant volatility in operating results. Any one or more of these factors may impair a borrower's ability to repay a loan. In addition, the success of a
small-to-medium size business often depends on the management talents and efforts of one person or a small group of persons, and the death, disability or
resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other
events that negatively impact businesses in the Company's primary service area could have a proportionately greater impact on small-to-medium-size businesses
and accordingly could cause the Company to incur substantial credit losses that could negatively affect its results of operations and financial condition.
The
ownership
of
foreclosed
property
exposes
the
Company
to
significant
costs,
some
of
which
are
uncertain.
When the Company has to foreclose upon real
property held as collateral, the Company is exposed to the risks inherent in the ownership of real estate. The amount that the Company may realize after a loan
default is dependent upon factors outside of the Company's control, including environmental cleanup liability, especially with regard to non-residential real estate,
neighborhood values, real estate tax rates, operating or maintenance expenses of the foreclosed properties, and supply of and demand for properties. Significant
costs associated with the ownership of real estate may exceed the income earned from such real estate, and the Company may have to advance funds to protect its
investment or dispose of the real estate at a loss. These factors may materially and adversely affect the Company's business, financial condition, cash flows and
result of operations.
15
INDEX
The
Company
and
its
subsidiaries
are
subject
to
extensive
regulation
which
could
adversely
affect
them.
The Company is subject to extensive regulation by
federal, state and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on
part or all of operations, including those referenced above. Regulations adopted by these agencies, which are generally intended to protect depositors and
customers rather than to benefit stockholders, govern a comprehensive range of matters including, without limitation, ownership and control of the Company's
shares, acquisition of other companies and businesses, permissible activities that the Company and its subsidiaries may engage in, maintenance of adequate capital
levels and other aspects of operations. These regulations could limit the Company's growth by restricting certain of its activities. The laws, rules and regulations
applicable to the Company are subject to regular modification and change. Regulatory changes could subject the Company to more demanding regulatory
compliance requirements which could affect the Company in unpredictable and adverse ways. Such changes could subject the Company to additional costs, limit
the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other
things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or damage to the Company's
reputation, which could have a material adverse effect on the Company's business, financial condition and results of operations. Legislation and regulatory
initiatives containing wide-ranging proposals for altering the structure, regulation and competitive relationship of financial institutions are introduced regularly.
The Company cannot predict in what form or whether a proposed statute or regulation will be adopted or the extent to which such adoption may affect its business.
Market
risk
affects
the
earnings
of
Trust.
The fee structure of Trust is generally based upon the market value of accounts under administration. Most of these
accounts are invested in equities of publicly traded companies and debt obligations of both government agencies and publicly traded companies. As such,
fluctuations in the equity and debt markets in general have had a direct impact upon the earnings of Trust.
Compliance
with
the
CFPB
regulations
aimed
at
the
mortgage
banking
industry
may
require
substantial
changes
to
mortgage
lending
systems
and
processes
that
may
adversely
affect
income
from
the
Company's
residential
mortgage
activities.
The CFPB has finalized a number of significant rules that impact nearly
every aspect of the lifecycle of a residential real estate loan. Among other things, the rules adopted by the CFPB require mortgage lenders either to make a
reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to
repay the loan according to its terms, or to originate "qualified mortgages." In June 2015, the CFPB issued rules that combined disclosures previously established
by the Truth in Lending Act and the Real Estate Settlement Procedures Act into a single disclosure referred to as the TILA-RESPA Integrated Disclosure, or TRID.
TRID applies to most closed-end mortgage loans and overhauls the manner in which mortgage loan origination disclosures are made.
Although the Company does not originate or sell first mortgage loans at this time, it may elect to do so in the future, and TRID does apply to the mortgages it
purchases. TRID also applies to second mortgages originated by the Company (but not to equity lines of credit). During 2015, the Company made significant
changes to its residential real estate business, including investments in technology and employee training. These CFPB rules, in addition to other previously-issued
and to-be-issued CFPB regulations, could materially affect the Company's ability to originate and sell residential real estate loans or limit the terms on which the
Company may offer products, which could adversely affect the Company's financial condition and results of operations.
The
Basel
III
Final
Rules
require
higher
levels
of
capital
and
liquidity,
which
could
adversely
affect
the
Company's
net
income
and
return
on
equity.
The
capital adequacy and liquidity guidelines applicable to the Company and the Bank under the Basel III Final Rules began to be phased in beginning in 2015. The
Basel III Final Rules, when fully phased in, will require the Company and the Bank to maintain substantially more capital as a result of higher minimum capital
levels and more demanding regulatory capital risk-weightings and calculations. The changes to the standardized calculations of risk-weighted assets are complex
and may create enormous compliance burdens for the Company and the Bank. The Basel III Final Rules will require the Company and the Bank to substantially
change the manner in which they collect and report information to calculate risk-weighted assets, and may increase dramatically risk-weighted assets as a result of
applying higher risk weightings to many types of loans and securities. As a result, the Company and the Bank may be forced to limit originations of certain types of
commercial and mortgage loans, thereby reducing the amount of credit available to borrowers and limiting opportunities to earn interest income from the loan
portfolio, which may have a detrimental impact on the Company's net income.
If the Company were to require additional capital as a result of the Basel III Final Rules, it could be required to access the capital markets on short notice and in
relatively weak economic conditions, which could result in raising capital that significantly dilutes existing stockholders. Additionally, the Company may be forced
to limit banking operations and activities, and growth of loan portfolios and interest income, to focus on retention of earnings to improve capital levels. Higher
capital levels may also lower the Company's return on equity.
16
INDEX
The
Company
is
dependent
on
key
personnel
and
the
loss
of
one
or
more
of
those
key
personnel
could
harm
its
business.
The banking business in Virginia, and
in the Company's primary service area in the Hampton Roads MSA, is highly competitive and dominated by a relatively small number of large banks. Competition
for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in
the Virginia community banking industry. The Company's success depends to a significant degree upon its ability to attract and retain qualified management, loan
origination, administrative, marketing and technical personnel and upon the continued contributions of and customer relationships developed by management and
personnel. In particular, the Company's success is highly dependent upon the capabilities of its senior executive management. The Company believes that its
management team, comprised of individuals who have worked in the banking industry for many years, is integral to implementing the Company's business plan.
The Company has not entered into employment agreements with any of its executive management employees, and the loss of the services of one or more of them
could harm the Company's business.
The
allowance
for
loan
losses
may
not
be
adequate
to
cover
actual
losses.
A significant source of risk arises from the possibility that losses could be sustained
because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans and leases. There is no precise method to predict
loan losses. Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. Accounting
measurements related to impairment and the allowance for loan losses require significant estimates that are subject to uncertainty and changes relating to new
information and changing circumstances. The allowance for loan losses may not be adequate to cover actual loan losses. In addition, future provisions for loan
losses could materially and adversely affect, and have in recent years materially and adversely affected, the Company's operating results.
The allowance for loan losses is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolutions,
changes in the size and composition of the loan portfolio and industry information. Also included in management's estimates for loan losses are considerations with
respect to the impact of economic events, the outcome of which are uncertain. The determination of the appropriate level of the allowance for loan losses
inherently involves a high degree of subjectivity and judgment. The amount of future losses is susceptible to changes in economic and other conditions, including
changes in interest rates, that may be beyond the Company's control and these future losses may exceed current estimates. If management's assumptions prove to
be incorrect or if the Company experiences significant loan losses in future periods, the current level of the allowance for loan losses may not be adequate to cover
actual loan losses and adjustments may be necessary. In addition, federal regulatory agencies, as an integral part of their examination process, review the
Company's loans and allowance for loan losses and may require an increase in the allowance for loan losses or recognition of additional loan charge-offs, based on
judgments different from those of management. While management believes that the Company's allowance is adequate to cover current losses, the Company
cannot assure investors that it will not need to increase the allowance or that regulators will not require the allowance to be increased. Either of these occurrences
could materially and adversely affect earnings and profitability.
The
Company
may
be
adversely
affected
by
changes
in
government
monetary
policy.
As a bank holding company, the Company's business is affected by the
monetary policies established by the FRB, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. In setting its
policy, the FRB may utilize techniques such as the following:
·
·
·
Engaging in open market transactions in U.S. Government securities;
Setting the discount rate on member bank borrowings; and
Determining reserve requirements.
These techniques determine, to a significant extent, the Company's cost of funds for lending and investing. These techniques, all of which are outside the
Company's control, may have an adverse effect on deposit levels, net interest margin, loan demand or the Company's business and operations.
17
INDEX
The
Company's
future
success
depends
on
its
ability
to
compete
effectively
in
the
highly
competitive
financial
services
industry.
The Company faces substantial
competition in all phases of its operations from a variety of different competitors. Growth and success depends on the Company's ability to compete effectively in
this highly competitive financial services environment. Many competitors offer products and services that are not offered by the Company, and many have
substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price
loans and deposits more aggressively and may have larger lending limits that would allow them to serve the credit needs of larger customers. In addition, financial
technology start-ups are emerging in key areas of banking. Some of the financial services organizations with which the Company competes are not subject to the
same degree of regulation as is imposed on bank holding companies and federally insured national banks, and may have broader geographic services areas and
lower cost structures. As a result, these non-bank competitors have certain advantages over the Company in accessing funding and in providing various services.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.
Failure to compete effectively to attract new and retain current customers in the Company's markets could cause it to lose market share, slow its growth rate and
may have an adverse effect on its financial condition and results of operations.
The
Company
may
not
be
able
to
compete
effectively
without
the
appropriate
use
of
current
technology.
The use of technology in the financial services market,
including the banking industry, evolves frequently. The Company may be unable to attract and maintain banking relationships with certain customers if it does not
offer appropriate technology-driven products and services. In addition to better serving customers, the effective use of technology may increase efficiency and
reduce costs. The Company may not be able to effectively implement new technology-driven products or services or be successful in marketing these products and
services to its customers. As a result, the Company's ability to compete effectively may be impaired, which could lead to a material adverse effect on the
Company's financial condition and results of operations.
Negative
public
opinion
could
damage
the
Company's
reputation
and
adversely
impact
the
Company's
business,
financial
condition
and
results
of
operation.
Reputation risk, or the risk to the Company's business, financial condition and results of operation from negative public opinion, is inherent in the financial services
industry. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending or foreclosure practices, regulatory
compliance, corporate governance and sharing or inadequately protecting customer information, and from actions taken by government regulators and community
organizations in response to those activities. Negative public opinion could adversely affect the Company's ability to keep and attract customers and employees,
could expose it to litigation and regulatory action, and could adversely affect its access to the capital markets. Damage to the Company's reputation could adversely
affect deposits and loans and otherwise negatively affect the Company's business, financial condition and results of operation.
Deposit
insurance
premiums
could
increase
in
the
future,
which
may
adversely
affect
future
financial
performance.
The FDIC insures deposits at FDIC insured
financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a certain level. Economic conditions
from 2008 to 2011 increased the rate of bank failures and expectations for further bank failures, requiring the FDIC to make payments for insured deposits from the
DIF. Although the DIF has since been replenished, a similar economic downturn in the future could require measures similar to those implemented during the last
financial crisis, such as special assessments or required prepayments of insurance premiums. If the FDIC takes action to replenish the DIF, or if the Bank's asset
size increases, the Bank's FDIC insurance premiums could increase, which could have an adverse effect on the Company's results of operations.
The
Company
may
need
to
raise
additional
capital
in
the
future
and
such
capital
may
not
be
available
when
needed
or
at
all.
The Company may need to raise
additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset
quality or earnings were to deteriorate significantly. Economic conditions and the loss of confidence in financial institutions may increase the Company's cost of
funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve
Bank's discount window. The Company's ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that
time, which are outside of the Company's control, and the Company's financial performance.
18
INDEX
The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company's access to the capital
markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets, or a downgrade of the
parent company or the Bank's ratings, may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the
Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to
compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the
Company's liquidity, business, financial condition and results of operations.
The
Company
and
its
subsidiaries
are
subject
to
operational
risk,
which
could
adversely
affect
business,
financial
condition
and
results
of
operation.
The
Company and its subsidiaries, like all businesses, are subject to operational risk, including the risk of loss resulting from human error, fraud or unauthorized
transactions due to inadequate or failed internal processes and systems, and external events that are wholly or partially beyond the Company's control (including,
for example, sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, and cyber-attacks). Operational risk also
encompasses compliance (legal) risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical
standards. The Company and its subsidiaries have established a system of internal controls to address these risks, but there are inherent limitations to such risk
management strategies as there may exist, or develop in the future, risks that are not anticipated, identified or monitored. Any losses resulting from operational risk
could take the form of explicit charges, increased operational costs, litigation costs, harm to reputation or forgone opportunities, loss of customer business, or the
unauthorized release, misuse, loss or destruction of proprietary information, any and all of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The
Company's
directors
and
executive
officers
own
a
significant
portion
of
the
Company's
common
stock
and
can
exert
significant
influence
over
its
business
and
corporate
affairs.
The Company's directors and executive officers, as a group, beneficially owned 29.12% of the Company's common stock as of June 30,
2017. Consequently, if they vote their shares in concert, they can significantly influence the outcome of matters submitted to the Company's stockholders for
approval, including the election of directors. The interests of the Company's directors and executive officers may conflict with the interests of other holders of the
Company's common stock, and the Company's directors and executive officers may take actions affecting the Company with which other holders of the Company's
common stock disagree.
Future
sales
of
the
Company's
common
stock
by
stockholders
or
the
perception
that
those
sales
could
occur
may
cause
the
common
stock
price
to
decline.
Although the Company's common stock is listed for trading on the NASDAQ stock market, the trading volume in the common stock may be lower than that of
other larger financial institutions. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the
marketplace of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general
economic and market conditions over which the Company has no control. Given the potential for lower relative trading volume in the common stock, significant
sales of the common stock in the public market, or the perception that those sales may occur, could cause the trading price of the Company's common stock to
decline or to be lower than it otherwise might be in the absence of these sales or perceptions.
Future
issuances
of
the
Company's
common
stock
could
adversely
affect
the
market
price
of
the
common
stock
and
could
be
dilutive.
The Company may issue
additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of the Company's
common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, could materially adversely affect
the market price of the common stock and could be dilutive to stockholders. Any decision the Company makes to issue common stock in the future will depend on
market conditions and other factors, and the Company cannot predict or estimate the amount, timing, or nature of possible future issuances of common stock.
Accordingly, holders of the Company's common stock bear the risk that future issuances of securities will reduce the market price of the common stock and dilute
their stock holdings in the Company.
19
INDEX
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
As of December 31, 2017, the Company owned its main office, which includes a branch, located in Hampton, Virginia; the corporate headquarters, which includes
a branch; six office buildings; and 12 branches. All of these are owned directly and free of any encumbrances.
20
INDEX
The land at the Fort Monroe branch is leased by the Company under an agreement that expires in July 2019. Two of the remaining three branches are leased from
unrelated parties. The Crown Center branch is leased from Crown Center Associates, LLC, which is indirectly owned by Michael Glasser, a member of the
Company's Board of Directors. These three branch leases have renewal options with expiration dates ranging from March 31, 2018 to December 31, 2024.
For more information concerning the commitments under current leasing agreements, see Note 6 of the Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.
Item 3.
Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any material pending legal proceedings before any court, administrative agency, or other tribunal.
Item 4. Mine Safety Disclosures
None.
21
INDEX
Name (Age) And Present Position
Robert F. Shuford, Sr. (80)
Chairman, President & Chief Executive Officer
Old Point Financial Corporation
Robert F. Shuford, Jr. (53)
Executive Vice President/Bank
Old Point Financial Corporation
EXECUTIVE OFFICERS OF THE REGISTRANT
Served in
Current Position
Since
Principal Occupation During Past Five Years
1965
Chairman of the Board, President & Chief Executive Officer of the Company
Chairman of the Board of the Bank
2015
Executive Vice President/Bank of the Company since 2015; Chief Operating
Officer & Senior Vice President/Operations of the Company from 2003 to
2015
President & Chief Executive Officer of the Bank since 2015; Senior
Executive Vice President & Chief Operating Officer of the Bank from 2012
to 2015; Executive Vice President & Chief Operating Officer of the Bank
from 2003 to 2012
Jeffrey W. Farrar (57)
Chief Financial Officer & Senior Vice President/Finance
Old Point Financial Corporation
2017
Chief Financial Officer & Senior Vice President/Finance of the Company; a
Certified Public Accountant, Mr. Farrar previously spent the past three years
as Executive Vice President and Director of Wealth Management, Mortgage
and Insurance for Union Bankshares Corporation; and the previous 18 years
as Chief Financial Officer for StellarOne Corporation and its predecessor
companies.
Chief Financial Officer & Executive Vice President of the Bank
Eugene M. Jordan, II (63)
Secretary to the Board & Executive Vice President/Trust
Old Point Financial Corporation
2003
Secretary to the Board & Executive Vice President/Trust of the Company
since 2015; Executive Vice President/ Trust of the Company from 2003 to
2015
President and Chief Executive Officer of Trust since 2003
22
INDEX
Joseph R. Witt (57)
Chief Business Development Officer & Senior Vice President
Old Point Financial Corporation
2008
Chief Business Development Officer & Senior Vice President of the
Company since 2015; Chief Administrative Officer & Senior Vice
President/Administration of the Company from 2012 to 2015; Senior Vice
President/ Corporate Banking/Human Resources of the Company from 2010
to 2012; Senior Vice President/Corporate Banking of the Company from
2008 to 2010
Senior Executive Vice President & Chief Business Development Officer of
the Bank since 2015; Senior Executive Vice President & Chief
Administrative Officer of the Bank from 2012 to 2015; Executive Vice
President/ Corporate Banking & Human Resources Director of the Bank from
2010 to 2012
Donald S. Buckless (53)
Chief Lending Officer & Senior Vice President
Old Point Financial Corporation
2016
Chief Lending Officer & Senior Vice President of the Company since 2016
Chief Lending Officer & Executive Vice President of the Bank since 2016;
Chief Lending Officer & Senior Vice President of the Bank from 2015 to
2016; Senior Vice President/Commercial Lending Officer of the Bank from
May 2012 to 2015; Senior Vice President of SunTrust from December 2000
to May 2012
23
INDEX
Item 5. Market for Reg istrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
The common stock of t he Company is quoted on the NASDAQ Capital Market under the symbol "OPOF". The approximate number of stockholders of record as
of March 13, 2018 was 1,192. On that date, the closing price of the Company's common stock on the NASDAQ Capital Market was $25.85. The range of high and
low sale prices and dividends paid per share of the Company's common stock for each quarter during 2017 and 2016 is presented in Item 7 of this report on Form
10-K under "Capital Resources" and is incorporated herein by reference. Additional information related to restrictions on funds available for dividend declaration
can be found in Note 17 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on
Form 10-K.
On January 12, 2010, the Company authorized a program to repurchase during any given calendar year up to an aggregate of 5 percent of the shares of the
Company's common stock outstanding as of January 1 of that calendar year. The Company did not repurchase any shares of the Company's common stock under
this plan during 2017. There is currently no stated expiration date for this program.
Pursuant to the Company's stock option plans, participants may exercise stock options by surrendering shares of the Company's common stock that the participants
already own. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable stock options. No
such repurchases occurred during 2017.
24
INDEX
Item 6.
Selected Financial Data
The following table summarizes the Company's performance for the past five years.
SELECTED FINANCIAL HIGHLIGHTS
Years ended December 31,
2017
2016
2015
2014
2013
(dollars in thousands except per share data)
RESULTS OF OPERATIONS
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income (loss)
FINANCIAL CONDITION
Total assets
Securities available for sale, at fair value
Loans held for investment, net of deferred fees and costs
Allowance for loan losses
Deposits
Total borrowings
Total liabilities
Stockholders' equity
PERTINENT RATIOS
Return on average assets
Return on average equity
Net interest margin (FTE)
Efficiency ratio
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Leverage ratio
Tangible common equity / tangible assets
Cash dividends declared
Book value
ASSET QUALITY
Nonaccrual loans
OREO
ALLL / total outstanding loans
Nonaccrual loans / total loans
ALLL / nonaccrual loans
NPAs / total outstanding loans
Net charge-offs / total average loans
Provision / total average loans
PER SHARE DATA
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash dividends declared
Market value per share
Book value per share
Tangible book value per share
Price to earnings ratio, diluted
Price to book value ratio
Dividend payout ratio
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
32,934
3,012
29,922
4,160
25,762
14,058
39,946
(126)
(97)
(29)
981,826
157,121
738,540
9,448
783,594
98,193
885,438
96,388
$
$
$
$
$
$
$
$
$
$
0.00%
(0.03%)
3.64%
90.83%
11.18%
12.28%
9.98%
9.76%
$
0.44
$
19.20
$
12,882
$
-
1.28%
1.74%
73.34%
2.18%
0.44%
0.62%
$
$
$
$
$
$
(0.01)
(0.01)
0.44
29.75
19.20
19.20
(2,975.00)
1.55
(4,400.00%)
4,991,060
4,991,060
25
29,826
2,574
27,252
1,930
25,322
13,466
34,831
3,957
160
3,797
902,966
199,365
603,882
8,245
784,502
18,704
808,976
93,990
$
$
$
$
$
$
$
$
$
$
0.43%
3.99%
3.66%
85.54%
13.39%
14.51%
10.68%
10.41%
$
0.40
$
18.94
7,159
1,067
$
$
1.37%
1.19%
115.17%
1.84%
0.24%
0.33%
$
$
$
$
$
$
0.77
0.77
0.40
25.00
18.94
18.94
32.47
1.32
51.95%
30,295
3,632
26,663
1,025
25,638
13,136
35,086
3,688
54
3,634
896,787
214,192
568,475
7,738
746,471
50,950
803,611
93,176
$
$
$
$
$
$
$
$
$
$
0.41%
4.02%
3.56%
88.16%
13.78%
14.89%
10.93%
10.39%
$
0.34
$
18.79
$
4,582
$
2,741
1.36%
0.81%
168.88%
1.88%
0.06%
0.18%
$
$
$
$
$
$
0.73
0.73
0.34
17.16
18.79
18.79
23.51
0.91
46.58%
30,289
3,849
26,440
600
25,840
12,644
34,172
4,312
196
4,116
876,280
139,346
535,994
7,075
716,654
67,816
787,783
88,497
$
$
$
$
$
$
$
$
$
$
0.47%
4.81%
3.57%
87.43%
14.36%
15.44%
10.75%
10.10%
$
0.26
$
17.85
5,570
5,106
$
$
1.32%
1.04%
127.02%
2.20%
0.07%
0.12%
$
$
$
$
$
$
0.83
0.83
0.26
15.00
17.85
17.85
18.07
0.84
31.33%
29,823
4,680
25,143
1,300
23,843
12,773
33,105
3,511
348
3,163
864,288
155,639
500,699
6,831
725,405
56,586
783,527
80,761
0.36%
3.73%
3.23%
87.31%
14.50%
15.58%
10.37%
9.34%
0.22
16.29
11,324
6,415
1.36%
2.26%
60.32%
3.65%
0.38%
0.28%
0.64
0.64
0.22
12.82
16.29
16.29
20.03
0.79
34.38%
4,959,173
4,960,934
4,959,009
4,959,009
4,959,009
4,959,009
4,959,009
4,959,009
INDEX
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 financial condition, changes in financial condition and the results of
operations of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Trust. This discussion should be read in
conjunction with the Consolidated Financial Statements and other financial information contained elsewhere in this report.
Caution About Forward-Looking Statements
In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact
may be deemed to be a forward-looking statement. These forward-looking statements may include, but are not limited to, statements regarding profitability,
including the focus on reducing time deposits; the net interest margin; strategies for managing the net interest margin and the expected impact of such efforts;
levels and sources of liquidity; the loan portfolio and expected trends in the quality of the loan portfolio; the allowance and provision for loan losses; the effect of a
sustained increase in nonperforming assets; the securities portfolio; monetary policy actions of the Federal Open Market Committee; changes in interest rates;
interest rate sensitivity; asset quality; levels of net loan charge-offs and nonperforming assets; sales of OREO properties; levels of interest expense; levels and
components of noninterest income and noninterest expense; lease expense; income taxes; expected impact of efforts to restructure the balance sheet; expected
yields on the loan and securities portfolios; expected rates on interest-bearing liabilities; expected timing of and effect of the pending acquisition of Citizens
National; market risk; future impacts of the Tax Cuts and Jobs Act (the Tax Act) on the Company's operations; business and growth strategies; investment strategy;
and financial and other goals. Forward-looking statements often use words such as "believes," "expects," "plans," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends" or other words of similar meaning. These statements can also be identified by the fact that they do not relate
strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ
materially from historical results or those anticipated by such statements.
There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to the possibility
that: any of the anticipated benefits of the pending acquisition of Citizens National will not be realized or will not be realized within the expected time period;
Citizens National may not be integrated into the Company successfully or such integration may be more difficult, time-consuming, or costly than expected; or
obtaining required regulatory approvals or completing the acquisition may be more difficult, time-consuming, or costly than expected. Other factors that could
have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, effects of or changes in interest rates and
yields; general economic and general business conditions, including unemployment levels; uncertainty over future federal spending or the budget priorities of the
current presidential administration, particularly in connection with the Department of Defense, on the Company's service area; the Tax Act, including, but not
limited to, the effect of the lower corporate tax rate, including on the valuation of the Company's tax assets and liabilities; any future refinements to the Company's
preliminary analysis of the impact of the Tax Act on the Company; changes in the effect of the Tax Act due to issuance of interpretive regulatory guidance or
enactment of corrective or supplemental legislation; the transfer of the securities portfolio from held-to-maturity securities to available-for-sale securities; the
quality or composition of the loan or securities portfolios; the volume and mix of interest-earning assets and interest-bearing liabilities; the effects of management's
investment strategy and strategy to manage the net interest margin; the adequacy of the Company's credit quality review processes; the level of nonperforming
assets and related charge-offs and recoveries; turnover times experienced by the mortgage companies to which the Company has extended warehouse lines of
credit; the performance of the Company's re-opened indirect automobile dealer lending program; the federal government's guarantee of repayment of student loans
purchased by the Company; the ability of the Company to diversify its sources of noninterest income; new incentive structure for securities brokerage activities;
the local real estate market; volatility and disruption in national and international financial markets; government intervention in the U.S. financial system;
application of the Basel III capital standards to the Company and its subsidiaries; FDIC premiums and/or assessments; demand for loan and other banking products
and financial services in the Company's primary service area; levels of noninterest income and expense; deposit flows; competition; the use of inaccurate
assumptions in management's modeling systems; technological risks and developments and cyber-attacks and events; any interruption or breach of security in the
Company's information systems or those of the Company's third party vendors or other service providers; reliance on third parties for key services; adequacy of the
allowance for loan losses; and changes in accounting principles, policies and guidelines. The Company could also be adversely affected by monetary and fiscal
policies of the U.S. Government, as well as any regulations or programs implemented pursuant to the Dodd-Frank Act or other legislation and policies of the
Comptroller, U.S. Treasury and the Federal Reserve Board.
26
INDEX
These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue
reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily
indicative of future results.
Executive Overview
Description
of
Operations
Headquartered in Hampton, Virginia, the Company is the parent company of Trust and the Bank. Trust is a wealth management services provider. The Bank offers
a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial
customers. The Bank is an independent community bank and has 18 branches throughout the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight
County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County.
27
INDEX
Management
Initiatives
in
2017
Management's two main 2017 initiatives were to grow and diversify the loan portfolio and to expand and increase noninterest revenues. Management believes
substantial progress was made with respect to both initiatives. Net loans held for investment increased by $133.5 million when comparing December 31, 2017 to
December 31, 2016. This was in large part due to an expansion of the Company's indirect automobile lending program, which began in late 2016. Noninterest
income increased $592 thousand in 2017 from 2016 which was driven by the acquisition of Old Point Mortgage completed in the second quarter of 2017. The
Company also established Old Point Insurance, LLC in 2017, in partnership with Morgan Marrow Company offering a full array of insurance products.
Primary
Financial
Data
for
2017
In 2017, the Company's net income decreased $3.8 million to a net loss of $29 thousand, as compared to net income of $3.8 million in 2016, or a decrease of
100.76%. The decline was primarily the result of an increased provision for loan losses and three nonrecurring expenses in the fourth quarter. First, the Company
completed the previously announced termination and settlement of its defined benefit pension plan which resulted in $2.2 million in after-tax compensation
expense. Second, the Company incurred after-tax expenses associated with the planned merger with Citizens National Bank totaling $241 thousand. Third, the
changes to the corporate income tax rate resulting from the passage of the Tax Cuts and Jobs Act (the "Tax Act") precipitated $1.2 million in tax expenses related
to the reevaluation of the Company's net deferred tax asset.
Assets as of December 31, 2017 were $981.8 million, an increase of $78.9 million or 8.73% compared to assets as of December 31, 2016. During 2017, the
Company experienced significant loan growth which was funded by cash flows from the securities portfolio and decreased cash and cash equivalents as well as
borrowings from the Federal Home Loan Bank (FHLB). Net loans grew $133.5 million, or 22.41%, over the year, while securities available for sale declined $42.2
million, cash and cash equivalents decreased $11.4 million, and FHLB advances increased $67.5 million.
Critical Accounting Estimates
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles (GAAP) and conform to general
practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies,
including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and
related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position
and/or results of operations. The accounting policy that required management's most difficult, subjective or complex judgments is the Company's allowance for
loan losses, which is described below.
Allowance
for
Loan
Losses
The allowance for loan losses is an estimate of probable losses inherent in the loan portfolio. The allowance is based on three basic principles of accounting which
require: (i) that losses be accrued when they are probable of occurring and estimable, (ii) that losses be accrued based on the differences between the loan balances
and the value of collateral, present value of expected future cash flows (discounted at the loan's effective interest rate) or values that are observable in the
secondary market and (iii) that adequate documentation exist to support the allowance for loan losses estimate.
The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. Management's
estimate is based on certain observable, historical data and other factors that management believes are most reflective of the underlying credit losses being
estimated. This evaluation includes credit quality trends; collateral values; discounted cash flow analysis; loan volumes; geographic, borrower and industry
concentrations; the findings of internal credit quality assessments; and results from external bank regulatory examinations. These factors, as well as identified
impaired loans, historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.
Authoritative accounting literature requires that the impairment of loans that have been separately identified for evaluation be measured based on the present value
of expected future cash flows (discounted at the loan's effective interest rate) or, alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral)
and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral.
Authoritative accounting literature, as amended, also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest
income recognized on loans.
28
INDEX
For loans not individually evaluated for impairment, the loan portfolio is segmented into pools, based on the loan classifications as defined by Schedule RC-C of
the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report) and collectively evaluated for
impairment. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools
based on whether the loan's payments are current (including loans 1-29 days past due), 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due.
All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other
assets especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but
as of December 31, 2017 and December 31, 2016, the Company had no loans in these categories.
Specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment
status of the loan and the net market value of any underlying collateral.
While management uses the best information available to establish the allowance for loan losses, future adjustment to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the valuations or if required by regulators, based upon information available to them at the
time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations
indicate that loss levels may vary from previous estimates.
During the third quarter of 2017, the Company changed its method for calculating the allowance for loan and lease losses. This change is discussed in detail in
Note 4 of the Notes to the Consolidated Financial Statements included in this annual report on Form 10-K.
Other
Than
Temporary
Impairment
of
Securities
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary
and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more-likely-than-not that the Company will be required
to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that
the Company will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to a credit loss,
which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no
credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in
net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be
other-than-temporary based on the Company's ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity
security results in a write-down that must be included in net income. Management regularly reviews each investment security for other-than-temporary impairment
based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for
the issuer, management's best estimate of the present value of cash flows expected to be collected from debt securities, management's intention with regard to
holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Other
Real
Estate
Owned
(OREO)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals,
general market conditions, recent sales of similar properties, length of time the properties have been held, and management's ability and intention with regard to
continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a
further deterioration in market conditions.
Retirement
Plan
The Company maintained a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consisted
primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The
Company's actuary determined plan obligations and annual pension expense using a number of key assumptions including the discount rate, the interest crediting
rate, the estimated future return on plan assets and the anticipated rate of future salary increases. This plan was terminated in the fourth quarter of 2017. The
termination and settlement of this plan resulted in $2.2 million in after-tax compensation expense in 2017.
29
INDEX
Income Taxes
The Company recognizes expense for federal income and state bank franchise taxes payable as well as deferred federal income taxes for estimated future tax
effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the Consolidated Financial Statements. Income and
franchise tax returns are subject to audit by the Internal Revenue Service (IRS) and state taxing authorities. Income and franchise tax expense for current and prior
periods is subject to adjustment based on the outcome of such audits. The Company believes it has adequately provided for all taxes payable.
The Tax Act was signed into law on December 22, 2017. This permanently reduced the corporate income tax rate from a maximum of 35% to 21%, effective for
tax years including or commencing January 1, 2018. The Company recorded a charge to tax expense in the fourth quarter of 2017 of $1.2 million associated with
an initial estimate of the reevaluation of its deferred tax assets and liabilities necessitated by the lower corporate income tax rate.
Earnings Summary
Net loss for 2017 was $29 thousand ($0.01 per diluted share) compared to net income of $3.8 million ($0.77 per diluted share) in 2016. The decrease in net income
was due to higher noninterest expense, particularly nonrecurring charges related to the termination of the Company's defined benefit pension plan and the planned
merger with Citizens National Bank. Personnel costs also increased due to the acquisition of Old Point Mortgage in the second quarter. Provision expense was also
significantly higher in 2017. Partially offsetting the higher noninterest expense were increases in net interest income and noninterest income. Net interest income
increased mainly due to significant growth in the loan portfolio, while the Old Point Mortgage acquisition was primarily responsible for the increase in noninterest
income.
Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets
and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields
and rates, have a significant impact on the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by
average earning assets.
Net interest income, on a fully tax-equivalent basis, was $30.9 million in 2017, an increase of $2.7 million from 2016 and an increase of $3.2 million from 2015.
Growth in the loan portfolio was primarily responsible for the increase in 2017 when compared to 2016. The net interest margin was 3.64% in 2017 as compared to
3.66% in 2016 and 3.56% in 2015. The decline in the net interest margin in 2017 relative to 2016 was primarily the result of a higher average rate on interest-
bearing liabilities.
When comparing 2017 to 2016, the following changes occurred. Tax equivalent interest income increased $3.1 million, or 10.21%. Average earning assets
increased $79.0 million, or 10.27%. Total average loans increased $87.8 million, or 15.00%, and average investment securities decreased $1.0 million, or 0.59%, as
continued loan demand allowed the Company to shift its assets from securities to loans.
In 2017, the Company significantly expanded its indirect automobile lending program as part of a strategic initiative to grow and diversify the loan portfolio. This
was largely responsible for the strong loan growth which was funded in part by excess liquidity that was previously held in a noninterest-bearing account at a
correspondent bank. This contributed to the $21.4 million decline in average cash and due from banks. This also explains the decreases in interest-bearing due from
banks and federal funds sold average balances. Interest income was enhanced by the loan growth and the shift in asset composition to loans from lower yielding
and non-earnings assets. However, interest income was negatively impacted by continued declines in average loan yields, from 4.52% in 2016 to 4.36% in 2017, as
yields on new loan originations were generally lower than on loan maturities and paydowns. Total average earning asset yield was unchanged in 2017 compared to
2016 at 4.00%. Management expects the recent trend in declining loan yields that the Company has experienced to stabilize. The Federal Open Market Committee
(FOMC) raised the target range for the federal funds rate three times in 2017, and additional rate increases are forecasted for 2018.
30
INDEX
Average interest-bearing liabilities increased $40.8 million, or 7.17%, due to increases in both interest-bearing non-maturity deposits and FHLB advances.
Additional FHLB advances supplemented modest growth in average deposits and provided funding to support loan growth. Total interest expense increased $438
thousand, or 17.02%, when comparing 2017 to 2016. The increase was driven by increased deposit and borrowing costs. The average rate on interest-bearing
liabilities in 2017 was 0.49%, an increase of 4 basis points from 2016.
The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields. Nonaccrual loans are included in loans
outstanding.
TABLE I
AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*
Years ended December 31,
ASSETS
Loans *
Investment securities:
Taxable
Tax-exempt *
Total investment securities
Interest-bearing due from banks
Federal funds sold
Other investments
Total earning assets
Allowance for loan losses
Cash and due from banks
Bank premises and equipment, net
Other assets
2017
Interest
Income/
Expense
Average
Balance
Yield/
Rate
Average
Balance
2016
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2015
Interest
Income/
Expense
Yield/
Rate
(dollars in thousands)
$ 673,015 $ 29,318
4.36% $ 585,206 $ 26,451
4.52% $ 563,534 $ 26,106
4.63%
102,644
67,403
170,047
1,343
921
2,348
847,674
(8,950)
838,724
20,723
38,428
41,171
1,964
2,426
4,390
15
8
155
33,886
1,802
1.91% 104,549
2,326
3.60% 66,509
4,128
2.58% 171,058
48
9,226
1.12%
6
1,667
0.87%
6.60%
113
1,562
4.00% 768,719 30,746
(7,895)
760,824
2,510
1.72% 130,541
2,520
3.50% 71,831
5,030
2.41% 202,372
15
5,848
0.52%
2
1,860
0.36%
7.23%
133
2,373
4.00% 775,987 31,286
(7,404)
768,583
1.92%
3.51%
2.49%
0.26%
0.11%
5.60%
4.03%
42,111
40,480
42,643
31,858
41,988
41,957
Total assets
$ 939,046
$ 886,058
$ 884,386
LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Time deposits
$ 27,909 $
233,295
82,872
208,095
10
291
41
2,208
0.04% $ 20,045 $
0.12% 221,339
0.05% 78,305
1.06% 210,339
9
179
39
2,116
0.04% $ 11,219 $
0.08% 228,627
0.05% 74,436
1.01% 221,087
4
186
37
2,144
0.04%
0.08%
0.05%
0.97%
Total time and savings deposits
Federal funds purchased, repurchase
agreements and other borrowings
Federal Home Loan Bank advances
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Stockholders' equity
552,171
2,550
0.46% 530,028
2,343
0.44% 535,369
2,371
0.44%
25,743
32,301
38
424
0.15% 25,348
1.31% 14,016
25
206
0.10% 30,777
1.47% 27,466
30
1,231
0.10%
4.48%
610,215
226,951
5,359
842,525
96,521
3,012
0.49% 569,392
214,876
6,510
2,574
0.45% 593,612
194,677
5,664
3,632
0.61%
790,778
95,280
793,953
90,433
Total liabilities and stockholders' equity
$ 939,046
$ 886,058
$ 884,386
Net interest margin *
$ 30,874
3.64%
$ 28,172
3.66%
$ 27,654
3.56%
* Computed on a fully tax-equivalent basis using a 34% rate.
The tax-equivalent adjustment of income and yields will change in 2018 as a result of the passage of the Tax Act. The benefit of the tax-exemption for interest
income from municipal bonds and loans to municipalities will decline due to the decrease in the corporate income tax rate to 21%.
31
INDEX
The following table summarizes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities and changes in
interest rates.
TABLE II
VOLUME AND RATE ANALYSIS*
2017 vs. 2016
Increase (Decrease)
Due to Changes in:
2016 vs. 2015
Increase (Decrease)
Due to Changes in:
2015 vs. 2014
Increase (Decrease)
Due to Changes in:
Volume
Rate
Total
Volume
Rate
Total
Volume
Rate
Total
(in thousands)
$
3,969 $ (1,102) $
2,867 $
1,004 $
(659) $
345 $
2,237 $ (1,090) $
1,147
(33)
31
(2)
195
69
264
162
100
262
(3)
(106)
3,858
5
115
(718)
2
9
3,140
4
10
2
(23)
(7)
-
269
262
(3)
102
-
115
214
13
(51)
176
1
112
2
92
207
13
218
438
(500)
(187)
(687)
-
46
363
5
(7)
2
(104)
(104)
(5)
(603)
(712)
(208)
(7)
(215)
4
(33)
(903)
-
-
-
76
76
(708)
(194)
(902)
4
13
(540)
5
(7)
2
(28)
(28)
-
(422)
(346)
(5)
(1,025)
(1,058)
(740)
(79)
(819)
(312)
19
(293)
(1,052)
(60)
(1,112)
(2)
(1)
1,415
(1)
11
(1,373)
-
12
1
(167)
(154)
(2)
(45)
(201)
(1)
(5)
(10)
(43)
(59)
-
43
(16)
(3)
10
42
(1)
7
(9)
(210)
(213)
(2)
(2)
(217)
EARNING ASSETS
Loans *
Investment securities:
Taxable
Tax-exempt *
Total investment securities
Federal funds sold
Other investments
Total earning assets
INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Time deposits
Total time and savings deposits
Federal funds purchased, repurchase
agreements and other borrowings
Federal Home Loan Bank advances
Total interest-bearing liabilities
Change in net interest income
$
3,596 $
(894) $
2,702 $
1,075 $
(557) $
518 $
1,616 $ (1,357) $
259
* Computed on a fully tax-equivalent basis using a 34% rate.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity
prices. The Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact the amount of interest income and
expense the Company receives or pays on a significant portion of its assets and liabilities and the market value of its interest-earning assets and interest-bearing
liabilities, excluding those which have a very short-term until maturity. Management is responsible for reviewing the interest rate sensitivity position of the
Company and establishing policies to monitor and limit exposure to this risk.
32
INDEX
Three complementary modeling techniques are utilized to measure and monitor the exposure to interest rate risk: static gap analysis, earnings simulation analysis,
and economic value of equity (EVE) analysis. Static gap measures the aggregate dollar volume of rate-sensitive assets relative to rate-sensitive liabilities re-pricing
over various time horizons. This metric does not effectively capture the re-pricing characteristics or embedded optionality of the Company's assets and liabilities,
so it is not relied upon or addressed here. Earnings simulation measures the potential effect of changes in market interest rates on future net interest income. This
analysis incorporates management's assumptions for product pricing and pre-payment expectations and is the Company's preferred tool to assess its interest rate
sensitivity in the short- to medium-term. The simulation utilizes a "static" balance sheet approach, which assumes that management makes no changes to the
composition of the balance sheet to mitigate the impact of interest rate changes. EVE modeling estimates the fair value of assets and liabilities in different interest
rate environments using discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all
liabilities. This measure provides an indication of the future earnings capacity of the balance sheet, and the change in EVE over different rate scenarios is a
measure of long-term interest rate risk. The Company places less emphasis on EVE results due to the inherent imprecision of cash flow estimations and the limited
utility of a static balance sheet assumption over the long-term.
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and
pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the
national and regional economy, and other financial and business risk factors.
When the Company is liability sensitive, net interest income should improve if interest rates fall since liabilities will reprice faster than assets (depending on the
optionality or prepayment speeds of the assets). Conversely, if interest rates rise, net interest income should decline. When the Company is asset sensitive, net
interest income should improve if interest rates rise and fall if rates fall. The rate change model assumes that these changes will occur gradually over the course of
a year.
The table below shows the Company's interest rate sensitivity for the periods and rate scenarios presented (dollars in thousands):
Change in Interest Rates:
+300 basis points
+200 basis points
+100 basis points
Unchanged
-50 basis points
-100 basis points
TABLE III
CHANGE IN NET INTEREST INCOME
As of December 31,
2017
$
%
(1.42)
(1.02)
(0.49)
-
(0.28)
(0.92)
2016
$
%
1.35
0.88
0.42
-
(0.63)
(1.22)
(462)
(332)
(160)
0
(90)
(297)
380
248
117
-
(177)
(343)
Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are
based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and
liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not
be parallel.
Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the
Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their
debt.
33
INDEX
Provision for Loan Losses
The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of
the portfolio. This expense is based on management's estimate of probable credit losses inherent in the loan portfolio. Management's evaluation included credit
quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit
quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic
and business conditions, were used in developing estimated loss factors for determining the allowance for loan losses. Based on its analysis of the adequacy of the
allowance for loan losses, management concluded that the provision was appropriate.
The provision for loan losses was $4.2 million for the year ended December 31, 2017 as compared to $1.9 million for 2016. A portion of the increase is due to loan
growth during 2017, which required the Company to set aside additional reserves. The provision was also impacted by higher levels of charge offs in 2017 than in
2016. Charged-off loans totaled $3.3 million in 2017, compared to $1.8 million in 2016. Recoveries amounted to $330 thousand in 2017 and $347 thousand in
2016. The Company's net loans charged off to average loans were 0.44% in 2017 as compared to 0.24% in 2016.
Net loan charge-offs for 2017 were higher than in 2016 primarily due to charge-offs in the third and fourth quarters of 2017 on several borrowing relationships
whose conditions had deteriorated.
The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could
increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming
assets would increase charge-offs and reduce earnings due to larger contributions to the loan loss provision. If current economic conditions remain stable and net
loan charge-offs are consistent with management's forecast, management expects that the loan loss provision will be lower in 2018 than in 2017.
34
INDEX
Noninterest Income
Unless
otherwise
noted,
all
comparisons
in
this
section
are
between
the
twelve
months
ended
December
31,
2017
and
the
twelve
months
ended
December
31,
2016.
Noninterest income increased $592 thousand or 4.40% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Noninterest
income in 2017 was elevated in part by a nonrecurring gain recognized on the acquisition of Old Point Mortgage of $550 thousand. Mostly offsetting this was a
significant reduction in gains on the sale of available-for-sale securities. There was significant securities sales activity in 2016 as part of a restructuring of the
securities portfolio which resulted in considerable net gains. This did not reoccur in 2017.
Aside from the impact of nonrecurring gains, three other categories of noninterest income increased: fiduciary and asset management fees (up $226 thousand or
6.35%), other service charges, commissions and fees (up $242 thousand or 6.14%), and mortgage banking income (up $232 thousand or 56.17%). There was broad
growth in the fiduciary and asset management category with significant gains in personal trust income, retirement services income, and investment management
income. Other service charges, commissions and fees increased primarily due to growth in merchant processing and debit card fee income. Mortgage banking
income increased as a result of the acquisition of Old Point Mortgage.
The increases from these changes were partially offset by declines in deposit service charges in 2017. Both overdraft fee income and service charges on personal
and business deposits decreased year over year. Income from bank-owned life insurance was also down modestly, $21 thousand or 2.64%, in 2017 relative to 2016.
The Company continues to focus on diversifying noninterest income through efforts to expand Trust, insurance, and mortgage banking activities, and a continued
focus on business checking and other corporate services.
35
INDEX
Noninterest Expense
Unless
otherwise
noted,
all
comparisons
in
this
section
are
between
the
twelve
months
ended
December
31,
2017
and
the
twelve
months
ended
December
31,
2016.
The Company's noninterest expense increased $5.1 million or 14.69%. The largest contributing factor of this increase was higher salaries and employee benefits,
which included a nonrecurring pre-tax charge associated with the termination and settlement of the defined benefit pension plan of $3.4 million. Salaries and
employee benefits also increased due to higher personnel costs resulting from the addition of staff in connection with the Old Point Mortgage acquisition
completed in April 2017. The Company also incurred $241 thousand in nonrecurring merger costs associated with the Citizens National acquisition during the
fourth quarter of 2017.
Of the remaining categories of noninterest expense, the most significant changes when comparing 2017 to 2016 were in loan related expenses, occupancy and
equipment, data processing, FHLB advance prepayment fees, and loss (gain) on other real estate owned.
·
·
·
·
·
Loan related expenses (increased $424 thousand or 220.83%): The expansion of the Company's indirect automobile lending operations substantially
increased costs related to credit reporting and application processing.
Occupancy and equipment (increased $289 thousand or 5.18%): Building rental expenses increased with the addition of office space for Old Point Mortgage
personnel. Building maintenance and repair expense was also elevated.
Data processing fees (increased $163 thousand or 10.06%): The increase was due to higher expenses associated with enhancements to the Company's
disaster recovery capabilities and increased debit card expense due to higher transaction volumes. Also, in 2016 the Company was able to use earnings
credits from deposits with a correspondent bank to offset some processing related expenses. Due to the decline in cash and due from bank balances, this
opportunity was not available in 2017.
FHLB advance prepayment penalty (decreased $391 thousand or 100.00%): The Company incurred a prepayment penalty on the early payoff of an advance
in the first quarter of 2016 that bore an interest rate considerably above market rates for alternative funding. There were no advance prepayments in 2017.
Loss (gain) on other real estate owned (decreased $172 thousand or -111.69%): In 2016 and 2017, the Company worked diligently to sell the properties held
in other real estate owned, with the last two sales closing in the second quarter of 2017. Prior to 2017, both properties had already been written down to the
anticipated sales price (less costs to sell); the Company recorded a small gain on the final sales in 2017, as compared to a net loss in 2016.
The Company recorded an income tax benefit in 2017 compared to tax expense in 2016 due to lower income. The tax benefit would have been approximately $1.2
million higher had the passage of the Tax Act not required the reevaluation of the Company's net deferred tax asset. The Company's effective tax rate should
benefit in the future from the lower statutory corporate income tax rate . Tax expense is positively impacted by the Company's investment in tax-exempt securities,
low income housing investments, and BOLI income.
Balance Sheet Review
At December 31, 2017, the Company had total assets of $981.8 million, an increase of $78.9 million or 8.73% compared to assets as of December 31, 2016.
Asset growth in 2017 was driven by strong loan growth, particularly in the consumer automobile loan sector due to a renewed focus on indirect dealer lending. Net
loans held for investment increased $133.5 million or 22.41%, from $595.6 million at December 31, 2016 to $729.1 million at December 31, 2017. Increases in
consumer automobile loans accounted for $108.8 million of the net loan growth during 2017. This growth was funded in part by declines in cash and cash
equivalents and securities available for sale. Cash and cash equivalents decreased $11.4 million or 44.26% from December 31, 2016 to December 31, 2017, and
securities available for sale decreased $42.2 million or 21.19% over the same period. Total deposits declined slightly ($908 thousand or 0.12%) in 2017. To
compensate for the lack of deposit growth the Company obtained FHLB advances for various terms to provide additional liquidity to fund the loan growth. The
Company also utilized its unsecured federal funds lines with correspondents to fulfill some short-term funding needs.
36
INDEX
The Company's holdings of Alternative A-paper, or "Alt-A", type mortgage loans such as adjustable rate and nontraditional type loans were inconsequential,
amounting to less than 1.00% of the Company's loan portfolio as of December 31, 2017.
The Company does not have a formal program for subprime lending. The Company is, however, required by law to comply with the CRA, which imposes on
financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income borrowers. In
order to comply with the CRA and meet the credit needs of its local communities, the Company finds it necessary to make certain loans with subprime
characteristics.
For the purposes of this discussion, a "subprime loan" is defined as a loan to a borrower having a credit score of 660 or below. The majority of the Company's
subprime loans are to customers in the Company's primary service area.
37
INDEX
The following table details, as of December 31, 2017 and 2016, the Company's loans with subprime characteristics that were secured by 1-4 family first mortgages,
1-4 family open-end (i.e., equity lines of credit) and 1-4 family junior lien loans (i.e., second mortgages) for which the Company has recorded a credit score in its
system.
Loans Secured by 1 - 4 Family First Mortgages,
1 - 4 Family Open-end and 1 - 4 Family Junior Liens
As of December 31,
(dollars in thousands)
Subprime
Non-subprime
Total loans
2017
2016
Amount
Percent
Amount
Percent
22,312
147,827
170,139
13.1% $
86.9%
100.0% $
21,675
134,163
155,838
13.9%
86.1%
100.0%
738,540
$
603,882
$
$
$
Percentage of Real Estate-Secured Subprime Loans to Total Loans
3.02%
3.59%
In addition to the subprime loans secured by real estate discussed above, as of December 31, 2017, the Company had an additional $16.3 million in subprime
consumer loans that were either unsecured or secured by collateral other than real estate. Together with the subprime loans secured by real estate, the Company's
total subprime loans as of December 31, 2017 were $38.6 million, amounting to 5.23% of the Company's total loans at December 31, 2017.
The Company has no investments secured by "Alt-A" type mortgage loans such as adjustable rate and nontraditional type mortgages or subprime loans.
Securities Portfolio
When comparing December 31, 2017 to December 31, 2016, securities available-for-sale decreased $42.2 million, or 21.19%. The vast majority of the decline was
due to principal curtailments on mortgage-backed securities and calls and maturities of other securities, principally tax-exempt municipal bonds. The Company
also made some strategic sales of securities in the second quarter of 2017 to both realize gains as well as provide additional liquidity.
Restricted securities increased $2.9 million or 296.49% from December 31, 2016 to December 31, 2017 as a result of higher balances in FHLB stock. The
Company is required to hold FHLB stock based on its borrowings; since outstanding FHLB advances increased by $67.5 million during 2017, the Company was
required to increase its holdings of FHLB stock.
The Company's strategy for the securities portfolio is primarily intended to manage the portfolio's susceptibility to interest rate risk and to provide liquidity to fund
loan growth. The securities portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when
necessary.
38
INDEX
The following table sets forth a summary of the securities portfolio:
TABLE IV
SECURITIES PORTFOLIO
As of December 31,
Available-for-sale securities, at fair value:
U.S. Treasury securities
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Money market investments
Corporate bonds
Other marketable equity securities
Restricted securities:
Federal Home Loan Bank stock
Federal Reserve Bank stock
Total
2017
2016
(in thousands)
2015
$
$
$
$
$
- $
9,435
64,765
74,296
1,194
7,234
197
157,121 $
3,677 $
169
3,846 $
20,000 $
9,195
77,987
83,694
647
7,678
164
199,365 $
801 $
169
970 $
-
24,240
78,433
107,396
631
3,393
99
214,192
1,847
169
2,016
160,967 $
200,335 $
216,208
The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of December 31, 2017:
Obligations of U.S. Government Agencies
Weighted average yield
Obligations of state and political subdivisions
Weighted average yield
Mortgage-backed securities
Weighted average yield
Money market investments
Weighted average yield
Corporate bonds
Weighted average yield
Federal Home Loan Bank stock - restricted
Weighted average yield
Federal Reserve Bank stock - restricted
Weighted average yield
Other marketable equity securities
Weighted average yield
Total securities
Weighted average yield
$
$
$
$
$
$
$
$
$
1 year
or less
1-5
years
996
$
1.28%
5-10
years
(dollars in thousands)
893
$
1.37%
-
-
$
1,117
$
2.88%
12,869
$
2.75%
$
-
-
8,971
$
1.73%
Over 10
years
Total
7,546
$
2.00%
34,386
$
3.80%
48,666
$
1.80%
$
$
-
-
-
-
3,677
$
5.01%
169
$
6.00%
$
197
-
9,435
1.86%
64,765
3.48%
74,296
1.85%
1,194
1.10%
7,234
4.23%
3,677
5.01%
169
6.00%
197
-
16,393
$
3.42%
16,659
$
2.05%
$
-
-
$
-
-
393
$
2.13%
4,945
$
5.46%
$
$
$
-
-
-
-
-
-
$
$
$
-
-
-
-
-
-
1,194
$
1.10%
1,896
$
1.48%
$
$
$
-
-
-
-
-
-
5,203
$
1.66%
23,126
$
2.29%
37,997
$
3.08%
94,641
$
2.67%
160,967
2.68%
The table above is based on maturity. Therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average life
of the $74.3 million in mortgage-backed securities as of December 31, 2017 was 4.61 years. Yields are calculated on a fully tax-equivalent basis using a 34% rate.
39
INDEX
Loan Portfolio
The following table shows a breakdown of total loans by segment at December 31 for years 2013 through 2017:
As of December 31,
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Other
Total
TABLE V
LOAN PORTFOLIO
2017
2016
2015
(in thousands)
2014
2013
$
60,398 $
27,489
465,231
174,225
11,197
54,434 $
23,116
448,408
58,907
19,017
43,197 $
19,685
437,159
50,427
18,007
37,698 $
9,082
435,914
30,493
22,807
30,702
14,505
416,966
19,791
18,735
$
738,540 $
603,882 $
568,475 $
535,994 $
500,699
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
Based on the North American Industry Classification System code, there are no categories of loans that exceed 10% of total loans other than the categories
disclosed in the preceding table.
As of December 31, 2017, the total loan portfolio increased by $134.7 million or 22.30% from December 31, 2016. Although competition for quality loans remains
fierce, the Company accelerated the growth of its loan portfolio in 2017, aided significantly by the focus on its indirect dealer lending division which was re-
opened in September 2016. This contributed positively to interest income in 2017 and is expected to do so in the future as well. While there are risks inherent in
any new loan program, the Company has hired knowledgeable staff and put in place programs and policies to mitigate those risks. Management is monitoring the
allowance for loan losses carefully and will make changes as the portfolio ages.
In addition to the loan growth generated by the re-opening of the dealer department, the Company also experienced appreciable increases in commercial real estate
loans, home equity loans, and home equity lines of credit.
The maturity distribution and rate sensitivity of certain categories of the Company's loan portfolio at December 31, 2017 is presented below:
TABLE VI
MATURITY SCHEDULE OF SELECTED LOANS
December 31, 2017
Commercial
Real estate - construction
Total
Loans due after 1 year with:
Fixed interest rate
Variable interest rate
Total
Within 1
year
1 to 5 years
After 5
years
Total
$
$
15,969 $
8,507
24,476 $
(in thousands)
20,728 $
18,964
39,692 $
23,701 $
18
23,719 $
$
$
36,704 $
2,988
39,692 $
14,979 $
8,740
23,719 $
60,398
27,489
87,887
51,683
11,728
63,411
40
INDEX
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, and other real estate
owned (OREO). Restructured loans are loans with terms that were modified in a troubled debt restructuring (TDR) for borrowers experiencing financial
difficulties. During the year ended December 31, 2017, the Company restructured four loans.
Nonperforming assets increased by $5.0 million or 44.59%, from $11.1 million at December 31, 2016 to $16.1 million at December 31, 2017. The 2017 total
consisted of $3.2 million in loans still accruing interest but past due 90 days or more and $12.9 million in nonaccrual loans. Of the $12.9 million in nonaccrual
loans, $12.0 million was secured by real estate. All of the nonaccrual loans are classified as impaired. Impaired loans are a component of the allowance for loan
losses. When a loan changes from "90 days past due but still accruing interest" to "nonaccrual" status, the loan is normally reviewed for impairment. If impairment
is identified, then the Company records a charge-off based on the value of the collateral or the present value of the loan's expected future cash flows, discounted at
the loan's effective interest rate. If the Company is waiting on an appraisal to determine the collateral's value, management allocates funds to cover the deficiency
to the allowance for loan losses based on information available to management at the time.
The recorded investment in impaired loans decreased to $18.5 million as of December 31, 2017 from $20.1 million as of December 31, 2016 as detailed in Note 4
of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. The majority
of these loans were collateralized.
41
INDEX
The following table presents information concerning the aggregate amount of nonperforming assets, which includes nonaccrual loans, past due loans, TDRs and
OREO:
As of December 31,
Nonaccrual loans
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Total nonaccrual loans
Loans past due 90 days or more and accruing interest
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer (2)
Other
Total loans past due 90 days or more and accruing interest
Restructured loans
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Total restructured loans
Less nonaccrual restructured loans (included above)
Less restructured loans in compliance (3)
Net nonperforming restructured loans
Other real estate owned
Construction, land development, and other land
1-4 family residential properties
Multifamily (5 or more) residential properties
Former branch sites
Nonfarm nonresidential properties
Total nonperforming assets
Interest income that would have been recorded under original
loan terms on nonaccrual loans included above
Interest income recorded for the period on nonaccrual loans
included above
TABLE VII
NONPERFORMING ASSETS
2017
2016
2015
(in thousands)
2014
2013
$
$
$
$
$
$
$
$
$
$
$
$
836 $
722
11,324
-
12,882 $
471 $
-
306
2,401
4
3,182 $
98 $
92
14,781
-
14,971 $
8,561
6,410
- $
- $
-
-
-
-
- $
231 $
-
6,847
81
7,159 $
- $
-
276
2,603
5
2,884 $
144 $
96
11,616
-
11,856 $
2,838
9,018
- $
940 $
-
-
127
-
1,067 $
276 $
-
4,306
-
4,582 $
164 $
-
23
3,163
6
3,356 $
- $
99
11,077
12
11,188 $
2,497
8,691
- $
1,090 $
724
-
-
927
2,741 $
- $
499
5,071
-
5,570 $
10 $
-
107
1,019
5
1,141 $
- $
102
12,203
13
12,318 $
4,240
8,078
- $
2,138 $
884
-
886
1,198
5,106 $
149
2,545
8,630
-
11,324
-
-
527
5
14
546
-
-
12,076
15
12,091
3,630
8,461
-
2,783
457
-
886
2,289
6,415
16,064 $
11,110 $
10,679 $
11,817 $
18,285
474 $
318 $
196 $
301 $
762
281 $
269 $
141 $
265 $
251
42
INDEX
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due
principal portion of these guaranteed loans totaled $4.2 million at December 31, 2017 and $4.8 million at December 31, 2016. For additional information,
refer to Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on
Form 10-K.
(3) Amounts listed represent restructured loans that are in compliance with their modified terms as of the date presented.
As shown in the table above, as of December 31, 2017 compared to December 31, 2016, the nonaccrual loan category increased by $5.7 million or 79.94% and the
90-days past due and still accruing interest category increased by $298 thousand or 10.33%.
The majority of the balance of nonaccrual loans at December 31, 2017 was related to a few large credit relationships. Of the $12.9 million of nonaccrual loans at
December 31, 2017, $9.0 million, or approximately 69.73%, was comprised of four credit relationships . All loans in these relationships have been analyzed to
determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover outstanding principal balances. The Company
has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect .
Although increases in nonaccrual loans and loans rated substandard would typically warrant an increase in the allowance, management believes that the collateral
and/or cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.
43
INDEX
The majority of the loans past due 90 days or more and still accruing interest at December 31, 2017 ($2.3 million) were student loans. The federal government has
provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans; as such,
management does not expect even a significant increase in past due student loans to have a material effect on the Company.
OREO decreased by $1.1 million or 100.00% when comparing December 31, 2017 to December 31, 2016, as the Company sold the remaining properties in 2017.
Management believes the Company has an excellent credit quality review process in place to identify problem loans quickly. For a detailed discussion of the
Company's nonperforming assets, refer to Note 4 and Note 5 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of this report on Form 10-K.
Management is cautiously optimistic about the future and is well aware that if the economy begins to decline, nonperforming assets could increase in future
periods. As the Company experienced in 2009, 2010 and 2011, the effect of a sustained increase in nonperforming assets would likely be lower earnings caused by
larger contributions to the loan loss provision, which in turn would be driven by larger impairments in the loan portfolio and higher levels of loan charge-offs.
The Allowance for Loan Losses
The allowance for loan losses is based on several components. In evaluating the adequacy of the allowance, each segment of the loan portfolio is divided into
several pools of loans:
1.
2.
3.
4.
Specific identification (regardless of risk rating)
Pool–substandard
Pool–other assets especially mentioned (OAEM) (rated just above substandard)
Pool–pass loans (all other rated loans)
The first component of the allowance for loan losses is determined based on specifically identified loans that are impaired. These loans are individually analyzed
for impairment and include nonperforming loans and both performing and nonperforming TDRs. This component may also include loans considered impaired for
other reasons, such as outdated financial information on the borrower or guarantors or financial problems of the borrower, including operating losses, marginal
working capital, inadequate cash flow, or business interruptions. Changes in TDRs and nonperforming loans affect the dollar amount of the allowance. Increases in
the impairment allowance for TDRs and nonperforming loans are reflected as an increase in the allowance for loan losses except in situations where the TDR or
nonperforming loan does not require a specific allocation (i.e., the discounted present value of expected future cash flows or the collateral value is considered
sufficient).
The majority of the Company's TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains
current appraisals when applicable. If the Company has not yet received a current appraisal on loans being reviewed for impairment, any loan balance that is in
excess of the estimated appraised value is allocated in the allowance. As of December 31, 2017 and December 31, 2016, the impaired loan component of the
allowance for loan losses amounted to $95 thousand and $800 thousand, respectively. The impaired loan component of the allowance for loan losses is reflected as
a valuation allowance related to impaired loans in Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of this report on Form 10-K.
44
INDEX
The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes
in certain loans, changes in underwriting, changes in management and legal and regulatory changes. For the December 31, 2017 calculation, the qualitative factors
which had the most significant impact on the allowance were those affected by changes in the economy and past due and nonaccrual loans. Continued incremental
improvements in the economy allowed for a reduction in the allowance. At the same time, past due and nonaccrual loans increased in several categories when
comparing December 31, 2017 to December 31, 2016.
Historical loss is the final component of the allowance for loan losses. The calculation of the historical loss component is conducted on loans evaluated collectively
for impairment and uses migration analysis on pooled segments. These segments are based on the loan classifications set by the Federal Financial Institutions
Examination Council in the instructions for the Call Report applicable to the Bank.
45
INDEX
Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on
whether the loan's payments are current (including loans 1 – 29 days past due), 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other
loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets
especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of
December 31, 2017 and December 31, 2016, the Company had no loans in these categories.
With the December 31, 2016 calculation, the historical loss was based on a four migration periods covering the twelve quarters each. The calculation for December
31, 2017 had one significant change, which are described in detail below. On a combined basis, the historical loss and qualitative factor components amounted to
$9.4 million and $7.4 million as of December 31, 2017 and December 31, 2016, respectively. Growth in the loan portfolio is the major reason for the increase in
these combined components when comparing the allowance calculation as of December 31, 2017 to the allowance calculation as of December 31, 2016.
Beginning with the September 30, 2017 calculation, management made the following change to its methodology in order to ensure the allowance accurately
reflects probable losses inherent in the loan portfolio.
Change in Migration Periods
Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). Multiple migration
periods can also be calculated, allowing the Company to assess the migration of loans based on more than one starting point. For example, the Company could run
a migration analysis that begins on June 30, 2014 and follows the performance of the loans outstanding on that date through June 30, 2017, assessing changes in
risk ratings and the amount of any charge-offs to determine the historical loss rate. The Company could then run a second migration analysis that begins on
September 30, 2014 and follows those loans through September 30, 2017 to calculate a second historical loss rate. These two loss rates would then be averaged to
determine the overall loss rate applied to the loan portfolio.
The length of a migration period can also be extended. Adding additional quarters to the migration analysis extends the period over which the loan could cease to
perform, increasing the number of loans that default and thus also increasing the historical loss rates. While a longer migration period provides a more conservative
estimate of expected future losses, extending the migration period too far can provide less accurate estimates if there have been changes in the economy or the
Company's loan management processes.
Increasing the number of migration periods, as opposed to lengthening the individual migration periods, provides the Company with an average loss rate that is less
affected by unusual balances in the segments of the portfolio. Because migration analysis follows only those loans outstanding at the beginning of the migration
period, a significant change in the balance of a loan pool during the migration period can produce results that are not indicative of the performance of the pool.
For example, a migration period of twelve quarters (three years) may apply to a pool of loans that has a balance of $300 thousand at the beginning of the migration
period. In a relatively small loan pool such as this, if a loan of $150 thousand is charged off during the migration period, the migration analysis would show a loss
rate of 50%, based on the original outstanding balance of $300 thousand and a charge-off of $150 thousand. In this example, the 50% loss rate calculated for the
migration period would result from the unique timing and loan balance factors within the period and would not necessarily provide an appropriate reflection of the
performance of the loans in the pool. By using multiple migration periods, such unusual situations have less of an impact on the calculated historical loss rate,
providing a more accurate representation of the losses expected to be incurred.
As part of the quarterly calculation, management reviews the length of the migration periods and the number of migration periods used. To better reflect the risks
inherent in the loan portfolio, in the third quarter of 2017, the Company increased the number of migration periods from four to eight. As with the methodology in
prior quarters, each migration period covers twelve quarters, with the most recent migration period ending with the most recent quarter. This same methodology
was used in the December 31, 2017 calculation.
46
INDEX
Overall Change in Allowance
As a result of management's analysis, the Company added, through the provision, $4.2 million to the allowance for loan losses for the year ended December 31,
2017. The allowance for loan losses, as a percentage of year-end loans, was 1.28% in 2017 and 1.37% in 2016. Management believes that the allowance has been
appropriately funded for losses on existing loans, based on currently available information. The Company will continue to monitor the loan portfolio and levels of
nonperforming assets closely and make changes to the allowance for loan losses when necessary.
See Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K for a
discussion of the financial statement impact of this change.
47
INDEX
The following table shows an analysis of the allowance for loan losses:
TABLE VIII
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,
2017
2016
2015
(dollars in thousands)
2014
2013
Balance at the beginning of period
$
8,245
$
7,738
$
7,075
$
6,831
$
7,324
Charge-offs:
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Other
Total charge-offs
Recoveries:
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Other
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Selected loan loss statistics
Loans (net of unearned income):
End of period balance
Average balance
Net charge-offs to average total loans
Provision for loan losses to average total loans
Provision for loan losses to net charge-offs
Allowance for loan losses to period end loans
Earnings to loan loss coverage (2)
Allowance for loan losses to nonperforming loans
807
0
1,934
279
267
3,287
37
104
45
56
88
330
915
0
504
204
147
1,770
79
3
197
28
40
347
2,957
1,423
293
0
321
92
191
897
50
1
393
39
52
535
362
286
51
563
163
175
1,238
55
173
524
64
66
882
356
4,160
9,448
$
1,930
8,245
$
1,025
7,738
$
600
7,075
$
200
501
1,548
141
316
2,706
76
6
513
111
207
913
1,793
1,300
6,831
738,540
673,015
$
$
603,882
585,206
$
$
568,475
563,534
$
$
535,994
517,183
$
$
500,699
471,203
0.44%
0.62%
140.68%
1.28%
1.36
58.81%
0.24%
0.33%
135.63%
1.37%
4.14
82.10%
0.06%
0.18%
283.15%
1.36%
13.02
97.48%
0.07%
0.12%
168.54%
1.32%
13.80
105.42%
0.38%
0.28%
72.50%
1.36%
2.68
57.55%
$
$
$
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) Income before taxes plus provision for loan losses, divided by net charge-offs.
48
INDEX
The following table shows the amount of the allowance for loan losses allocated to each category at December 31 of the years presented.
TABLE IX
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,
2017
2016
2015
2014
2013
Percent
of
Loans
to
Total
Loans
Amount
Percent
of
Loans
to
Total
Loans
Percent
of
Loans
to
Total
Loans
(dollars in thousands)
Amount
Amount
Percent
of
Loans
to
Total
Loans
Amount
Percent
of
Loans
to
Total
Loans
Amount
Commercial
Real estate-construction
Real estate-mortgage (1)
Consumer
Other
Total
$
$
1,889
541
5,217
1,644
157
9,448
8.18% $
3.72%
62.99%
23.59%
1.52%
100.00% $
1,493
846
5,267
455
184
9.16% $
3.83%
74.25%
9.61%
3.15%
8,245 100.00% $
633
985
5,628
279
213
7.60% $
3.46%
76.90%
8.87%
3.17%
7,738 100.00% $
595
703
5,347
219
211
7.03% $
1.69%
81.33%
5.69%
4.26%
7,075 100.00% $
350
662
5,357
294
168
6.13%
2.90%
83.28%
3.95%
3.74%
6,831 100.00%
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
For the year ended December 31, 2017 as compared to the year ended December 31, 2016, there was an increase in the allowance for loan losses due to growth in
the loan portfolio. The change in the allowance was distributed among the loan segments based on the composition of loans in each segment. See Note 4 of the
Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K for further
information related to the effect of the change in the calculation method.
49
INDEX
Although the allowance for loan losses is allocated into these categories, the entire allowance for loan losses is available to cover loan losses in any category. For
example, if real estate-construction loans experienced losses of $1.0 million, the allowance for loan losses could absorb these losses even though only $541
thousand is allocated to that category.
Deposits
The following table shows the average balances and average rates paid on deposits for the periods presented.
TABLE X
DEPOSITS
Years ended December 31,
2017
Average
Balance
Average
Rate
2016
Average
Balance
Average
Rate
(dollars in thousands)
2015
Average
Balance
Average
Rate
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Other time deposits
Total interest-bearing deposits
Demand deposits
Total deposits
$
$
27,909
233,295
82,872
208,095
552,171
226,951
779,122
0.04% $
0.12%
0.05%
1.06%
0.46%
$
20,045
221,339
78,305
210,339
530,028
214,876
744,904
0.04% $
0.08%
0.05%
1.01%
0.44%
$
11,219
228,627
74,436
221,087
535,369
194,677
730,046
0.04%
0.08%
0.05%
0.97%
0.44%
The Company's average total deposits were $779.1 million for the year ended December 31, 2017, an increase of $34.2 million or 4.59% from average total
deposits for the year ended December 31, 2016. The demand deposit and money market account categories had the largest increases, totaling $12.1 million and
$12.0 million, respectively. Average time deposits, which is the Company's most expensive deposit category, decreased by a total of $2.2 million as seen in the
table above. The average rate paid on interest-bearing deposits by the Company in 2017 was 0.46% compared to 0.44% in 2016.
As loan growth accelerated in 2017, the Company made strategic increases in the rates on time deposits in certain maturities to fund loan growth and manage its
interest-rate risk. Selected money market deposit rates were also raised in 2017 to attract and retain desirable customers relationships as market and competitors'
rates increased. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.
The following table shows time deposits in amounts of $100 thousand or more by time remaining until maturity at the dates presented.
TABLE XI
TIME DEPOSITS OF $100,000 OR MORE
As of December 31,
Maturing in:
Within 3 months
3 through 6 months
6 through 12 months
Greater than 12 months
2017
2016
(in thousands)
2015
$
$
25,136 $
11,192
8,830
76,418
121,576 $
15,074 $
21,183
19,276
59,501
115,034 $
23,844
11,474
8,572
65,207
109,097
50
INDEX
Return on Equity and Assets
The return on average stockholders' equity and assets, the dividend pay-out ratio, and the average equity to average assets ratio for the past three years are
presented below.
As of December 31,
Return on average assets
Return on average equity
Dividend pay-out ratio
Average equity to average assets
2017
2016
2015
0.00%
-0.03%
-7,575.86%
10.28%
0.43%
3.99%
52.23%
10.75%
0.41%
4.02%
46.40%
10.23%
Capital Resources
Total stockholders' equity as of December 31, 2017 was $96.4 million, up 2.55% from $94.0 million on December 31, 2016 as the increase in other comprehensive
income associated with the termination of the defined benefit pension plan exceeded the net loss for the period, dividends paid, and the mark-to-market adjustment
on available-for-sale securities.
51
INDEX
The Company's capital position remains strong as evidenced by the regulatory capital measurements. Under the banking 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.
In June 2013, the federal bank regulatory agencies adopted the Basel III Final Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-
weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. For an overview of the Basel III Final Rules, refer to
"Regulation and Supervision" included in Item 1, "Business" of this report on Form 10-K.
The following is a summary of the Company's capital ratios for the past three years. As shown below, these ratios were all well above the regulatory minimum
levels.
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Tier 1 Leverage
2017
Regulatory
Minimums
2017
2016
2015
4.50%
6.00%
8.00%
4.00%
11.18%
11.18%
12.28%
9.98%
13.39%
13.39%
14.51%
10.68%
13.78%
13.78%
14.89%
10.93%
Year-end book value per share was $19.20 in 2017, $18.94 in 2016, and $18.79 in 2015. Cash dividends were $2.2 million or $0.44 per share in 2017, $2.0
million or $0.40 per share in 2016, and $1.7 million or $0.34 per share in 2015. The common stock of the Company has not been extensively traded. The table
below shows the high and low sales prices and dividends paid for each quarter of 2017 and 2016. The stock is quoted on the NASDAQ Capital Market under the
symbol "OPOF" and the prices below are based on trade information as reported by The NASDAQ Stock Market, LLC. There were 1,192 stockholders of record of
the Company as of March 13, 2018. This stockholder count does not include stockholders who hold their stock in a nominee registration.
The following is a summary of the quarterly dividends paid and high and low sales prices of Old Point Financial Corporation common stock for the previous two
years.
Dividend
$
$
$
$
0.11 $
0.11 $
0.11 $
0.11 $
2017
High
Sales Price
30.43 $
33.88 $
34.82 $
34.64 $
Low
Dividend
2016
High
Sales Price
Low
24.40 $
28.93 $
29.61 $
26.03 $
0.10 $
0.10 $
0.10 $
0.10 $
20.25 $
20.50 $
21.45 $
26.00 $
17.38
18.50
18.30
19.34
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Five Year Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative shareholder return on the Company's common stock during the five years ended
December 31, 2017, with (1) the Total Return Index for the NASDAQ Composite, and (2) the Total Return Index for SNL U.S. Bank NASDAQ. This comparison
assumes $100 was invested on December 31, 2012 in the Company's common stock and the comparison groups and assumes the reinvestment of all cash dividends
prior to any tax effect and retention of all stock dividends.
52
INDEX
Index
Old Point Financial Corporation
NASDAQ Composite Index
SNL U.S. Bank NASDAQ Index
Source:
S&P
Global
Market
Intelligence
Period Ending
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
100.00
100.00
100.00
118.04
140.12
143.73
140.51
160.78
148.86
164.22
171.97
160.70
244.07
187.22
222.81
12/31/2017
294.78
242.71
234.58
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and
loans maturing within one year.
In addition, secondary sources are available through the use of borrowed funds if the need should arise. The Company's sources of funds include a large stable
deposit base and secured advances from the Federal Home Loan Bank of Atlanta (FHLB). As of December 31, 2017, the Company had $217.0 million in FHLB
borrowing availability. The decrease in availability for FHLB advances is mainly due to the $67.5 million increase in outstanding advances during 2017. The
Company also has available short-term unsecured borrowed funds in the form of federal funds with correspondent banks. As of year-end 2017 and 2016, the
Company had $45.0 million and $55.0 million available in federal funds lines of credit to address any short-term borrowing needs.
As a result of the Company's management of liquid assets, the availability of borrowed funds and the ability to generate liquidity through liability funding,
management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and to meet its customers' future borrowing
needs.
Notwithstanding the foregoing, the Company's ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions
nationally and in the Company's markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company
may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide
additional liquidity for the Company's operations.
53
INDEX
The following table sets forth information relating to the Company's sources of liquidity and the outstanding commitments for use of liquidity at December 31,
2017 and December 31, 2016. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage
ratio.
LIQUIDITY SOURCES AND USES
Total
December 31, 2017
In Use
Available
Total
(dollars in thousands)
December 31, 2016
In Use
Available
SOURCES
Federal funds lines of credit
Federal Home Loan Bank advances
Federal funds sold & balances at the Federal Reserve
Securities, available-for-sale and unpledged at fair value
Total short-term funding sources
USES
Unfunded loan commitments and lending lines of credit
Letters of credit
Commitments to purchase assets
Total potential short-term funding uses
$
55,000 $
284,513
10,000 $
67,500
$
55,000 $
270,048
- $
-
45,000
217,013
586
90,536
353,135
68,152
999
-
69,151
Liquidity coverage ratio
510.7%
55,000
270,048
3,718
126,457
455,223
69,389
1,079
165
70,633
644.5%
The fair value of unpledged available-for-sale securities decreased from December 31, 2016 to December 31, 2017 primarily due to declining balances in the
securities portfolio. Unpledged available-for-sale securities also declined due to a $2.0 million increase in customer repurchase agreements. The increase in
repurchase agreements from December 31, 2016 to December 31, 2017 was primarily a result of balance fluctuations in the account of a single customer.
Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources
or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity
or operations. The Company's internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company's primary
external source of liquidity is advances from the FHLB.
The Company's operating activities provided $9.4 million of cash during the year ended December 31, 2017, compared to $8.7 million provided during 2016. Even
though net income declined significantly, much of this resulted from noncash charges related to the pension termination and increased loan loss provision expense
associated with loan growth. The Company's investing activities used $98.4 million of cash during 2017, compared to $23.6 million used during 2016, principally
due to additional loan growth. The Company's financing activities provided $77.5 million of cash during 2017 compared to $3.8 million provided of cash during
2016. This change is principally due to increases in FHLB advances.
54
INDEX
Effects of Inflation
Management believes changes in interest rates affect the financial condition of the Company, and other financial institutions, to a far greater degree than changes in
the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same
magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected
rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other
governmental regulatory authorities.
Management believes that the key to achieving satisfactory performance in an inflationary environment is the Company's 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.
Off-Balance Sheet Lending Related Commitments
The Company had $144.1 million in consumer and commercial commitments at December 31, 2017. As of the same date, the Company also had $3.3 million in
letters of credit that the Company will fund if certain future events occur. It is expected that only a portion of these commitments will ever actually be funded.
55
INDEX
Management believes that the Company has the liquidity and capital resources to handle these commitments in the normal course of business. See Note 15 of the
Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.
Contractual Obligations
In the normal course of business, there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are
commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table provides the
Company's contractual obligations as of December 31, 2017:
Contractual Obligations
Short-Term Debt Obligations
Long-Term Debt Obligations
Operating Lease Obligations
Total contractual cash obligations excluding deposits
Deposits
Total
Payments due by period
Total
Less Than
1 Year
1-3 Years
(in thousands)
3-5 Years
More Than
5 Years
$
$
78,193 $
20,000
413
98,606
783,594
882,200 $
78,193 $
-
178
78,371
650,967
729,338 $
- $
20,000
235
20,235
89,121
109,356 $
- $
-
-
-
43,506
43,506 $
-
-
-
-
-
-
Short-term debt obligatio ns include federal funds purchased, overnight repurchase agreements and Federal Home Loan Bank advances maturing within a year of
origination. Long-term debt obligations consist of Federal Home Loan Bank advances with original maturities greater than one year.
Short-Term Borrowings
Certain short-term borrowings at December 31, 2017, 2016 and 2015 are presented below. Information is presented only on those categories whose average
balance at December 31 exceeded 30 percent of total stockholders' equity at the same date.
Balance at December 31,
Federal funds purchased
Repurchase agreements
Federal Home Loan Bank advances
Average daily balance for the year ended
December 31,
Federal funds purchased
Repurchase agreements
Federal Home Loan Bank advances
Maximum month-end outstanding
balance:
Federal funds purchased
Repurchase agreements
Federal Home Loan Bank advances
$
$
$
TABLE XII
SHORT-TERM BORROWINGS
2017
2016
2015
Balance
Rate
Balance
Rate
Balance
Rate
(dollars in thousands)
10,000
20,693
47,500
1.62% $
0.10%
1.51%
-
18,704
-
0.00% $
0.10%
0.00%
-
25,950
-
854
24,889
27,589
1.52% $
0.10%
1.24%
204
25,144
12,115
0.75% $
0.10%
0.54%
-
30,654
-
10,000
36,809
47,500
$
-
34,519
20,000
$
-
44,614
-
56
-
0.09%
-
-
0.10%
-
INDEX
Quarterly Data
The table below contains a comparison of the Company's quarterly income and expenses for the periods indicated:
2017
2016
Years Ended December 31,
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest and dividend income
Interest expense
$
8,580 $
(914)
8,568 $
(837)
(in thousands, except per share data)
7,725 $
(588)
7,590 $
(640)
8,061 $
(673)
7,436 $
(633)
7,435 $
(582)
Net interest income
Provision for loan losses
Net interest income, after
provision for loan losses
7,666
(1,235)
7,731
(1,275)
7,388
(1,000)
7,137
(650)
6,950
(630)
6,803
100
6,853
(1,250)
6,431
6,456
6,388
6,487
6,320
6,903
5,603
6,496
Noninterest income
Noninterest expenses
3,443
(12,854)
3,361
(9,116)
4,091
(9,270)
3,163
(8,706)
3,188
(8,566)
3,327
(8,689)
3,286
(8,485)
3,665
(9,091)
Income before income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
$
$
$
(2,980)
91
(2,889) $
701
56
757 $
1,209
(48)
1,161 $
944
(2)
942 $
942
(47)
895 $
1,541
(212)
1,329 $
404
148
552 $
1,070
(49)
1,021
(0.58) $
(0.58) $
0.15 $
0.15 $
0.23 $
0.23 $
0.19 $
0.19 $
0.18 $
0.18 $
0.27 $
0.27 $
0.11 $
0.11 $
0.21
0.21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This information is incorporated herein by reference from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", on
pages 20 through 44 of this report on Form 10-K.
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.
57
7,365
(719)
6,646
(150)
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Old Point Financial Corporation
Hampton, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Old Point Financial Corporation. and Subsidiaries (the Company) as of December 31, 2017 and
2016, the related consolidated statements of operation, comprehensive income, changes in stockholders’ equity and cash flows for the three years then ended, and
the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the three years
then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control
—
Integrated
Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’s auditor since 2004.
Winchester, Virginia
March 15, 2018
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Old Point Financial Corporation
Hampton, Virginia
Opinion on the Internal Control over Financial Reporting
We have audited Old Point Financial Corporation and Subsidiaries' (the Company) internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal
Control
—
Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal
Control
—
Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets as of December 31, 2017 and 2016, and the related consolidated statements of operation, comprehensive income, changes in stockholders’ equity and cash
flows for the three years then ended of the Company and our report dated March 15, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting in the accompanying Management’s
Report
of
Internal
Control
over
Financial
Reporting
. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 15, 2018
59
Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets
INDEX
Assets
Cash and due from banks
Interest-bearing due from banks
Federal funds sold
Cash and cash equivalents
Securities available-for-sale, at fair value
Restricted stock, at cost
Loans held for sale
Loans, net
Premises and equipment, net
Bank-owned life insurance
Other real estate owned, net of valuation allowance
Goodwill
Other assets
Total assets
Liabilities & Stockholders' Equity
Deposits:
Noninterest-bearing deposits
Savings deposits
Time deposits
Total deposits
Federal funds purchased
Overnight repurchase agreements
Federal Home Loan Bank advances
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,019,703 and 4,961,258 shares outstanding (includes 2,245
and 0 unvested restricted shares, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements.
60
December
31, 2017
December
31, 2016
(dollars in thousands,
except per share data)
$
$
$
$
13,420 $
908
84
14,412
157,121
3,846
779
729,092
37,197
25,981
-
621
12,777
981,826 $
225,716 $
345,053
212,825
783,594
10,000
20,693
67,500
3,651
885,438
21,885
1,667
2,302
25,854
199,365
970
-
595,637
39,324
25,206
1,067
-
15,543
902,966
228,641
344,452
211,409
784,502
-
18,704
-
5,770
808,976
25,087
17,270
54,738
(707)
96,388
981,826 $
24,806
16,427
56,965
(4,208)
93,990
902,966
INDEX
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Operations
Interest and Dividend Income:
Interest and fees on loans
Interest on due from banks
Interest on federal funds sold
Interest on securities:
Taxable
Tax-exempt
Dividends and interest on all other securities
Total interest and dividend income
Interest Expense:
Interest on savings deposits
Interest on time deposits
Interest on federal funds purchased, securities sold under agreements to repurchase and other
borrowings
Interest on Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income, after provision for loan losses
Noninterest Income:
Fiduciary and asset management fees
Service charges on deposit accounts
Other service charges, commissions and fees
Bank-owned life insurance income
Mortgage banking income
Gain on sale of available-for-sale securities, net
Gain on acquisition of Old Point Mortgage
Other operating income
Total noninterest income
Noninterest Expense:
Salaries and employee benefits
Pension termination settlement
Occupancy and equipment
Data processing
FDIC insurance
Customer development
Professional services
Employee professional development
Loan related expenses
Other taxes
Prepayment fee on Federal Home Loan Bank advance
Loss (gain) on other real estate owned
Merger expenses
Other operating expenses
Total noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic earnings (loss) per share:
Weighted average shares outstanding
Net income (loss) per share of common stock
Diluted earnings (loss) per share:
Weighted average shares outstanding
Net income (loss) per share of common stock
Years Ended
December 31,
2017
2015
2016
(dollars in thousands, except per share data)
29,191 $
15
8
1,964
1,601
155
32,934
342
2,208
38
424
3,012
29,922
4,160
25,762
3,786
3,874
4,182
774
645
96
550
151
14,058
20,863
3,350
5,864
1,783
478
575
2,069
794
616
563
-
(18)
241
2,768
39,946
(126)
(97)
(29) $
26,322 $
48
6
1,802
1,535
113
29,826
227
2,116
25
206
2,574
27,252
1,930
25,322
3,560
4,052
3,940
795
413
522
-
184
13,466
19,878
-
5,575
1,620
483
612
2,122
659
192
505
391
154
-
2,640
34,831
3,957
160
3,797 $
25,972
15
2
2,510
1,663
133
30,295
227
2,144
30
1,231
3,632
26,663
1,025
25,638
3,617
4,021
4,084
885
259
76
-
194
13,136
20,747
-
5,330
1,625
586
584
1,413
591
146
439
-
957
-
2,668
35,086
3,688
54
3,634
4,991,060
(0.01) $
4,959,173
0.77 $
4,959,009
0.73
4,991,060
(0.01) $
4,960,934
0.77 $
4,959,009
0.73
$
$
$
$
See Notes to Consolidated Financial Statements.
61
INDEX
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Net income (loss)
Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on available-for-sale securities
Amortization of unrealized losses on securities transferred to held-to-maturity
Changes in defined benefit plan assets and benefit obligations
Other comprehensive income (loss), net of tax
Comprehensive income
See Notes to Consolidated Financial Statements.
62
2017
Years Ended
December 31,
2016
(dollars in thousands)
2015
$
(29) $
3,797 $
3,634
1,032
-
2,469
3,501
3,472 $
(1,163)
-
117
(1,046)
2,751 $
(498)
3,386
(157)
2,731
6,365
$
INDEX
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Shares of
Common
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
(dollars in thousands, except per share data)
Balance at December 31, 2014
4,959,009 $
24,795 $
16,392 $
53,203 $
(5,893) $
88,497
Net income
Other comprehensive income, net of tax
Cash dividends ($0.40 per share)
Balance at December 31, 2015
Net income
Other comprehensive loss, net of tax
Exercise of stock options
Employee Stock Purchase Plan share issuance
Cash dividends ($0.44 per share)
-
-
-
4,959,009 $
-
-
-
24,795 $
-
-
-
16,392 $
-
-
1,250
999
-
-
-
6
5
-
-
-
19
16
-
3,634
-
(1,686)
55,151 $
3,797
-
-
-
(1,983)
-
2,731
-
(3,162) $
-
(1,046)
-
-
-
3,634
2,731
(1,686)
93,176
3,797
(1,046)
25
21
(1,983)
Balance at December 31, 2016
4,961,258 $
24,806 $
16,427 $
56,965 $
(4,208) $
93,990
Net loss
Other comprehensive income, net of tax
Exercise of stock options
Employee Stock Purchase Plan share issuance
Repurchase of common stock related to stock option exercises
Stock-based compensation expense
Cash dividends ($0.44 per share)
-
-
58,105
3,548
(5,453)
-
-
-
-
290
18
(27)
-
-
-
-
875
81
(130)
17
-
(29)
-
-
-
-
-
(2,198)
-
3,501
-
-
-
-
-
(29)
3,501
1,165
99
(157)
17
(2,198)
Balance at December 31, 2017
5,017,458 $
25,087 $
17,270 $
54,738 $
(707) $
96,388
See Notes to Consolidated Financial Statements.
63
INDEX
Years Ended December 31,
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Provision for loan losses
Net gain on sale of available-for-sale securities
Net amortization of securities
Increase in loans held for sale
Net (gain) loss on disposal of premises and equipment
Net (gain) loss on write-down/sale of other real estate owned
Income from bank owned life insurance
Stock compensation expense
Deferred tax benefit
Decrease (increase) in other assets
Decrease (Increase) in other liabilities
Pension plan contribution
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities
Proceeds from redemption of restricted securities, net
Proceeds from maturities and calls of available-for-sale securities
Proceeds from maturities and calls of held-to-maturity securities
Proceeds from sales of available-for-sale securities
Paydowns on available-for-sale securities
Paydowns on held-to-maturity securities
(Purchases) paydowns of consumer installment loans, net
Net increase in all other loans (including repayments on student loans)
Proceeds from sales of other real estate owned
Payments for improvements to other real estate owned
Purchases of premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
(Increase) decrease in noninterest-bearing deposits
Decrease in savings deposits
Decrease (increase) in time deposits
Decrease (increase) in federal funds purchased and repurchase agreements, net
Increase in Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Proceeds from exercise of stock options and ESPP issuance
Repurchase and retirement of common stock
Cash dividends paid on common stock
Net cash provided by financing activities
Net (increase) decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest
Income tax
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized gain (loss) on securities available-for-sale
Loans transferred to other real estate owned
Former bank property transferred from fixed assets to foreclosed properties
(Increase) decrease in pension liability
Securities transferred from held-to-maturity to available-for-sale
Unamortized losses on transfer date on securities transferred from available-for-sale to held-to-maturity,
2017
2016
(dollars in thousands)
2015
$
(29) $
3,797 $
3,634
2,742
4,160
(96)
2,247
(779)
4
(18)
(774)
17
(117)
458
3,177
(1,554)
9,438
(23,095)
(2,876)
50,290
-
4,480
9,981
-
(6,944)
(130,671)
1,084
-
(619)
(98,370)
(2,925)
601
1,416
11,989
167,500
(100,000)
1,264
(157)
(2,198)
77,490
(11,442)
25,854
14,412 $
2,725
1,930
(522)
2,196
-
(3)
154
(795)
-
(19)
(567)
(243)
-
8,653
(151,204)
1,046
43,660
-
107,647
11,288
-
(2,281)
(34,549)
1,699
(52)
(891)
(23,637)
13,551
23,082
1,398
(7,246)
55,000
(80,000)
46
-
(1,983)
3,848
(11,136)
36,990
25,854 $
2,543
1,025
(76)
2,188
-
6
957
(885)
-
(227)
(3,969)
3,637
(1,000)
7,833
(104,103)
277
80,790
300
23,005
9,353
8,161
(6,797)
(26,599)
1,956
-
(1,756)
(15,413)
28,810
14,292
(13,285)
(11,866)
20,000
(25,000)
-
-
(1,686)
11,265
3,685
33,305
36,990
2,880 $
600
2,587 $
-
3,646
200
1,563 $
-
-
3,741
-
(1,762) $
-
127
177
-
(755)
553
-
(237)
85,555
$
$
$
eliminated upon transfer back to available-for-sale
-
-
4,197
Amortization of unrealized loss on securities transferred to held-to-maturity
-
-
934
See Notes to Consolidated Financial Statements.
64
INDEX
NOTE 1, Significant Accounting Policies
THE COMPANY
Headquartered in Hampton, Virginia, Old Point Financial Corporation is a holding company that conducts substantially all of its operations through two
subsidiaries, The Old Point National Bank of Phoebus and Old Point Trust & Financial Services, N.A. The Bank serves individual and commercial customers, the
majority of which are in Hampton Roads, Virginia. As of December 31, 2017, the Bank had 18 branch offices. The Bank offers a full range of deposit and loan
products to its retail and commercial customers, including mortgage loan products offered through its Old Point Mortgage division. A full array of insurance
products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Trust offers a full range of services for individuals and
businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration,
tax services and investment management services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Old Point Financial Corporation (the Company) and its wholly-owned subsidiaries, The Old Point
National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). All significant intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the
allowance for loan losses, other-than-temporary impairment of securities, and the valuation allowance on other real estate owned.
VARIABLE INTEREST ENTITIES
Current accounting guidance states that if a business enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. This interpretation explains how to
identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate the entity. It also requires
existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties
involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. At this time, the Company has no VIEs that are consolidated.
ACQUISITIONS
The Bank had a joint venture agreement with Tidewater Mortgage Services, Inc. (TMSI) to provide mortgage origination services through Old Point Mortgage,
LLC (OPM), a joint venture between the Bank and TMSI. Per the terms of the joint venture agreement, TMSI and the Bank owned 51% and 49%, respectively, of
OPM, and TMSI was the managing member.
On April 20, 2017, the Bank completed its purchase of TMSI's interest in OPM, which terminated the joint venture agreement between TMSI and the Bank and
made OPM a wholly-owned subsidiary of the Bank as of that date. OPM's fair value was based on an independent valuation performed as of March 31, 2017. Since
OPNB had a 49% interest in OPM prior to acquisition of the remaining interest and obtains a controlling interest with the buy-out, this will transaction was
accounted for as a business combination achieved in stages or a step acquisition. OPNB has through the aforementioned valuation estimated the fair value of its
previously held equity interest in the target resulting in a gain for the excess of the acquisition-date fair value of its previously held equity interest in the target over
its carrying value of $550 thousand which is included as a gain on acquisition of Old Point Mortgage in the Consolidated Statements of Income.
65
INDEX
The table below summarizes the transaction and goodwill recognition (000's):
Consideration transferred
Acquisition-date fair value of previously-held equity interest
Total
Net assets acquired
Goodwill
$
$
1,534
2,002
3,536
2,915
621
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's activities are with customers located within the Hampton Roads region. The types of securities that the Company invests in are included in
Note 3. The types of lending that the Company engages in are included in Note 4. The Company has significant concentrations in the following industries:
construction, lessors of real estate, activities related to real estate, ambulatory health care and religious organizations. The Company does not have any significant
concentrations to any one customer.
At December 31, 2017 and 2016, there were $317.2 million and $308.5 million, or 42.95% and 51.09%, respectively, of total loans concentrated in commercial
real estate. Commercial real estate for purposes of this note includes all construction loans, loans secured by multifamily residential properties, loans secured by
farmland and loans secured by nonfarm, nonresidential properties.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash and balances due from banks and federal funds sold, all of
which mature within 90 days.
INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks mature within one year and are carried at cost.
SECURITIES
Certain debt securities that management has the positive intent and ability to hold until maturity are classified as "held-to-maturity" and recorded at amortized cost.
Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as "available-for-sale" and recorded at
fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized
in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. The Company employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments.
In the event that the cost of an investment exceeds its fair value, the Company evaluates, among other factors, the magnitude and duration of the decline in fair
value; the expected cash flows of the securities; the financial health of and business outlook for the issuer; the performance of the underlying assets for interests in
securitized assets; and the Company's intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an
impairment charge is recorded in investment income and a new cost basis in the investment is established.
RESTRICTED STOCK, AT COST
The Company, as a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of Atlanta (FHLB), is required to maintain an investment in the
capital stock of both the FRB and the FHLB. Based on the redemption provisions of these investments, the stocks have no quoted market value, are carried at cost
and are listed as a restricted securities. The Company reviews its holdings for impairment based on the ultimate recoverability of the cost basis in the FRB and
FHLB stock.
66
INDEX
LOANS HELD FOR SALE
The Company records loans held for sale using the lower of cost or market value. In addition, the Company requires a firm purchase commitment from a
permanent investor before a loan can be closed, thus limiting interest rate risk. Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income. The change in fair value of loans held for sale is recorded as a component of "Mortgage banking income, net" within the Company's
Consolidated Statements of Operations.
LOANS
The Company extends loans to individual consumers and commercial customers for various purposes. Most of the Company's loans are secured by real estate,
including real estate construction loans and real estate mortgage loans (i.e., residential 1-4 family mortgages, commercial real estate loans, second mortgages and
equity lines of credit). Other loans are secured by collateral that is not real estate, which may include inventory, accounts receivable, equipment or other personal
property. A substantial portion of the loan portfolio is represented by real estate mortgage loans throughout Hampton Roads. The ability of the Company's debtors
to honor their contracts is dependent in part upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for unearned income, the allowance for loan losses and any unamortized deferred fees or costs on originated loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well
as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
NONACCRUALS, PAST DUES AND CHARGE-OFFS
The accrual of interest on commercial loans (including construction loans and commercial loans secured and not secured by real estate) is generally discontinued at
the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Consumer loans not secured by real estate and consumer real
estate secured loans (i.e., residential 1-4 family mortgages, second mortgages and equity lines of credit) are generally placed on nonaccrual status when payments
are 120 days past due. Past due status is based on the contractual terms of the loan, and loans are considered past due when a payment of principal and/or interest is
due but not paid. Regular payments not received within the payment cycle are considered to be 30, 60, or 90 or more days past due accordingly. In all cases, loans
are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is
accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status or charged off. Loans are generally returned to accrual status
when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed
paying the full amount of the scheduled contractual interest and principal payments for at least six months.
Loans are generally fully charged off or partially charged down to the fair value of collateral securing the asset when:
·
·
·
·
Management determines the asset to be uncollectible;
Repayment is deemed to be protracted beyond reasonable time frames;
The asset has been classified as a loss by either the internal loan review process or external examiners;
The borrower has filed for bankruptcy protection and the loss becomes evident due to a lack of borrower assets; or
The loan is 120 days or more past due unless the loan is both well secured and in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
67
INDEX
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired, such as a loan that is
considered a TDR (discussed in detail below). These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting
guidance for loan impairment. All loans, including consumer loans, whose terms have been modified in a TDR are also individually analyzed for estimated
impairment. Impairment is measured on a loan-by-loan basis for construction loans and commercial loans (i.e., commercial mortgage loans on real estate and
commercial loans not secured by real estate) by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is collateral dependent. For those loans that are classified as impaired, an allowance is
established when the discounted value of expected future cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying
value of that loan.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
The general component covers loans that are not classified as impaired. Loans collectively evaluated for impairment are pooled, with a historical loss rate, based on
migration analysis, applied to each pool, segmented by risk grade or days past due, depending on the type of loan. Based on credit risk assessments and
management's analysis of qualitative factors, additional loss factors are applied to loan balances. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and consumer loans secured by real estate (i.e.,
residential 1-4 family mortgages, second mortgages and equity lines of credit) for impairment disclosures, unless the terms of such loans have been modified in a
TDR due to financial difficulties of the borrower.
Each portfolio segment has risk characteristics as follows:
·
·
·
Commercial: Commercial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the
ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk
associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.
Real estate-construction: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according
to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the
general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure
unrelated to the project.
Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and
changes in the value of the collateral. Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If
non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.
68
INDEX
·
·
Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer
loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance
companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral
other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.
Each segment of the portfolio is pooled by risk grade or by days past due. Loans not secured by real estate and made to individuals for household, family and other
personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are
segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all
pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides
management with information regarding trends (or migrations) in a particular loan segment. At December 31, 2017 management used four twelve-quarter
migration periods, and at December 31, 2016, m anagement used one twelve-quarter migration period.
TROUBLED DEBT RESTRUCTURINGS
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management grants a concession for other than an insignificant
period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in
financial difficulty before their loans reach nonaccrual status and works with them to grant appropriate concessions, if necessary, and modify their loans to more
affordable terms. These modified terms could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment
extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. In cases where borrowers are granted new terms that provide for
a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company (i.e., put presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership); (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity or the ability to unilaterally cause the holder to return specific assets.
OTHER REAL ESTATE OWNED (OREO)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance (direct write-downs) are included in loss
(gain) on other real estate owned.
BANK-OWNED LIFE INSURANCE
The Company owns insurance on the lives of a certain group of key employees. The cash surrender value of these policies is included as an asset on the
consolidated balance sheets, and the increase in cash surrender value is recorded as noninterest income on the consolidated statements of operations. In the event of
the death of an insured individual under these policies, the Company would receive a death benefit payment. Any excess in the amount received over the recorded
cash surrender value would be recorded as other operating income on the consolidated statements of operations.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation and amortization computed on the straight-line method over the
estimated useful lives of the assets. Buildings and equipment are depreciated over their estimated useful lives ranging from 3 to 39 years; leasehold improvements
are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over its
estimated useful life ranging from 3 to 5 years.
69
INDEX
OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial letters of credit and
lines of credit. Such financial instruments are recorded when they are funded.
PENSION PLAN
The Company has a non-contributory defined benefit pension plan, which was frozen by the Company in 2006 and terminated in 2017. This plan was terminated in
the fourth quarter of 2017. Details regarding the impact of this can be found in Note 14.
STOCK COMPENSATION PLANS
Stock compensation accounting guidance (FASB ASC 718, "Compensation -- Stock Compensation") requires that the compensation cost related to share-based
payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments
issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share
plans, performance-based awards, share appreciation rights and employee share purchase plans.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period,
generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period
for the entire award. A Black Scholes model is used to estimate the fair value of the stock options, while the market price of the Company's common stock at the
date of grant is used for restricted stock awards.
INCOME TAXES
The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, "Income Taxes"). The Company adopted the
accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves
to maintain for uncertain tax positions.
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company
determines deferred income taxes using the liability or balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of
the difference between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more-likely-than-
not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more
than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the
more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood
of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has
met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to
management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that
some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
No uncertain tax positions were recorded in 2017 or 2016.
70
INDEX
The results for the year ended December 31, 2017 include the effect of the Tax Cuts and Jobs Act (the Tax Act), which was signed into law on December 22, 2017.
Among other things, the Tax Act permanently lowers the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of
35%, effective January 1, 2018. As a result of the federal corporate income tax rate, U.S. GAAP requires companies to re-measure their deferred tax assets and
deferred tax liabilities, including those accounted for in accumulated other comprehensive income (loss), as of the date of the Tax Act's enactment and record the
corresponding effects in income tax expense in the fourth quarter of 2017. As a result of the permanent reduction in the corporate income tax rate, the Company
recognized a $1.2 million reduction in the value of its net deferred tax asset and recorded a corresponding incremental income tax expense in the Company's
consolidated statement of income for 2017. The Company's evaluation of the effect of the Tax Act is considered a preliminary estimate and is subject to refinement
in 2018. No material adjustment is anticipated.
EARNINGS PER COMMON SHARE
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to
outstanding stock options and shares to be issued as part of the employee stock purchase plan and are determined using the treasury stock method.
TRUST ASSETS AND INCOME
Securities and other property held by Trust in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying Consolidated
Financial Statements.
ADVERTISING EXPENSES
Advertising expenses are expensed as incurred. Advertising expense for the years ended 2017, 2016 and 2015 was $249 thousand, $273 thousand, and $217
thousand, respectively.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income, net of tax. Other comprehensive income (loss), net of tax includes unrealized
gains and losses on securities available-for-sale, unrealized losses on securities transferred from available-for-sale to held-to-maturity, and unrealized losses related
to changes in the funded status of the pension plan which are also recognized as separate components of equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates
involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606." This ASU revised guidance for the recognition,
measurement, and disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard updates
that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all
entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based
recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of
the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. Entities can elect to
adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of
the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of
the beginning of the reporting period in which the entity first applies the new guidance. The Company plans to adopt this guidance on the effective date, January 1,
2018 via the modified retrospective approach. The Company has completed its assessment of the adoption of this ASU, noting the standard will result in expanded
disclosures related to non-interest income and enhance the qualitative disclosures on the revenues within the scope of the new guidance. The Company has
concluded the adoption of ASU 2014-09 will not have a material impact on its consolidated financial statements.
71
INDEX
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities." This ASU requires an entity to, among other things: (i) measure equity investments at fair value through net income, with certain exceptions;
(ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and
financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an
exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax
assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain
observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure
requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only
permitted for the provision related to instrument-specific credit risk. The Company has completed its assessment of ASU No. 2016-01 and upon adoption there will
be enhancements to the current financial instrument disclosures.
During February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be
required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's
obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's
right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted
improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a
modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period
presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have
on its consolidated financial statements. As the Company owns the majority of its buildings, management does not anticipate that the ASU will have a material
impact.
During June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-
looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to
those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale
debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission (SEC)
filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU
2016-13 will have on its consolidated financial statements and has formed a committee to oversee the adoption of the new standard. The ALLL model currently in
use by the Company already provides it with the ability to archive prior period information and contains loan balance and charge-off information beginning with
September 30, 2011. The committee has reviewed the data included in each monthly archive file and has added fields to enhance its data analysis capabilities under
the new standard.
During August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to
address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using
a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the
amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period.
The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
72
INDEX
During January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this
ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs,
processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not
required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and
continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1)
require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to
create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in
evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15,
2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No
disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial
statements. The Company's pending merger with Citizens National Bank will be accounted for under the acquisition accounting guidance.
During January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The
amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2
measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under
the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
During March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost." The amendments in this ASU require an employer that offers defined benefit pension plans, other
postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same
line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be
presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate
line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part
of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual
periods. Early adoption is permitted. The Company has concluded the adoption of ASU 2017-07 will not have a material impact on its consolidated financial
statements.
During March 2017, the FASB issued ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on
Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium.
Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt
securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified
retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a
change in accounting principle. The Company is currently assessing the impact that ASU 2017 ‐ 08 will have on its consolidated financial statements.
73
INDEX
During May 2017, the FASB issued ASU 2017 ‐ 09, "Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments
provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting
under Topic 718. The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been
issued. The Company has concluded that ASU 2017 ‐ 08 will not have a material impact on its consolidated financial statements.
During August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The
amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the
presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified
upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company has concluded that the adoption of ASU 2017-12 will
not have a material impact on its consolidated financial statements.
During February 2018, the FASB issued ASU 2018-02, "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income." The amendments provide financial statement preparers with an option to reclassify stranded tax effects
within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate
in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of
adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act
is recognized. The Company has elected to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act in the consolidated financial statements for
the period ending December 31, 2018.
NOTE 2, Restrictions on Cash and Amounts Due from Banks
The Company is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2017 and 2016, the Company had no balance
requirements on any of its accounts. The Company had approximately $0.5 million and $9.9 million in deposits in financial institutions in excess of amounts
insured by the FDIC at December 31, 2017 and December 31, 2016, respectively.
NOTE 3, Securities Portfolio
The amortized cost and fair value, with gross unrealized gains and losses, of securities available-for-sale were:
December 31, 2017
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Money market investments
Corporate bonds and other securities
Other marketable equity securities
Total
December 31, 2016
U.S. Treasury securities
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Money market investments
Corporate bonds and other securities
Other marketable equity securities
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair
Value
9,530 $
64,413
75,906
1,194
7,049
100
158,192 $
20,000 $
9,361
78,645
85,649
647
7,598
100
202,000 $
$
$
$
$
74
27 $
489
-
-
195
97
808 $
- $
-
358
18
-
92
64
532 $
(122) $
(137)
(1,610)
-
(10)
-
(1,879) $
- $
(166)
(1,016)
(1,973)
-
(12)
-
(3,167) $
9,435
64,765
74,296
1,194
7,234
197
157,121
20,000
9,195
77,987
83,694
647
7,678
164
199,365
INDEX
Securities with a fair value of $66.6 million and $72.9 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits, securities sold
under agreements to repurchase, FHLB advances and for other purposes required or permitted by law.
At December 31, 2017, the Company held no securities of any single issuer (excluding U.S. Government agencies) with a book value that exceeded 10 percent of
stockholders' equity.
The amortized cost and fair value of securities by contractual maturity are shown below.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total debt securities
Other securities without stated maturities
Total securities
The following table provides information about securities sold in the years ended December 31:
Proceeds from sales
Gross realized gains
Gross realized losses
December 31, 2017
Available-for-Sale
Amortized
Cost
Fair
Value
(in thousands)
$
4,015 $
23,293
38,197
91,393
156,898
1,294
4,009
23,126
37,997
90,598
155,730
1,391
$
158,192 $
157,121
2017
2016
2015
(in thousands)
$
$
$
4,480 $
107,647 $
23,005
96 $
578 $
- $
56 $
76
-
OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES
Management assesses whether the Company intends to sell or it is more-likely-than-not that the Company will be required to sell a security before recovery of its
amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not
intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount
that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference
between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and
the present value of expected future cash flows is due to factors that are not credit related and is recognized in other comprehensive income.
75
INDEX
The present value of expected future cash flows is determined using the best-estimate cash flows discounted at the effective interest rate implicit to the security at
the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best-estimate
cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may
include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including
subordination and guarantees.
The Company has a process in place to identify debt securities that could potentially have a credit or interest-rate related impairment that is other than temporary.
This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, and
cash flow projections as indicators of credit issues. On a quarterly basis, management reviews all securities to determine whether an other-than-temporary decline
in value exists and whether losses should be recognized. Management considers relevant facts and circumstances in evaluating whether a credit or interest rate-
related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (a) the extent and length of time the fair value has
been below cost; (b) the reasons for the decline in value; (c) the financial position and access to capital of the issuer, including the current and future impact of any
specific events and (d) for fixed maturity securities, the Company's intent to sell a security or whether it is more-likely-than-not the Company will be required to
sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the Company's ability and intent
to hold the security for a period of time that allows for the recovery in value.
The Company has not recorded impairment charges on securities for the years ended December 31, 2017 and 2016.
The following table shows the number of securities with unrealized losses, the gross unrealized losses and fair value of the Company's investments with unrealized
losses that are deemed to be temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position, as of the dates indicated:
Less Than Twelve
Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2017
More Than Twelve
Months
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(dollars in thousands)
Total
Fair
Value
Number
of
Securities
Securities Available-for-Sale
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Corporate bonds and other securities
Total securities available-for-sale
$
$
11 $
32
67
2
112 $
3,189 $
11,141
9,742
1,098
25,170 $
111 $
105
1,543
8
1,767 $
3,089 $
10,999
64,554
792
79,434 $
122 $
137
1,610
10
1,879 $
6,278
22,140
74,296
1,890
104,604
13
29
24
11
77
76
INDEX
Less Than Twelve
Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2016
More Than Twelve
Months
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(dollars in thousands)
Total
Fair
Value
Number
of
Securities
Securities Available-for-Sale
$
Obligations of U. S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Corporate bonds and other securities
Total securities available-for-sale
$
166 $
1,016
1,973
11
3,166 $
9,195 $
38,020
80,680
1,787
129,682 $
- $
-
-
1
1 $
- $
-
-
100
100 $
166 $
1,016
1,973
12
3,167 $
9,195
38,020
80,680
1,887
129,782
6
56
23
13
98
Certain investments within the Company's portfolio had unrealized losses at December 31, 2017 and December 31, 2016, as shown in the tables above. The
unrealized losses were caused by increases in market interest rates. The Company purchases only highly-rated securities, including U.S. government agencies and
mortgage-backed securities guaranteed by government-sponsored entities. The municipal and corporate securities portfolios are reviewed regularly to ensure that
ratings of individual securities have not deteriorated below the threshold established by the Company's policy.
Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments
before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at
December 31, 2017 or December 31, 2016.
Restricted Stock
The restricted stock category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is
restricted to certain types of entities and the securities lack a market. Therefore, FHLB and Federal Reserve Bank stock is carried at cost and evaluated for
impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing
temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold
this stock until its value is recovered.
NOTE 4, Loans and Allowance for Loan Losses
The following is a summary of the balances in each class of the Company's loan portfolio as of the dates indicated:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer automobile loans
Other consumer loans
Other (1)
Total loans
Less: Allowance for loan losses
Loans, net of allowance and deferred fees (2)
77
December
31,
2017
December
31,
2016
(in thousands)
$
$
101,021 $
289,682
27,489
17,918
56,610
492,720
60,398
119,251
54,974
11,197
738,540
(9,448)
729,092 $
94,827
285,429
23,116
17,128
51,024
471,524
54,434
10,407
48,500
19,017
603,882
(8,245)
595,637
INDEX
(1) Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $594 thousand
and $536 thousand at December 31, 2017 and December 31, 2016, respectively.
(2) Net deferred loan costs totaled $916 thousand and $522 thousand at December 31, 2017 and December 31, 2016, respectively.
CREDIT QUALITY INFORMATION
The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled
or at all. The Company's internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as
additional information becomes available, at which time management analyzes the resulting scores to track loan performance.
The Company's internally assigned risk grades are as follows:
·
·
·
·
·
Pass: Loans are of acceptable risk.
Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management's close attention.
Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.
Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on
currently existing facts, conditions and values highly questionable or improbable.
Loss: Loans have been charged off because they are considered uncollectible and of such little value that their continuance as bankable assets is not
warranted.
The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer automobile loans
Other consumer loans
Other
Total
Pass
Credit Quality Information
As of December 31, 2017
OAEM
Substandard
Total
(in thousands)
98,656 $
264,275
26,694
17,211
56,318
463,154
58,091
119,211
54,926
11,197
706,579 $
- $
10,526
74
431
-
11,031
1,469
-
-
-
12,500 $
2,365 $
14,881
721
276
292
18,535
838
40
48
-
19,461 $
101,021
289,682
27,489
17,918
56,610
492,720
60,398
119,251
54,974
11,197
738,540
$
$
78
INDEX
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer automobile loans
Other consumer loans
Other
Total
Pass
Credit Quality Information
As of December 31, 2016
OAEM
Substandard
Total
(in thousands)
$
$
92,458 $
260,948
22,219
16,445
50,387
442,457
49,979
10,407
48,334
19,017
570,194 $
1,138 $
10,014
162
475
500
12,289
2,278
-
-
-
14,567 $
1,231 $
14,467
735
208
137
16,778
2,177
-
166
-
19,121 $
94,827
285,429
23,116
17,128
51,024
471,524
54,434
10,407
48,500
19,017
603,882
As of December 31, 2017 and 2016 the Company did not have any loans internally classified as Loss or Doubtful.
AGE ANALYSIS OF PAST DUE LOANS BY CLASS
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest
and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of
the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and
principal and still accruing interest, because they are well-secured and in the process of collection. Loans in nonaccrual status that are also past due are included in
the aging categories in the table below.
Age Analysis of Past Due Loans as of December 31, 2017
30 - 59
Days Past
Due
60 - 89
Days Past
Due
90 or
More
Days Past
Due
Total
Current
Loans (1)
Total
Loans
Total Past
Due
(in thousands)
Recorded
Investment
> 90 Days
Past Due
and
Accruing
$
$
229 $
194
-
15
75
513
709
517
2,222
84
4,045 $
153 $
771
-
-
19
943
-
122
544
9
1,618 $
1,278 $
1,753
721
163
53
3,968
1,060
41
2,360
4
7,433 $
1,660 $
2,718
721
178
147
5,424
1,769
680
5,126
97
13,096 $
99,361 $
286,964
26,768
17,740
56,463
487,296
58,629
118,571
49,848
11,100
725,444 $
101,021 $
289,682
27,489
17,918
56,610
492,720
60,398
119,251
54,974
11,197
738,540 $
261
-
-
45
-
306
471
41
2,360
4
3,182
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer automobile loans
Other consumer loans
Other
Total
(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
In the table above, the other consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government.
The past due principal portion of these guaranteed loans totaled $4.2 million at December 31, 2017.
79
INDEX
Age Analysis of Past Due Loans as of December 31, 2016
30 - 59
Days Past
Due
60 - 89
Days Past
Due
90 or
More
Days Past
Due
Total
Current
Loans (1)
Total
Loans
Total Past
Due
(in thousands)
Recorded
Investment
> 90 Days
Past Due
and
Accruing
$
$
564 $
2,280
162
-
394
3,400
5
-
1,876
41
5,322 $
- $
1,625
-
200
9
1,834
-
11
702
12
2,559 $
496 $
227
-
188
86
997
86
-
2,684
5
3,772 $
1,060 $
4,132
162
388
489
6,231
91
11
5,262
58
11,653 $
93,767 $
281,297
22,954
16,740
50,535
465,293
54,343
10,396
43,238
18,959
592,229 $
94,827 $
285,429
23,116
17,128
51,024
471,524
54,434
10,407
48,500
19,017
603,882 $
218
-
-
58
-
276
-
-
2,603
5
2,884
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer automobile loans
Other consumer loans
Other
Total
(1) For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
In the table above, the consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The
past due principal portion of these guaranteed loans totaled $4.8 million at December 31, 2016.
NONACCRUAL LOANS
The Company generally places commercial loans (including construction loans and commercial loans secured and not secured by real estate) in nonaccrual status
when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred
or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection.
Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and consumer loans secured by real
estate (including residential 1 - 4 family mortgages, second mortgages, and equity lines of credit) are not required to be placed in nonaccrual status. Although
consumer loans and consumer loans secured by real estate are not required to be placed in nonaccrual status, the Company may elect to place these loans in
nonaccrual status, if necessary to avoid a material overstatement of interest income. Generally, consumer loans secured by real estate are placed in nonaccrual
status only when payments are 120 days past due.
Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. If a charge-off has not
occurred sooner for other reasons, a consumer loan not secured by real estate will generally be placed in nonaccrual status when payments are 120 days past due.
These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, when classified as a "loss," when repayment is
unreasonably protracted, when bankruptcy has been initiated, or when the loan is 120 days or more past due unless the credit is well-secured and in the process of
collection.
80
INDEX
When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the
cash basis or cost recovery method, until it qualifies for return to accrual status or is charged off. Generally, loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full
amount of the scheduled contractual interest and principal payments for at least six months.
The following table presents loans in nonaccrual status by class of loan as of the dates indicated:
Nonaccrual Loans by Class
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer loans
Total
December
31, 2017
December
31, 2016
(in thousands)
$
$
1,447 $
9,468
721
118
292
12,046
836
-
12,882 $
598
6,033
-
129
87
6,847
231
81
7,159
The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest
recorded by the Company on nonaccrual loans for the periods presented:
Interest income that would have been recorded under original loan terms
Actual interest income recorded for the period
Reduction in interest income on nonaccrual loans
2017
Years Ended December 31,
2016
(in thousands)
2015
$
$
474 $
281
193 $
318 $
269
49 $
196
141
55
TROUBLED DEBT RESTRUCTURINGS
The Company's loan portfolio includes certain loans classified as TDRs, where economic concessions have been granted to borrowers who are experiencing
financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reduction in the interest rate below current
market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.
When the Company modifies a loan, management evaluates any possible impairment as discussed further under Impaired Loans below.
The following table presents TDRs during the period indicated, by class of loan:
Troubled Debt Restructurings by Class
For the Year Ended December 31, 2017
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Total
Number of
Modifications
Recorded
Investment
Prior to
Recorded
Investment
After
Modification
Modification
(dollars in thousands)
Current
Investment
on
December
31, 2017
1 $
3
4 $
142 $
5,132
5,274 $
142 $
5,132
5,274 $
140
5,132
5,272
81
INDEX
Troubled Debt Restructurings by Class
For the Year Ended December 31, 2016
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer loans
Total
Number of
Recorded
Investment
Prior to
Recorded
Investment
After
Modifications
Modification
Modification
(dollars in thousands)
Current
Investment
on
December
31, 2016
6 $
1
1
1
9
1
2
12 $
1,061 $
150
53
93
1,357
152
8
1,517 $
1,061 $
150
53
93
1,357
152
8
1,517 $
992
-
53
86
1,131
144
-
1,275
Of the loans restructured in 2017 two were given a below-market rate for debt with similar risk characteristics and two were granted terms that the Company
would not otherwise extend to borrowers with similar risk charateristics. All of the loans restructured in 2016 were given below-market rates for debt with similar
risk characteristics.
At December 31, 2017 and 2016, the Company had no outstanding commitments to disburse additional funds on any TDR. Also at December 31, 2017 and 2016 ,
the Company had $77 thousand and $10 thousand, respectively, in loans secured by residential 1 - 4 family real estate that were in the process of foreclosure.
In the years ended December 31, 2017 and 2016 there were no defaulting TDRs where the default occurred within twelve months of restructuring. The Company
considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status
following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is
charged off.
All TDRs are factored into the determination of the allowance for loan losses and included in the impaired loan analysis, as discussed below.
IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include nonperforming loans and loans modified in a TDR.
When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan's
effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases,
management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management
determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and
unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal
under the cost recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that
would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if
payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer
would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired
loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.
82
INDEX
The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the
associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related
amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.
Impaired Loans by Class
As of December 31, 2017
Recorded Investment
Without
Valuation
Allowance
With
Valuation
Allowance
Unpaid
Principal
Balance
For the Year Ended
December 31, 2017
Associated
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
2,873 $
15,262
814
473
293
19,715 $
1,115
-
20,830 $
2,499 $
11,622
721
318
53
15,213 $
836
-
16,049 $
(in thousands)
316 $
1,644
92
135
239
2,426 $
-
-
2,426 $
52 $
1
18
14
10
95 $
-
-
95 $
2,525 $
13,541
406
464
261
17,197 $
1,388
41
18,626 $
90
579
23
20
-
712
30
-
742
Impaired Loans by Class
As of December 31, 2016
Recorded Investment
Without
Valuation
Allowance
With
Valuation
Allowance
Unpaid
Principal
Balance
For the Year Ended
December 31, 2016
Associated
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
2,496 $
16,193
619
526
87
19,921 $
1,077
81
21,079 $
1,835 $
11,095
528
309
86
13,853 $
-
81
13,934 $
(in thousands)
622 $
4,274
96
141
-
5,133 $
989
-
6,122 $
75 $
415
22
17
-
529 $
271
-
800 $
2,741 $
11,885
496
511
46
15,679 $
827
68
$ 16,574 $
119
727
43
25
3
917
74
1
992
$
$
$
$
$
$
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer loans
Total
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Second mortgages
Equity lines of credit
Total mortgage loans on real estate
Commercial and industrial loans
Consumer loans
Total
ALLOWANCE FOR LOAN LOSSES
Loans are either individually evaluated for impairment or pooled with like loans and collectively evaluated for impairment. Also, various qualitative factors are
applied to each segment of the loan portfolio. The allowance for loan losses is the accumulation of these components. Management's estimate is based on certain
observable, historical data and other factors that management believes are most reflective of the underlying credit losses being estimated.
83
INDEX
Management provides an allocated component of the allowance for loans that are individually evaluated for impairment. An allocated allowance is established
when the discounted value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower
than the carrying value of that loan. This allocation represents the sum of management's estimated losses on each loan.
Loans collectively evaluated for impairment are pooled, with a historical loss rate, based on migration analysis, applied to each pool, segmented by risk grade or
days past due, depending on the type of loan. Based on credit risk assessments and management's analysis of qualitative factors, additional loss factors are applied
to loan balances. These additional qualitative factors include: economic conditions, trends in growth, loan concentrations, changes in certain loans, changes in
underwriting, changes in management and changes in the legal and regulatory environment.
ALLOWANCE FOR LOAN LOSSES BY SEGMENT
The following table presents, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented.
Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
(in thousands)
For the Year Ended December 31, 2017
Allowance for Loan Losses:
Balance at the beginning of period
Charge-offs
Recoveries
Provision for loan losses
Ending balance
Ending balance individually evaluated for impairment
Ending balance collectively evaluated for impairment
Ending balance
Loan Balances:
Ending balance individually evaluated for impairment
Ending balance collectively evaluated for impairment
Ending balance
Commercial
Real Estate -
Construction
Real
Estate -
Mortgage Consumer
Other
Total
$
1,493 $
(807)
37
1,166
1,889
-
1,889
1,889
846 $
-
104
(409)
541
18
523
541
5,267 $
(1,934)
45
1,839
5,217
77
5,140
5,217
455 $
(279)
56
1,412
1,644
-
1,644
1,644
184 $
(267)
88
152
157
-
157
157
8,245
(3,287)
330
4,160
9,448
95
9,353
9,448
836
59,562
60,398 $
813
26,676
27,489 $
16,826
448,405
465,231 $
-
174,225
174,225 $
-
11,197
11,197 $
18,475
720,065
738,540
$
84
INDEX
For the Year Ended December 31, 2016
Allowance for Loan Losses:
Balance at the beginning of period
Charge-offs
Recoveries
Provision for loan losses
Ending balance
Ending balance individually evaluated for impairment
Ending balance collectively evaluated for impairment
Ending balance
Loan Balances:
Ending balance individually evaluated for impairment
Ending balance collectively evaluated for impairment
Ending balance
Commercial
Real Estate -
Construction
Real
Estate -
Mortgage
Consumer
Other
Total
$
633 $
(915)
79
1,696
1,493
271
1,222
1,493
985 $
-
3
(142)
846
22
824
846
5,628 $
(504)
197
(54)
5,267
507
4,760
5,267
279 $
(204)
28
352
455
-
455
455
213 $
(147)
40
78
184
-
184
184
7,738
(1,770)
347
1,930
8,245
800
7,445
8,245
989
53,445
54,434 $
624
22,492
23,116 $
18,362
430,046
448,408 $
81
58,826
58,907 $
-
19,017
19,017 $
20,056
583,826
603,882
$
CHANGES IN ACCOUNTING METHODOLOGY
Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). This migration
period can be lengthened or shortened based on management's assessment of the most appropriate length of time over which to analyze losses in the loan portfolio.
The Company can also calculate multiple migration periods, allowing management to assess the migration of loans based on more than one starting point.
In the third quarter of 2017, management changed its migration approach for calculating the allowance to better match the length of the current credit cycle. The
number of migration periods was changed from four to eight. Each migration period remains at twelve quarters, the length of the migration period used by the
Company in prior periods. This change had the result of reducing the calculated provision by $1.2 million for the twelve months ended December 31, 2017. The
prior methodology was resulting in distortion between required allocations by segment and the underlying credit metrics for those segments. By increasing the
number of migration periods from four to eight, the migration is better able to capture the performance of the portfolio segment over a greater portion of the credit
cycle.
The following table represents the effect on the loan loss provision as a result of these changes in methodology. It compares the methodology actually used for the
year ended December 31, 2017 to that used in prior periods.
Portfolio Segment:
Commercial
Real estate - construction
Real estate - mortgage
Consumer loans
Other
Total
Calculated
Provision
Based on
Current
Calculated
Provision
Based on
Prior
Methodology
Methodology
(in thousands)
Difference
$
$
1,166 $
(409)
1,839
1,412
152
4,160 $
1,653 $
(791)
2,397
1,698
361
5,318 $
(487)
382
(558)
(286)
(209)
(1,158)
85
INDEX
NOTE 5, Other Real Estate Owned (OREO)
The Company holds certain parcels of real estate due to completed foreclosure proceedings on defaulted loans or the closing of former branches. An analysis of the
balance in OREO is as follows:
Balance at beginning of year
Transfers to OREO due to foreclosure
Other additions to foreclosed properties
Closed branch locations transferred to OREO
Properties sold
Balance at end of year
Years Ended December 31,
2017
2016
(in thousands)
2,093 $
-
-
-
(2,093)
- $
5,290
-
52
127
(3,376)
2,093
$
$
Other additions to foreclosed properties in the table above are for capital improvements on existing properties.
OREOs are presented net of a valuation allowance for losses. As the fair values of OREOs change, adjustments are made to the recorded investment in the
properties through the valuation allowance to ensure that all properties are recorded at the lower of cost or fair value. Properties written down in previous periods
can be written back up if a current property valuation warrants the change, though never above the original cost of the property. An analysis of the valuation
allowance on OREOs is as follows:
Balance at beginning of year
Additions and write-downs
Reductions due to sales or increases in value
Balance at end of year
Expenses applicable to OREOs include the following:
Net loss (gain) on sales of real estate
Provision for losses (net write-downs)
Operating expenses, net of income (1)
Total Expenses
Years Ended December 31,
2017
2016
$
$
(in thousands)
1,026 $
-
(1,026)
- $
2,549
60
(1,583)
1,026
Years Ended December 31,
2016
2017
2015
$
$
(in thousands)
(18) $
-
10
(8) $
94 $
60
160
314 $
-54
1,011
219
1,176
(1) Included in other operating income and other operating expense on the Consolidated Statements of Operations.
NOTE 6, Premises and Equipment
Premises and equipment consisted of the following at December 31:
Land
Buildings
Construction in process
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation and amortization
86
2017
2016
(in thousands)
7,663 $
37,944
137
861
19,675
66,280
29,083
37,197 $
7,663
37,890
43
852
19,220
65,668
26,344
39,324
$
$
INDEX
Depreciation expense for the years ended December 31, 2017, 2016, and 2015 amounted to $2.7 million, $2.7 million, and $2.5 million, respectively.
The Company has noncancellable leases on premises and equipment expiring at various dates, not including extensions, to the year 2020. 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, 2017 under noncancellable leases is $413 thousand which is due as follows (in thousands):
2018
2019
2020
Total
$
$
178
156
79
413
The aggregate rental expense of premises and equipment was $345 thousand,$239 thousand, and $270 thousand for December 31, 2017, 2016, and 2015,
respectively.
NOTE 7, Low-Income Housing Tax Credits
The Company was invested in four separate housing equity funds at both December 31, 2017 and December 31, 2016. The general purpose of these funds is to
encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement
strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits
to investors, and preserve and protect project assets.
The investments in these funds were recorded as other assets on the consolidated balance sheets and were $3.5 million and $3.9 million at December 31, 2017 and
December 31, 2016, respectively. The expected terms of these investments and the related tax benefits run through 2033. Additional committed capital calls
expected for the funds totaled $1.1 million and $2.5 million at December 31, 2017 and December 31, 2016, respectively, and are recorded in accrued expenses and
other liabilities on the corresponding consolidated balance sheets. During the years ended December 31, 2017, 2016, and 2015, the Company recognized
amortization expense of $340 thousand, $300 thousand, and $219 thousand, respectively, which was included within noninterest expense on the consolidated
statements of operations.
The table below summarizes the tax credits and other tax benefits recognized by the Company and related to these investments, as of the periods indicated:
Tax credits received
Tax benefit from losses
Total tax benefit
NOTE 8, Deposits
2017
Years Ended December 31,
2016
(in thousands)
2015
$
$
412 $
116
528 $
384 $
102
486 $
(291)
74
365
The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2017 and 2016 was $39.9 million and $38.1 million,
respectively. As of December 31, 2017, no single customer relationship exceeded 5 percent of total deposits.
87
INDEX
At December 31, 2017 the scheduled maturities of time deposits (in thousands) are as follows:
2018
2019
2020
2021
2022
Total
NOTE 9, Short Term and Long Term Borrowings
Short-Term Borrowings
$
$
80,198
36,737
52,384
24,485
19,021
212,825
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Short-term
borrowings sources consist of federal funds purchased, overnight repurchase agreements (which are secured transactions with customers that generally mature
within one to four days), and advances from the FHLB.
The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. At December 31, 2017 and December 31,
2016 the remaining credit available from these lines totaled $45.0 million and $55.0 million, respectively. The Company has a collateral dependent line of credit
with the FHLB with remaining credit availability of $217.0 million and $270.0 million as of December 31, 2017 and December 31, 2016, respectively.
The following table presents total short-term borrowings as of the dates indicated (dollars in thousands):
Federal funds purchased
Overnight repurchase agreements
Federal Home Loan Bank Advances
Total short-term borrowings
Maximum month-end outstanding balance
Average outstanding balance during the period
Average interest rate during the period
Average interest rate at end of period
$
$
$
$
December
31, 2017
December
31, 2016
10,000
20,693
47,500
78,193
$
$
79,819
53,165
$
$
0.72%
1.27%
-
18,704
-
18,704
68,864
39,364
0.59%
0.10%
Long-Term Borrowings
At December 31, 2017, the Company had the following long-term FHLB advances outstanding (dollars in thousands).
Long-term Type
Fixed Rate Hybrid
Fixed Rate Hybrid
There were no long-term borrowings at December 31, 2016.
88
Interest
Rate
Maturity Date
2/28/2019 $
1.54%
1.90% 11/15/2019
$
Advance
Amount
10,000
10,000
20,000
INDEX
NOTE 10, Share-Based Compensation
The Company has adopted an employee stock purchase plan and offers share-based compensation through its equity compensation plan. Share-based compensation
arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights.
Accounting standards require all share-based payments to employees to be valued using a fair value method on the date of grant and to be expensed based on that
fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.
The Company's 1998 Stock Option Plan, pursuant to which stock options could be granted to key employees and non-employee directors, expired on March 9,
2008. Stock options that were outstanding on March 9, 2008 remained outstanding in accordance with their terms, but no new awards could be granted under the
plan after March 9, 2008. At December 31, 2017, no options to purchase shares of common stock granted under the stock option plan remain outstanding.
Stock option activity for the year ended December 31, 2017 is summarized below:
Options outstanding, January 1, 2017
Granted
Exercised
Canceled or expired
Options outstanding, December 31, 2017
Options exercisable, December 31, 2017
Weighted
Average
Exercise
Price
20.05
-
20.05
20.05
-
-
Shares
60,605 $
-
(58,105)
(2,500)
- $
- $
Weighted
Average
Remaining
Contractual
Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
- $
- $
-
-
During 2017 and 2016, the Company received $1.3 million and $25 thousand, respectively, from the exercise of stock options.
No options were granted during the years ended December 31, 2017 or December 31, 2016. As of December 31, 2017 and December 31, 2016, all outstanding
stock options were fully vested and there was no unrecognized stock-based compensation expense.
The 2016 Incentive Stock Plan (the Incentive Stock Plan) permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-
employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards
and performance units. The Company did not award any equity compensation under the Incentive Stock Plan during 2016.
Restricted stock activity for the year ended December 31, 2017 is summarized below.
Nonvested, January 1, 2017
Issued
Vested
Forfeited
Nonvested, December 31, 2017
The weighted average period over which nonvested awards are expected to be recognized in compensation expense is two years.
89
Weighted
Average
Grant
Date Fair
Value
-
33.60
-
-
33.60
Shares
- $
2,245
-
-
2,245 $
INDEX
The fair value of restricted stock granted during the year ended December 31, 2017 was $75 thousand.
The remaining unrecognized compensation expense for the shares granted during the year ended December 31, 2017 totaled $58 thousand as of December 31,
2017.
Stock-based compensation expense was $17 thousand for the year ended December 31, 2017. There was no stock compensation expense in 2016.
Under the Company's Employee Stock Purchase Plan (ESPP), substantially all employees of the Company and its subsidiaries can authorize a specific payroll
deduction from their base compensation for the periodic purchase of the Company's common stock. Shares of stock are issued quarterly at a discount to the market
price of the Company's stock on the day of purchase, which can range from 0-15% and for 2017 and 2016 was set at 5%.
Total stock purchases under the ESPP amounted to 3,548 shares during 2017 and 999 shares during 2016. At December 31, 2017, the Company had 245,453
remaining shares reserved for issuance under this plan.
NOTE 11, Stockholders' Equity and Earnings per Common Share
STOCKHOLDERS' EQUITY--OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents information on amounts reclassified out of accumulated other comprehensive Income (loss), by category, during the periods indicated:
Available-for-sale securities
Realized gains (losses) on sales of securities
Tax effect
Defined-benefit pension plan
Amortization of actuarial loss (1)
Tax effect
Total reclassifications for the period
$
$
$
$
$
Years Ended
December 31,
2016
2017
(in thousands)
2015
Affected Line Item on
Consolidated Statement of Income
96 $
33
63 $
(490) $
(167)
(323) $
522 $
177
345 $
(504) $
(171)
(333) $
Gain (loss) on sale of available-for-sale securities,
net
76
26 Income tax expense (benefit)
50
(390) Salaries and employee benefits
(133) Income tax expense (benefit)
(257)
(260) $
12 $
(207)
(1) This accumulated other comprehensive loss component is included in the computation of net periodic pension cost (see Note 14. Pension Plan and 401(k) Plan
for additional details).
90
INDEX
The following table presents the changes in accumulated other comprehensive Income (loss), by category, net of tax, for the periods indicated:
Unrealized
Losses on
Securities
Transferred
from
Available-
for-Sale to
Held-to-
Maturity
(1)
Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities
Defined
Benefit
Pension
Plans (2)
Accumulated
Other
Comprehensive
Income (Loss)
$
$
$
(78) $
(498)
(576)
(1,163)
(1,739) $
1,032
(707) $
(in thousands)
(3,386) $
3,386
-
-
- $
-
- $
(2,429) $
(157)
(2,586)
117
(2,469) $
2,469
- $
(5,893)
2,731
(3,162)
(1,046)
(4,208)
3,501
(707)
Balance at December 31, 2014
Net change for the year ended December 31, 2015
Balance at December 31, 2015
Net change for the year ended December 31, 2016
Balance at December 31, 2016
Net change for the year ended December 31, 2017
Balance at December 31, 2017
(1) Net change for the year ended December 31, 2015 represents reclassification due to the transfer of securities held-to-maturity to available-for-sale.
(2) Net change reflects termination and settlement of the pension plan during year ended December 31, 2017.
The following table presents the change in each component of other comprehensive income, net of tax on a pre-tax and after-tax basis for the periods indicated.
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period
Reclassification adjustment for gains recognized in income
Net unrealized gains on securities
Defined benefit pension plans:
Plan termination, settlement and net amortization
Pretax
Year Ended December 31, 2017
Tax Effect
(in thousands)
Net-of-Tax
$
1,659 $
(96)
1,563
564 $
(33)
531
1,095
(63)
1,032
3,741
1,272
2,469
Total change in accumulated other comprehensive income
$
5,304 $
1,803 $
3,501
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period
Reclassification adjustment for gains recognized in income
Net change
Defined benefit pension plans:
Net actuarial loss for the period
Amortization of actuarial loss from prior period
Net change
Pretax
Year Ended December 31, 2016
Tax Effect
(in thousands)
Net-of-Tax
$
(1,240) $
(522)
(1,762)
(327)
504
177
(422) $
(177)
(599)
(111)
171
60
(818)
(345)
(1,163)
(216)
333
117
Total change in accumulated other comprehensive loss
$
(1,585) $
(539) $
(1,046)
91
INDEX
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period
Reclassification adjustment for gains recognized in income
Net change
Unrealized losses on securities transferred from available-for-sale to held-to-maturity:
Elimination upon transfer back to available-for-sale
Amortization
Net change
Defined benefit pension plans:
Net actuarial loss for the period
Amortization of actuarial loss from prior period
Net change
$
Pretax
Year Ended December 31, 2015
Tax Effect
(in thousands)
Net-of-Tax
(679) $
(76)
(755)
4,197
934
5,131
(627)
390
(237)
(231) $
(26)
(257)
1,427
318
1,745
(213)
133
(80)
(448)
(50)
(498)
2,770
616
3,386
(414)
257
(157)
Total change in accumulated other comprehensive loss
$
4,139 $
1,408 $
2,731
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common
shares attributable to outstanding stock options.
The following is a reconciliation of the denominators of the basic and diluted EPS computations for the years ended December 31, 2017, 2016, and 2015:
Year Ended December 31, 2017
Net income, basic
Potentially dilutive common shares - stock options
Potentially dilutive common shares - employee stock purchase program
Diluted
Year Ended December 31, 2016
Net income, basic
Potentially dilutive common shares - stock options
Potentially dilutive common shares - employee stock purchase program
Diluted
Year Ended December 31, 2015
Net income, basic
Potentially dilutive common shares - stock options
Potentially dilutive common shares - employee stock purchase program
Diluted
Net Income
Available to
Common
Shareholders
(Numerator)
Weighted
Average
Common
Shares
(Denominator)
Per
Share
Amount
(in thousands except per share data)
$
$
$
$
$
$
(29)
-
-
(29)
3,797
-
-
3,797
3,634
-
-
3,634
4,991 $
-
-
4,991 $
4,959 $
2
-
4,961 $
4,959 $
-
-
4,959 $
(0.01)
-
-
(0.01)
0.77
-
-
0.77
0.73
-
-
0.73
The Company had no antidilutive shares in 2017. The Company did not include an average of 52 thousand and 76 thousand potential common shares attributable to
outstanding stock options in the diluted earnings per share calculation for 2016 and 2015, respectively, because they were antidilutive. Non-vested restricted
common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and
diluted per common share calculations.
92
INDEX
NOTE 12, Related Party Transactions
In the ordinary course of business, the Company has granted loans to principal stockholders, executive officers and directors and their affiliates. These loans were
made on substantially the same terms and conditions, including interest rates, collateral and repayment terms, as those prevailing at the same time for comparable
transactions with unrelated persons, and, in the opinion of management and the Company's board of directors, do not involve more than normal risk or present
other unfavorable features. None of the principal stockholders, executive officers or directors had direct or indirect loans exceeding 10 percent of stockholders'
equity at December 31, 2017.
Annual activity consisted of the following:
Balance, beginning of year
Additions
Reductions
Balance, end of year
2017
2016
(in thousands)
4,354 $
351
(418)
4,287 $
4,429
110
(185)
4,354
$
$
Deposits from related parties held by the Company at December 31, 2017 and 2016 amounted to $12.5 million and $13.8 million, respectively.
NOTE 13, Income Taxes
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act permanently reduced the corporate tax rate to 21% from the prior
maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, companies
are required to revalue their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the fourth quarter of 2017. The
Company continues to evaluate the impact on its 2017 tax expense of the revaluation required by the lower corporate tax rate implemented by the Tax Act. During
the fourth quarter of 2017, the Company recorded $1.2 million in additional tax expense based on the Company's preliminary analysis of the impact of the Tax Act.
The Company's preliminary estimate of the impact of the Tax Act is based on currently available information and interpretation of its provisions. The actual results
may differ from the current estimate due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies and/or changes in
interpretations and assumptions that the Company has preliminarily made. The Company's evaluation of the impact of the Tax Act is subject to refinement for up
to one year after enactment per the guidance under ASC 740, Accounting for Uncertainty in Income Taxes, and the Securities and Exchange Commission's Staff
Accounting Bulletin 118.
The components of income tax expense for the current and prior year-ends are as follows:
Current income tax expense
Deferred income tax benefit
Reported income tax expense (benefit)
2017
2016
(in thousands)
2015
$
$
20 $
(117)
(97) $
179 $
(19)
160 $
281
(227)
54
93
INDEX
A reconciliation of the expected federal income tax expense on income before income taxes with the reported income tax expense for the same periods follows:
Expected tax expense (34%)
Interest expense on tax-exempt assets
Low-income housing tax credits
Tax-exempt interest
Bank-owned life insurance
Impact of Tax Act
Other, net
Reported income tax expense
The effective tax rates for 2017, 2016, and 2015 were -77.0%, 4.0%, and 1.5%, respectively.
The components of the net deferred tax asset, included in other assets, are as follows:
2017
Years Ended December 31,
2016
(in thousands)
2015
(43) $
23
(412)
(628)
(263)
1,221
5
(97) $
1,345 $
15
(384)
(608)
(270)
-
62
160 $
1,254
22
(274)
(654)
(301)
-
7
54
$
$
Deferred tax assets:
Allowance for loan losses
Interest on nonaccrual loans
Other real estate owned
Pension - other comprehensive income
Bank owned life insurance benefit
Charitable contributions carried forward
Net unrealized loss on securities available-for-sale
Unexercised nonqualified options
Alternative minimum tax
Deferred benefits and compensation
Other
Deferred tax liabilities:
Depreciation
Accretion of discounts on securities
Deferred loan fees and costs
Pension
Net deferred tax assets
December 31,
2017
2016
(in thousands)
1,984 $
82
-
-
55
2
225
-
1,344
139
179
4,010 $
(404) $
-
(295)
-
(699)
3,311 $
2,803
71
349
1,272
94
1
896
36
1,019
256
89
6,886
(822)
(1)
(325)
(740)
(1,888)
4,998
$
$
$
$
The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject
to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2014.
NOTE 14, Pension Plan and 401(k) Plan
PENSION PLAN
The Company previously provided pension benefits for eligible participants through a non-contributory defined-benefit pension plan. The plan was frozen effective
September 30, 2006; therefore no additional participants have been or will be added to the plan since such date.
On November 23, 2016 the Company's Board of Directors voted to terminate the pension plan, effective January 31, 2017. The Company completed the transfer of
all liabilities and administrative responsibilities under the Plan in the fourth quarter of 2017 which resulted in a nonrecurring pretax termination charge of $3.4
million in 2017.
94
INDEX
Information pertaining to the activity in the plan, using a measurement date of December 31, is as follows:
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded Status at end of year
Amounts recognized in the consolidated balance sheets
Accrued pension liability
Amounts recognized in accumulated other comprehensive (income) loss
Loss
Deferred taxes
Net loss
Accumulated benefit obligation
Assumptions used to determine the benefit obligations at December 31,
Discount rate
Weighted-average assumptions used to determine net periodic pension cost
Discount rate
Expected long-term rate of return on plan assets
95
Years ended December 31,
2016
2017
(in thousands)
7,062 $
-
268
(6,977)
(353)
- $
5,499 $
(76)
1,554
(6,977)
- $
7,039
-
279
(461)
205
7,062
5,691
269
-
(461)
5,499
- $
(1,563)
December 31,
2017
2016
(in thousands)
- $
(1,563)
- $
-
- $
- $
3,741
(1,272)
2,469
7,062
$
$
$
$
$
$
$
$
$
2017
2016
0.00%
3.86%
During the years ending December 31,
2017
2016
3.86%
7.00%
4.03%
7.00%
INDEX
Components of net periodic pension cost
Interest cost
Expected return on plan assets
Amortization of unrecognized loss
Preliminary net periodic pension cost
Settlement/curtailment expense
Net periodic pension cost
Components of other amounts recognized in other comprehensive income (loss)
Net actuarial (gain) loss
Settlement loss
Amortization of actuarial loss
Total recognized in other comprehensive income (loss)
Total recognized in net periodic benefit cost and other comprehensive income (loss)
Years ended December 31,
2016
2017
2015
$
$
$
$
$
(in thousands)
268 $
(376)
490
382
3,350
3,732 $
99 $
(3,350)
(490)
(3,741) $
279 $
(391)
504
392
-
392 $
327 $
-
(504)
(177) $
(9) $
215 $
260
(376)
390
274
-
274
627
(390)
237
511
Fair value is discussed in detail in Note 16. Upon termination of the Company's pension plan in the fourth quarter of 2017 all assets under the plan were liquidated.
The fair value of the pension plan assets by asset category were as follows at December 31, 2016:
Asset Category
Level 1
Level 2
Level 3
Total
Assets at Fair Value as of December 31, 2016
Money market funds
Mutual funds
Common stock
Corporate bonds
Partnerships
Total assets at fair value
$
$
2,839 $
-
1,129
-
-
3,968 $
(in thousands)
- $
-
-
1,472
59
1,531 $
- $
-
-
-
-
- $
2,839
-
1,129
1,472
59
5,499
The Company made no contributions to the pension plan in 2016 or in 2017, until the plan was terminated.
401(K) PLAN
The Company has a 401(k) Plan in which substantially all employees are eligible to participate. Employees may contribute to the plan subject to certain limits
based on federal tax laws. The Company makes matching contributions equal to 100 percent of the first 4 percent of an employee's compensation contributed to the
plan. Matching contributions vest to the employee immediately. The Company may make profit sharing contributions to the plan as determined by the Board of
Directors. Profit sharing contributions vest to the employee over a six-year period. For the years ended December 31, 2017, 2016, and 2015, expense attributable to
the plan amounted to $536 thousand, $523 thousand, and $519 thousand, respectively.
NOTE 15, Commitments and Contingencies
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making
such commitments as it does for on-balance-sheet instruments.
The following financial instruments whose contract amounts represent credit risk were outstanding at December 31:
Commitments to extend credit:
Home equity lines of credit
Commercial real estate, construction and development loans committed but not funded
Other lines of credit (principally commercial)
Total
Letters of credit
96
2017
2016
(in thousands)
$
$
$
56,486 $
19,526
68,101
144,113 $
47,243
15,948
81,966
145,157
3,331 $
3,597
INDEX
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 Company evaluates each customer's credit-
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, 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.
Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are not collateralized and usually do not contain a specified maturity date, and ultimately may or
may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit
are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year, with the
exception of one letter of credit which expires in 2020. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.
LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will not have a material effect on the
Company's Consolidated Financial Statements.
NOTE 16, Fair Value Measurements
DETERMINATION OF FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance
with the "Fair Value Measurements and Disclosures" topics of FASB ASU 2010-06 and FASB ASU 2011-04, the fair value of a financial instrument is the price
that would be received in the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is
best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments.
In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and
level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances,
determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and
circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under
current market conditions.
In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model, used by the Company's bond accounting service
provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported
trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news
events impacting the individual sectors. For assets other than securities and for all liabilities, fair value is determined using the Company's asset/liability modeling
software. The software uses current yields, anticipated yield changes, and estimated duration of assets and liabilities to calculate fair value.
97
INDEX
In accordance with ASC 820, "Fair Value Measurements and Disclosures," the Company groups its financial assets and financial liabilities generally measured at
fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 –
Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations
are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 –
Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 –
Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or
estimation.
An instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Debt and equity securities with readily determinable fair values that are classified as "available-for-sale" are recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income. Securities available-for-sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable
market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models
that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are
classified within Level 3 of the valuation hierarchy. Currently, all of the Company's available-for-sale securities are considered to be Level 2 securities.
98
INDEX
The following table presents the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:
Description
Balance
Fair Value Measurements at
December 31, 2017 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in thousands)
Significant
Unobservable
Inputs
(Level 3)
Available-for-sale securities
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Money market investments
Corporate bonds
Other marketable equity securities
Total available-for-sale securities
Description
Available-for-sale securities
U.S. Treasury securities
Obligations of U.S. Government agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Money market investments
Corporate bonds
Other marketable equity securities
Total available-for-sale securities
$
$
$
$
9,435 $
64,765
74,296
1,194
7,234
197
157,121 $
- $
-
-
-
-
-
- $
9,435 $
64,765
74,296
1,194
7,234
197
157,121 $
Fair Value Measurements at
December 31, 2016 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in thousands)
Significant
Unobservable
Inputs
(Level 3)
- $
-
-
-
-
-
-
- $
20,000 $
9,195
77,987
83,694
647
7,678
164
199,365 $
Balance
20,000 $
9,195
77,987
83,694
647
7,678
164
199,365 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.
Impaired loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. The measurement of fair value and loss associated with impaired loans can
be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan's expected future cash flows,
discounted at the loan's effective interest rate. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts
receivable, with the vast majority of the collateral in real estate.
99
INDEX
The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent,
licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal.
Evaluations utilize many of the same techniques as appraisals, and are typically performed by independent appraisers. Once received, appraisals and evaluations
are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant
unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the
availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected
depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on
management's best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are
considered Level 3.
Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the
net book value on the applicable business' financial statements if not considered significant using observable market data. Likewise, values for inventory and
accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be
measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate. Because the loan is discounted at its effective
rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent impaired
loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as
part of the provision for loan losses on the Consolidated Statements of Operations.
Other Real Estate Owned (OREO)
Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of loss associated with OREOs is based on the fair value of
the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management
reasonably believes the transaction will be consummated in accordance with the terms of the contract, fair value is based on the sale price in that contract (Level 1).
If management has recent information about the sale of identical properties, such as when selling multiple condominium units on the same property, the remaining
units would be valued based on the observed market data (Level 2). Lacking either a contract or such recent data, management would obtain an appraisal or
evaluation of the value of the collateral as discussed above under Impaired Loans (Level 3). After the asset has been booked, a new appraisal or evaluation is
obtained when management has reason to believe the fair value of the property may have changed and no later than two years after the last appraisal or evaluation
was received. Any fair value adjustments to OREOs below the original book value are recorded in the period incurred and expensed against current earnings.
Loans Held For Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair
value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due
to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a
separate line item on the Company's Consolidated Statements of Income.
The following table presents the assets carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are
shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan's
expected future cash flows, discounted at the loan's effective interest rate. These loans are not carried on the consolidated balance sheets at fair value and, as such,
are not included in the table below. Former branch sites are carried at the lower of cost or market. Those carried at cost are not included in the table below.
Description
Impaired loans
Mortgage loans on real estate:
Residential 1-4 family
Construction
Equity lines of credit
Total
Loans held for sale
Carrying Value at December 31, 2017
Using
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
- $
-
-
- $
- $
- $
-
-
- $
779 $
264
74
229
567
-
Fair Value
264 $
74
229
567 $
779 $
$
$
$
100
INDEX
Description
Fair Value
Carrying Value at December 31, 2016
Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
Impaired loans
Mortgage loans on real estate:
Residential 1-4 family
Commercial
Construction
Total mortgage loans on real estate
Commercial loans
Total
Other real estate owned
Construction
Total
$
$
$
$
400 $
1,483
74
1,957
718
2,675 $
940 $
940 $
- $
-
-
-
-
- $
- $
- $
- $
-
-
-
-
- $
- $
- $
400
1,483
74
1,957
718
1,957
940
940
The following table displays quantitative information about Level 3 Fair Value Measurements as of the dates indicated:
Quantitative Information About Level 3 Fair Value Measurements
Fair Value
at
December
31, 2017
(dollars in
thousands)
Valuation Techniques
Unobservable Input
Description
Impaired loans
Residential 1-4 family real estate
$
264 Market comparables
Construction
74 Market comparables
Equity lines of credit
229 Market comparables
Selling costs
Liquidation discount
Selling costs
Liquidation discount
Selling costs
Liquidation discount
101
Range
(Average)
7.25%
0.00% - 4.00% (2.91%)
7.25%
4.00%
7.25%
4.00%
INDEX
Quantitative Information About Level 3 Fair Value Measurements
Fair Value
at
December
31, 2016
(dollars in
thousands)
Valuation Techniques
Unobservable Input
Description
Impaired loans
Residential 1-4 family real estate
$
400 Market comparables
Commercial real estate
1,483 Market comparables
Construction
74 Market comparables
Commercial loans
718 Market comparables
Other real estate owned
Construction
940 Market comparables
Selling costs
Liquidation discount
Selling costs
Liquidation discount
Selling costs
Liquidation discount
Selling costs
Liquidation discount
Selling costs
Liquidation discount
Range
(Average)
7.25%
4.00%
7.25%
4.00%
7.25%
4.00%
0.00%
0.00% - 38.58% (32.40%)
7.25%
0.00%
FASB ASC 825, "Financial Instruments," requires disclosure about fair value of financial instruments and excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair
value of the Company's assets.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments not discussed above:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and short-term instruments, including interest-bearing due from banks, approximate fair values.
RESTRICTED SECURITIES
The restricted security category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership
is restricted to certain types of entities and they lack a market. When the FHLB or Federal Reserve Bank repurchases stock, they repurchase at the stock's book
value. Therefore, the carrying amounts of restricted securities approximate fair value.
LOANS RECEIVABLE
The fair value of a loan is based on its interest rate in relation to its risk profile, in comparison to what an investor could earn on a different investment with a
similar risk profile. Variations in risk tolerance between lenders, and thus in risk pricing, can result in the same loan being priced differently at different
institutions. A bank's experience with the type of lending (such as commercial real estate) can also impact its assessment of the riskiness of a loan. A
comprehensive picture of competitors' rates in relation to borrower risk profiles is not available. Since the rate and risk profile are the primary factors in
determining the fair value of a loan, both of which are unobservable in the market, the Company classifies loans as Level 3 in the fair value hierarchy. The
Company uses a model which estimates market value based on the loan's interest rate (regardless of its risk level) and rates for debt of similar maturities where
market data is available. Fair values for non-performing loans are estimated as described above.
102
INDEX
BANK-OWNED LIFE INSURANCE
Bank-owned life insurance represents insurance policies on certain current and former officers of the Company. The cash value of the policies is estimated using
information provided by the insurance carrier. The insurance carrier uses actuarial data to estimate the value of each policy, based on the age and health of the
insured relative to other individuals about whom the carrier has information. Health information can be broken down into quantitative, observable inputs, such as
smoking habits, blood pressure, and weight, which, along with the insured's age, can be compared to observable data the insurance carrier has available. The carrier
can then estimate the cash value of each policy. Since the cash value represents the amount of cash the Company would receive when the policies are paid, the cash
value closely approximates the fair value of the policies. Accordingly, bank-owned life insurance is classified as Level 2.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Information about the
rates paid by other institutions for deposits of similar terms is readily available, and rates are mainly influenced by the term of the deposit itself. As a result, fair
value calculations are based on observable inputs, and are classified as Level 2.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased, overnight repurchase agreements, and other short-term borrowings maturing within 90 days approximate their
fair values. Since the contractual terms of these borrowings provide all information necessary to calculate the amounts that will be due at maturity, these liabilities
are classified as Level 2.
LONG-TERM BORROWINGS
The fair values of the Company's long-term borrowings are estimated based on the current cost to repay the debt in full, discounted to current values and including
any prepayment penalties that may apply. As the contractual terms of the borrowing provide all the necessary inputs for this calculation, long-term borrowings are
classified as Level 2.
ACCRUED INTEREST
The calculation of accrued interest is based on readily observable information, such as the rate and term of the underlying asset or liability. Since these amounts are
expected to be realized quickly (generally within 30 to 90 days), the carrying value approximates fair value and is classified as Level 2.
COMMITMENTS TO EXTEND CREDIT AND IRREVOCABLE LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2017 and December 31, 2016, the fair value of
fees charged for loan commitments and irrevocable letters of credit was immaterial.
103
INDEX
The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments as of the dates indicated are as follows:
Fair Value Measurements at
December 31, 2017 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
14,412 $
-
-
-
-
-
-
- $
-
-
-
-
- $
157,121
3,846
779
-
25,981
3,254
782,539 $
10,000
20,693
67,329
360
-
-
-
-
722,464
-
-
-
-
-
-
-
Carrying
Value
$
$
14,412 $
157,121
3,846
779
729,092
25,981
3,254
783,594 $
10,000
20,693
67,500
360
Fair Value Measurements at December 31, 2016 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in thousands)
Significant
Unobservable
Inputs
(Level 3)
25,854 $
-
-
-
-
-
- $
199,365
970
-
25,206
3,189
- $
-
-
783,450 $
18,704
228
-
-
-
594,190
-
-
-
-
-
Carrying
Value
$
$
25,854 $
199,365
970
595,637
25,206
3,189
784,502 $
18,704
228
Description
Assets
Cash and cash equivalents
Securities available-for-sale
Restricted securities
Loans held for sale
Loans, net of allowances for loan losses
Bank owned life insurance
Accrued interest receivable
Liabilities
Deposits
Federal funds purchased
Overnight repurchase agreements
Federal Home Loan Bank advances
Accrued interest payable
Description
Assets
Cash and cash equivalents
Securities available-for-sale
Restricted securities
Loans, net of allowances for loan losses
Bank owned life insurance
Accrued interest receivable
Liabilities
Deposits
Overnight repurchase agreements
Accrued interest payable
NOTE 17, Regulatory Matters
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can cause certain mandatory and possibly additional discretionary actions to be initiated by regulators that, if undertaken,
could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
104
INDEX
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth
in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The terms Tier 1 and
common equity tier 1 capital, risk-weighted assets and average assets, as used in this note, are as defined in the applicable regulations. Management believes, as of
December 31, 2017 and 2016, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital
framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Bank to comply with the following
minimum capital ratios: (i) a new common equity Tier 1 capital (CET1) ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted
assets (increased from the prior requirement); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage
ratio of 4.0% of total assets (unchanged from the prior requirement). The Basel III Final Rules establish a capital conservation buffer of 2.5%, which is added to
the 4.5% CET1 to risk-weighted assets to increase the ratio to at least 7%. The Basel III Final Rules also establish risk weighting that applied to many classes of
assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans. The Basel III Final Rules became
effective January 1, 2015 and the Basel III Final Rules capital conservation buffer will be phased in from 2015 to 2019.
When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital
conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of
at least 7%), (ii) a minimum ratio of Tier 1 captial to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1
capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total
(that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that
buffer is phased in, effectively resulting in a minimum total captial ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated
as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios
for the quarter).
As of December 31, 2017, the most recent notification from the Comptroller categorized the Bank as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, common equity tier 1 risk-based
and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the
Bank's category. The Company's and the Bank's actual capital amounts and ratios as of December 31, 2017 and 2016 are also presented in the table.
105
INDEX
December 31, 2017:
Total Capital to Risk Weighted Assets:
Consolidated
Old Point National Bank
Tier 1 Capital to Risk Weighted Assets:
Consolidated
Old Point National Bank
Common Equity Tier 1 Capital to Risk
Weighted Assets:
Consolidated
Old Point National Bank
Tier 1 Capital to Average Assets:
Consolidated
Old Point National Bank
December 31, 2016:
Total Capital to Risk Weighted Assets:
Consolidated
Old Point National Bank
Tier 1 Capital to Risk Weighted Assets:
Consolidated
Old Point National Bank
Common Equity Tier 1 Capital to Risk
Weighted Assets:
Consolidated
Old Point National Bank
Tier 1 Capital to Average Assets:
Consolidated
Old Point National Bank
Capital
Minimum
Capital
Requirement
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
$
106,029
97,194
12.28% $
11.30%
69,055
68,803
8.00%
8.00% $
N/A
86,004
N/A
10.00%
96,474
87,639
11.18%
10.19%
51,791
51,602
6.00%
6.00%
N/A
68,803
N/A
8.00%
96,474
87,639
11.18%
10.19%
38,843
38,702
4.50%
4.50%
N/A
55,902
96,474
87,639
9.98%
9.09%
38,686
38,575
4.00%
4.00%
N/A
48,218
N/A
6.50%
N/A
5.00%
$
106,443
98,237
14.51% $
13.47%
58,678
58,350
8.00%
8.00% $
N/A
72,938
N/A
10.00%
98,198
89,992
13.39%
12.34%
44,009
43,763
6.00%
6.00%
N/A
58,350
N/A
8.00%
98,198
89,992
13.39%
12.34%
33,007
32,822
4.50%
4.50%
N/A
47,410
98,198
89,992
10.68%
9.85%
36,768
36,549
4.00%
4.00%
N/A
45,686
N/A
6.50%
N/A
5.00%
The approval of the Comptroller 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 Bank and Trust can distribute as dividends to the Company in
2018, without approval of the Comptroller, $388 thousand (Trust only) plus an additional amount equal to the Bank's and Trust's retained net profits for 2018 up to
the date of any dividend declaration.
NOTE 18, Segment Reporting
The Company operates in a decentralized fashion in three principal business segments: the Bank, the Trust, and the Parent. Revenues from the Bank's operations
consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust's operating revenues consist principally of
income from fiduciary and asset management fees. The Parent company's revenues are mainly interest and dividends received from the Bank and Trust companies.
The Company has no other segments.
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment
appeals to different markets and, accordingly, requires different technologies and marketing strategies.
106
INDEX
Information about reportable segments, and reconciliation of such information to the Consolidated Financial Statements as of and for the years ended December 31
follows:
2017
Bank
Trust
Unconsolidated
Parent
(in thousands)
Eliminations Consolidated
Revenues
Interest and dividend income
Fiduciary and asset management fees
Other income
Total operating income
Expenses
Interest expense
Provision for loan losses
Salaries and employee benefits
Other expenses
Total operating expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Capital expenditures
Total assets
2016
Revenues
Interest and dividend income
Fiduciary and asset management fees
Other income
Total operating income
Expenses
Interest expense
Provision for loan losses
Salaries and employee benefits
Other expenses
Total operating expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Capital expenditures
Total assets
$
$
$
$
$
$
$
$
32,861 $
-
9,389
42,250
3,010
4,160
20,968
14,109
42,247
3
(65)
71 $
3,786
944
4,801
-
-
2,800
1,075
3,875
926
328
667 $
-
200
867
-
-
445
811
1,256
(665) $
-
(261)
(926)
2
-
-
(262)
(260)
32,934
3,786
10,272
46,992
3,012
4,160
24,213
15,733
47,118
(389)
(666)
(126)
(360)
-
68 $
598 $
(29) $
(666) $
613 $
6 $
- $
- $
(97)
(29)
619
975,991 $
6,126 $
96,406 $
(96,697) $
981,826
Bank
Trust
Unconsolidated
Parent
(in thousands)
Eliminations Consolidated
29,765 $
-
9,058
38,823
2,574
1,930
16,801
13,179
34,484
61 $
3,560
910
4,531
-
-
2,671
1,041
3,712
4,590 $
-
200
4,790
-
-
406
995
1,401
(4,590) $
-
(262)
(4,852)
-
-
-
(262)
(262)
29,826
3,560
9,906
43,292
2,574
1,930
19,878
14,953
39,335
4,339
819
3,389
(4,590)
3,957
288
280
(408)
-
160
4,051 $
539 $
3,797 $
(4,590) $
3,797
887 $
4 $
- $
- $
891
897,966 $
5,761 $
93,998 $
(94,759) $
902,966
107
INDEX
2015
Bank
Trust
Unconsolidated
Parent
(in thousands)
Eliminations Consolidated
Revenues
Interest and dividend income
Fiduciary and asset management fees
Other income
Total operating income
Expenses
Interest expense
Provision for loan losses
Salaries and employee benefits
Other expenses
Total operating expenses
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Capital expenditures
Total assets
$
$
$
$
30,242 $
-
8,548
38,790
3,633
1,025
17,630
13,254
35,542
54 $
3,617
1,032
4,703
-
-
2,685
1,010
3,695
4,009 $
-
200
4,209
(4,010) $
-
(261)
(4,271)
-
-
432
336
768
(1)
-
-
(261)
(262)
30,295
3,617
9,519
43,431
3,632
1,025
20,747
14,339
39,743
3,248
1,008
3,441
(4,009)
3,688
(96)
343
(193)
-
54
3,344 $
665 $
3,634 $
(4,009) $
3,634
1,682 $
74 $
- $
- $
1,756
891,877 $
5,694 $
93,191 $
(93,975) $
896,787
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes not including nonrecurring gains or losses.
Both the Parent and the Trust companies maintain deposit accounts with the Bank, on terms substantially similar to those available to other customers. These
transactions are eliminated to reach consolidated totals.
The Company operates in one geographical area and does not have a single external customer from which it derives 10 percent or more of its revenues.
NOTE 19, Condensed Financial Statements of Parent Company
Financial information pertaining to Old Point Financial Corporation (parent company only) is as follows:
Balance Sheets
Assets
Cash and cash equivalents
Securities available-for-sale
Investment in common stock of subsidiaries
Other assets
Total assets
Liabilities and Stockholders' Equity
Note payable - subsidiary
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total liabilities and stockholders' equity
108
December 31,
2017
2016
(in thousands)
2,622 $
197
93,533
54
96,406 $
18 $
25,087
17,270
54,738
(707)
96,406 $
2,366
164
91,437
31
93,998
8
24,806
16,427
56,965
(4,208)
93,998
$
$
$
$
INDEX
Statements of Income
Income:
Dividends from subsidiaries
Other income
Total income
Expenses:
Salaries and benefits
Legal expenses
Service fees
Other operating expenses
Total expenses
Income before income taxes and equity in undistributed net income (loss) of subsidiaries
Income tax benefit
Equity in undistributed net income (loss) of subsidiaries
Net income (loss)
Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income (loss) of subsidiaries
Stock compensation expense
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Cash flows from financing activities:
Proceeds from sale of stock
Cash dividends paid on common stock
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental schedule of noncash transactions:
Unrealized gain (loss) on securities available-for-sale
2017
Years Ended December 31,
2016
(in thousands)
2015
$
$
2,050 $
200
2,250
445
285
210
316
1,256
994
(360)
1,354
(1,383)
(29) $
2,900 $
200
3,100
406
774
166
55
1,401
1,699
(408)
2,107
1,690
3,797 $
2,900
200
3,100
432
180
137
19
768
2,332
(193)
2,525
1,109
3,634
Years Ended December 31,
2016
2017
2015
(in thousands)
$
(29) $
3,797 $
3,634
1,383
17
(34)
10
1,347
(1,690)
-
5
(7)
2,105
(1,109)
-
(5)
15
2,535
-
-
-
1,107
(2,198)
(1,091)
256
2,366
2,622 $
46
(1,983)
(1,937)
168
2,198
2,366 $
-
(1,686)
(1,686)
849
1,349
2,198
33 $
64
(1)
$
$
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
109
INDEX
Disclosure
Controls
and
Procedures.
Management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required
to be disclosed in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any
disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.
Management's
Report
on
Internal
Control
over
Financial
Reporting.
Management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Exchange Act.
Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's internal
control over financial reporting as of December 31, 2017. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated
Framework
in 2013. Based on this evaluation, using those criteria,
management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by Yount, Hyde & Barbour, PC, the
independent registered public accounting firm which also audited the Company's consolidated financial statements included in this Annual Report on Form 10-K.
Yount, Hyde & Barbour's attestation report on the Company's internal control over financial reporting is included in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
Changes
in
Internal
Control
over
Financial
Reporting.
There was no change in the Company's internal control over financial reporting that occurred during the
fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial
reporting.
110
INDEX
Item 9B. Other Information
None.
Part III
Except as otherwise indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Company's 2018 Annual
Meeting of Stockholders (the 2018 Proxy Statement) to be held on May 22, 2018.
Item 10. Directors, Executive Officers and Corporate Governance
The information with respect to the directors of the Company is set forth under the caption "Election of Directors" in the 2018 Proxy Statement and is incorporated
herein by reference.
The information regarding the Section 16(a) reporting requirements of the directors and executive officers is set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2018 Proxy Statement and is incorporated herein by reference.
The information concerning the executive officers of the Company required by this item is included in Part I of this report on Form 10-K under the caption
"Executive Officers of the Registrant."
The information regarding the Company's Audit Committee and its Audit Committee Financial Expert is set forth under the caption "Board Committees and
Attendance" in the 2018 Proxy Statement and is incorporated herein by reference.
The Company has a Code of Ethics which details principles and responsibilities governing ethical conduct for all Company directors, officers, employees and
principal stockholders.
A copy of the Code of Ethics will be provided free of charge, upon written request made to the Company's secretary at 1 West Mellen Street, Hampton, Virginia
23663 or by calling (757) 728-1200. The Code of Ethics is also posted on the Company's website at www.oldpoint.com in the "Community" section, under
"Investor Relations" and then "Governance Documents." The Company intends to satisfy the disclosure requirements of Form 8-K with respect to waivers of or
amendments to the Code of Ethics with respect to certain officers of the Company by posting such disclosures on its website under "Waivers of or amendments to
the Code of Ethics." The Company may, however, elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to
or in lieu of the website disclosure.
Item 11. Executive Compensation
The information set forth under the captions "Compensation and Benefits Committee Interlocks and Insider Participation" and "Executive Compensation" in the
2018 Proxy Statement is incorporated herein by reference.
111
INDEX
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" in the 2018 Proxy Statement is incorporated
herein by reference.
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 2018 Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the caption "Interest of Management in Certain Transactions" in the 2018 Proxy Statement is incorporated herein by reference.
The information regarding director independence set forth under the caption "Board Committees and Attendance" in the 2018 Proxy Statement is incorporated
herein by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the captions "Principal Accountant Fees" and "Audit Committee Pre-Approval Policy" in the 2018 Proxy Statement is incorporated
herein by reference.
112
INDEX
Item 15. Exhibits, Financial Statement Schedules
(a)(1)
Consolidated Financial Statements
Part IV
The following Consolidated Financial Statements and reports are included in Part II, Item 8, of this report on Form 10-K.
Report of Independent Registered Public Accounting Firm (Yount, Hyde & Barbour, P.C.)
Consolidated Balance Sheets – December 31, 2017 and 2016
Consolidated Statements of Operations – Years Ended December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity – Years Ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows – Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
(a)(2)
Consolidated Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the Consolidated Financial Statements or notes
thereto.
(a)(3)
Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
Exhibit No.
2.1
Description
Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National
Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)
3.1
3.1.1
3.2
10.4*
Articles of Incorporation of Old Point Financial Corporation, as amended June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K
filed on March 12, 2009)
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to
Exhibit 3.1.1 to Form 8-K filed May 31, 2016)
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed
August 10, 2016)
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with The Northwestern Mutual Life Insurance Company entered into
with each of Robert F. Shuford, Sr., Laurie D. Grabow and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.4 to Form 10-K filed
March 30, 2005)
10.5*
Directors' Compensation
10.6*
Base Salaries of Executive Officers of the Registrant
10.7*
Summary of Old Point Financial Corporation Incentive Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 30, 2015)
10.8*
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with Ohio National Life Assurance Corporation entered into with each
of Laurie D. Grabow and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.8 to Form 10-K filed March 14, 2008)
113
INDEX
10.9
Memorandum of Understanding between The Old Point National Bank of Phoebus and Tidewater Mortgage Services, Inc., dated September 10,
2007 (incorporated by reference to Exhibit 10.8 to Form 10-Q filed November 9, 2007)
10.10*
Form of 162 Insurance Plan (incorporated by reference to Exhibit 10.10 to Form 10-K filed March 12, 2009)
10.11*
10.12*
10.14
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with Ohio National Life Assurance Corporation entered into with
Joseph R. Witt (incorporated by reference to Exhibit 10.11 to Form 10-K filed March 12, 2010)
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with New York Life Insurance and Annuity Corporation entered into
with Eugene M. Jordan, II, Robert F. Shuford, Jr., and Joseph R. Witt (incorporated by reference to Exhibit 10.12 to Form 10-K filed March 30,
2012)
Settlement Agreement dated March 16, 2016 among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund,
L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr.
John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital,
LLC and Mr. William F. Keefe (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 17, 2016)
10.15*
Old Point Financial Corporation 2016 Incentive Stock Plan (incorporated by reference to Exhibit 10.15 to Form 8-K filed May 31, 2016)
10.16
10.17*
10.18*
10.19*
10.20
10.21
Membership Interest Purchase Agreement dated January 13, 2017 between Tidewater Mortgage Services, Inc. and The Old Point National Bank
of Phoebus (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 20, 2017)
Retirement Agreement, Waiver and General Release by and among Laurie D. Grabow and Old Point Financial Corporation, The Old Point
National Bank of Phoebus and Old Point Trust & Financial Services, N.A., dated March 10, 2017 (incorporated by reference to Exhibit 10.17 to
Form 10-K filed March 15, 2017)
Additional Employment Arrangement by and among Laurie D. Grabow and Old Point Financial Corporation and The Old Point National Bank of
Phoebus dated as of May 23, 2017 (incorporated by reference to Exhibit 10.18 to Form 8-K filed May 23, 2017)
Time-Based Restricted Stock Agreement, dated July 11, 2017, between Old Point Financial Corporation and Jeffrey W. Farrar (incorporated by
reference to Exhibit 10.19 to Form 8-K filed July 13, 2017)
Form of Support and Non-Competition Agreement, by and among Old Point Financial Corporation and certain shareholders of Citizens National
Bank (incorporated by reference to Annex A to Appendix A to the proxy statement/prospectus included in Amendment No. 1 to Form S-4 filed
January 26, 2018)
Form of Warrant Cancellation Agreement, by and among Old Point Financial Corporation, Citizens National Bank and holders of warrants to
acquire shares of common stock of Citizens National Bank (incorporated by reference to Annex B to Appendix A to the proxy
statement/prospectus included in Amendment No. 1 to Form S-4 filed January 26, 2018)
10.22*
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of
Phoebus and Robert F. Shuford, Jr. (incorporated by reference to Exhibit 10.22 to Form 8-K filed February 28, 2018)
114
INDEX
10.23*
10.24*
10.25*
10.26*
21
23
24
31.1
31.2
32.1
101
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of
Phoebus and Jeffrey W. Farrar (incorporated by reference to Exhibit 10.23 to Form 8-K filed February 28, 2018)
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of
Phoebus and Joseph R. Witt (incorporated by reference to Exhibit 10.24 to Form 8-K filed February 28, 2018)
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and Old Point Trust & Financial
Services, N.A. and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.25 to Form 8-K filed February 28, 2018)
Change of Control Severance Agreement, dated as of February 22, 2018, by and between The Old Point National Bank of Phoebus and Donald S.
Buckless
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form 10-K filed March 30, 2005)
Consent of Yount, Hyde & Barbour, P.C.
Powers of Attorney
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from Old Point Financial Corporation's annual report on Form 10-K for the year ended December 31, 2017, formatted in
XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations,
(iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) Consolidated
Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
* Denotes management contract.
Item 16. Form 10-K Summary
Not applicable.
115
INDEX
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.
OLD POINT FINANCIAL CORPORATION
/s/Robert F. Shuford, Sr.
Robert F. Shuford, Sr.,
Chairman, President & Chief Executive Officer
Date: March 15, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Robert F. Shuford, Sr.
Robert F. Shuford, Sr.
Date: March 15, 2018
/s/Jeffrey W. Farrar
Jeffrey W. Farrar
Date: March 15, 2018
/s/Stephen C. Adams*
Stephen C. Adams
/s/James Reade Chisman*
James Reade Chisman
/s/Russell S. Evans, Jr.*
Russell S. Evans, Jr.
/s/Michael A. Glasser*
Michael A. Glasser
/s/Dr. Arthur D. Greene*
Dr. Arthur D. Greene
/s/John Cabot Ishon*
John Cabot Ishon
/s/William F. Keefe*
William F. Keefe
/s/Tom B. Langley*
Tom B. Langley
/s/Dr. H. Robert Schappert*
Dr. H. Robert Schappert
/s/Robert F. Shuford, Jr.*
Robert F. Shuford, Jr.
/s/Ellen Clark Thacker*
Ellen Clark Thacker
/s/Joseph R. Witt*
Joseph R. Witt
*By Robert F. Shuford, Sr., as Attorney in Fact
Date: March 15, 2018
Chairman, President & Chief Executive Officer and Director
Principal Executive Officer
Chief Financial Officer & Senior Vice President/Finance
Principal Financial & Accounting Officer
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
116
Directors' Compensation
EXHIBIT 10.5
All non-employee directors of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N.A. (the Trust Company) receive
$600 and $350, respectively, for each board meeting they attend. The non-employee directors of the Bank and Trust Company receive $200 for each committee
meeting they attend except for the Bank's Investment Committee and Nominating and Corporate Governance Committee and the Trust Company's Marketing
Committee meetings, for which members receive $150 for attendance, and the Bank's Directors Loan Committee, Compensation and Benefits Committee and
Audit Committee meetings, for which members receive $200 for attendance.
In addition, non-employee directors of the Bank and Trust Company receive an annual retainer fee of $12,000 and $4,000, respectively. In addition, the chairman
of the Audit Committee receives an additional $3,000 annual retainer, the chairman of the Trust Company Board receive an additional $2,000 annual retainer, the
Lead Director of the Bank Board receives an additional $10,000 annual retainer, and the chairman of the Directors Loan Committee receives an additional $1,000
annual retainer.
All directors of Old Point Financial Corporation (the Company) have been elected as directors of the Bank, but there is no assurance that this practice will
continue. However, not all Company directors serve as directors of the Trust Company. There are no additional fees paid for being a Company director.
The Company reimburses travel, lodging and meal expense for all directors living outside of Virginia to attend board and committee meetings. The Company also
pays for all directors and their spouses to attend regular director seminars.
Non-employee directors are eligible to receive equity compensation awards under the Company’s 2016 Incentive Stock Plan.
Base Salaries of Executive Officers of the Registrant
As of April 1, 2018, the following are the base salaries (on an annual basis) of the executive officers of Old Point Financial Corporation:
Robert F. Shuford, Sr.
Chairman, President & Chief Executive Officer
Old Point Financial Corporation
Robert F. Shuford, Jr.
Executive Vice President/Bank
Old Point Financial Corporation
Joseph R. Witt
Chief Business Development Officer & Senior Vice President
Old Point Financial Corporation
Jeffrey W. Farrar
Chief Financial Officer & Senior Vice President/Finance
Old Point Financial Corporation
Eugene M. Jordan, II
Secretary to the Board & Executive Vice President/Trust
Old Point Financial Corporation
Donald S. Buckless (53)
Chief Lending Officer & Senior Vice President
Old Point Financial Corporation
Exhibit 10.6
$
300,000
$
330,000
$
297,030
$
285,000
$
190,000
$
187,200
RETIREMENT AGREEMENT, WAIVER AND GENERAL RELEASE
EXHIBIT 10.17
This Retirement Agreement (the " Agreemen t") dated March 10, 2017 confirms the following understandings and agreements with Old Point Financial
Corporation, its officers, directors, employees, agents, successors, assigns, affiliates, and subsidiaries, including but not limited to, The Old Point National Bank of
Phoebus and Old Point Trust & Financial Services, N.A., along with their affiliates, successors, assigns, officers, directors, employees, and agents (hereinafter
collectively called the "Company", "Old Point") and Laurie Grabow ("Employee", "you" or "your", "her or herself") with respect to Employee's retirement from
the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein, and other valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto stipulate and agree as follows:
1. Employee hereby makes a voluntary election to retire.
2. Employee acknowledges that she will be retiring from employment with the Company effective May 31, 2017 (the " Retirement Date ") or earlier date by
mutual agreement by the Company and Employee. During the remainder of Employee's employment, Employee will have those duties and
responsibilities as the Chief Financial Officer of Old Point. Employee further acknowledges that officials of the Company have explained to Employee
that Employee will receive payment of her regular base salary to the Retirement Date and accrued vacation, whether or not Employee signs this
Agreement. On the Retirement Date, Employee also shall be deemed to have resigned from all officer, director and other positions with the Company,
and to the extent that Employee is a trustee, or is a member of any committee of the Company or its benefits plans, as of the Retirement Date, Employee
shall be deemed to have resigned from such capacities and agrees to execute any additional, more specific resignation documents the Company may
request.
3.
In consideration of this AGREEMENT, and upon receipt of a validly executed copy of this AGREEMENT, the expiration of the 7-day revocation period
referenced in paragraph 14 below, and following the Retirement Date, Old Point agrees to provide Employee with the following additional compensation
and benefits:
A. Retirement Benefit. Provided that Employee signs this Agreement, does not revoke the Agreement and abides by its terms, and in return for
Employee's promises in this Agreement, the Company agrees to pay Employee 39 weeks of base salary at the rate in effect on the Retirement Date as
severance pay (the "Severance Period") following the Retirement Date. All salary payments shall be made at a time and in accord with the regular
payroll practices of the Company with respect to its executive officers. All such amounts shall be subject to and reduced by any applicable federal
and state withholding taxes or other deductions authorized by Employee. Employee agrees and acknowledges that Retirement Benefit is above and
beyond anything to which Employee is otherwise entitled to and is payable to Employee only in exchange for execution of this Agreement and that
the Retirement Benefit represents full and complete consideration for the release Employee is giving the Company in this Agreement.
- 1 -
B. Health/Dental Plan Continuation . If Employee is enrolled in an Old Point sponsored health and/or Dental insurance plan on the Retirement Date,
notwithstanding anything in the plan to the contrary, Employee will be eligible to continued health and/or dental insurance coverage under the Old
Point sponsored insurance plan for herself and her covered spouse. Employee, however, shall not be entitled to guaranteed or continued coverage
under any specific policy or plan and Old Point reserves the right to make changes in any policy or policies of insurance it offers. In the event Old
Point ceases to offer the policy or plan in which Employee participates, Employee shall be entitled to participate in the nearest equivalent policy or
plan replacing such terminated policy or plan in accordance with the terms of such plan. In the event Old Point ceases to offer any group plan
coverage to its employees, Employee's right to continued plan coverage will cease.
C. Health and Dental Insurance Premium Benefit . If Employee is eligible for Health Plan and Dental plan Continuation under paragraph 3.B. above, the
Company shall reimburse the Employee for the insurance premiums resulting from continuing coverage under the Company insurance plan pursuant
to the Consolidated Omnibus Budget Reconciliation Act ("COBRA") for 39 weeks.
D. 401(k) and Health Savings Account . Employee may not defer any portion of the Retirement Benefit to any retirement plan sponsored by Old Point,
including Old Point's 401(k), or any health-savings accounts sponsored by Old Point, including Employee's HSA. However, Employee may still be
deemed an eligible individual for purposes of making post-tax contributions to his or her HSA, if applicable, and should consult with appropriate tax
advisors or attorneys to determine the same.
4. Employee acknowledges that the above delineated payment and benefits represent additional monies and benefits to which he or she is not otherwise
entitled. Employee and Old Point acknowledge that this Agreement does not modify the benefits to which he or she is already entitled as a terminating
employee.
5.
In exchange for the payment and benefits described in paragraph 3 above, Employee, for herself and her heirs, legal representatives, beneficiaries, assigns
and successors in interest, hereby releases and forever discharges Old Point, its successors, assigns, officers, directors, employees, agents, representatives
and subsidiaries, whether in their individual or official capacities (hereinafter collectively referred to as the "RELEASED PARTIES") of and from any
and all actions or causes of action, suits, debts, claims, complaints, contracts, controversies, agreements, promises, damages, claims for attorney's fees,
punitive damages and reinstatement, judgments, and demands whatsoever, in law or in equity, that her or she has or ever had from the beginning of the
world to the date of this AGREEMENT, including, but without limiting the generality of the foregoing, any claim arising out of or in any way connected
with her employment relationship with Old Point or any claim alleging discrimination, harassment, retaliation or violation of Title VII of the Civil Rights
Act of 1964, as amended, and as amended by the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Americans with Disabilities
Act, as amended, the Virginia Human Rights Act, Virginia Code §2.1-714 through §2.1-725, violation of any other local, state or federal law, regulation
or ordinance, or any other claim arising under any common law theory of tort or contract, including, but not limited to, wrongful discharge, libel, slander,
defamation or intentional infliction of emotional distress. The parties recognize, however, that nothing contained in this AGREEMENT shall prohibit
either party from instituting legal action to enforce any provisions of this AGREEMENT.
- 2 -
EMPLOYEE UNDERSTANDS AND AGREES THAT, OTHER THAN CLAIMS THAT CANNOT BE WAIVED BY LAW, HE OR SHE IS WAIVING
AND RELEASING ANY AND ALL CLAIMS AGAINST OLD POINT TO THE DATE ON WHICH HE OR SHE SIGNS THIS AGREEMENT IN
EXCHANGE FOR CONSIDERATION TO WHICH HE OR SHE IS NOT OTHERWISE ENTITLED.
6. Employee acknowledges that she is over the age of forty (40) years and that, as such, she is covered by the Age Discrimination in Employment Act, 29
U.S.C. § 621 ("ADEA"). Employee further acknowledges that this AGREEMENT constitutes a release in accord with the provisions of the ADEA.
7. Acknowledgements and Affirmations .
a. Employee represents and affirms that Employee has not filed any claim or charge against Old Point.
b. Employee also represents and affirms that Employee has reported all hours worked as of the date she signs this release and has been paid and/or has
received all compensation, wages, bonuses, commissions, and/or benefits to which she may be entitled. Employee represents and affirms that she has
been granted any leave to which she was entitled under the Family and Medical Leave Act or related state or local leave or disability accommodation
laws.
c. Employee further represents and affirms that she has no known workplace injuries or occupational diseases.
d. Employee also represents and affirms that she has not divulged any proprietary or confidential information of Old Point and will continue to maintain
the confidentiality of such information consistent with Old Point's policies and/or common law.
e. Employee further represents and affirms that she has not been retaliated against for reporting any allegations of wrongdoing by Old Point, including
any allegations of corporate fraud. Both Parties acknowledge that this Agreement does not limit either party's right, where applicable, to file or
participate in an investigative proceeding of any federal, state or local governmental agency.
Employee represents and affirms that all of Old Point's decisions regarding calculation of Employee's pay and benefits earned through the date of
Employee's separation from employment were not discriminatorily based on age, disability, race, color, sex, religion, national origin or any other
classification protected by law.
f.
8.
In consideration of the benefits provided to Employee pursuant to this Agreement, Employee agrees to keep the terms and conditions of this Agreement
confidential and private and not to divulge the terms, conditions, or benefits of this Early Retirement Agreement to the general public, media, or press.
This provision shall not be interpreted to prevent Employee from disclosing information concerning this Agreement to Employee's spouse, pursuant to a
valid court order or legal requirement, or to Employee's financial, tax, or legal advisor. Should Employee violate this paragraph 8, Old Point's obligation
to provide the benefits provided in this Agreement shall immediately cease.
9. This AGREEMENT may not be modified, altered or changed except upon the express prior written consent of the parties.
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10. This AGREEMENT contains all the terms and conditions agreed upon by the parties hereto with reference to the subject matters hereof. No other
agreements, oral or otherwise, shall be deemed to exist or to bind either of the parties hereto. No representative of either party hereto had or has any
authority to make any representation or promise not contained in this AGREEMENT, and each of the parties hereto acknowledges that each has not
executed this AGREEMENT in reliance upon any such representation or promise.
11. This AGREEMENT may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
12. This AGREEMENT shall in all respects be interpreted, enforced, governed and construed by and under the laws of the Commonwealth of Virginia.
13. The invalidity, illegality or unenforceability of any provision hereof or any particular application thereof shall not be deemed to affect or impair in any
manner the validity, legality or enforceability of any other provision of this AGREEMENT, and this AGREEMENT shall continue in full force and effect
and shall be interpreted so as to implement as nearly as possible the intention of the parties in the absence of such provision or application.
14. Employee acknowledges that Old Point has advised her that she has a right to consult with an attorney prior to signing this AGREEMENT; and,
after such consultation or declining to seek such consultation, Employee freely and voluntarily enters into this AGREEMENT. Employee further
acknowledges that Old Point has given her a period of forty-five (45) days from the date of receipt of this AGREEMENT, in which to consider
the terms and binding effect of this AGREEMENT and decide whether she wishes to sign it. Employee further understands that if she signs this
AGREEMENT, she will have seven (7) days thereafter in which she can change her mind and revoke it. Employee agrees that if she decides to
revoke this AGREEMENT within the seven (7) day revocation period, she will provide such revocation notice in writing to Rachel Blankenship,
Senior Vice President, Human Resources, Old Point National Bank, 101 East Queen Street, Hampton, Virginia 23669. Employee understands
and agrees that this AGREEMENT is not effective or enforceable until the expiration of the seven (7) day revocation period.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on the date first above written.
By:
Name:
Its:
By:
Name:
Its:
By:
Name:
Its:
OLD POINT FINANCIAL CORPORATION
/s/ Robert F. Shuford, Sr.
Robert F. Shuford, Sr.
Chairman, President & Chief Executive Officer
THE OLD POINT NATIONAL BANK OF PHOEBUS
/s/ Robert F. Shuford, Jr.
Robert F. Shuford, Jr.
President & Chief Executive Officer
OLD POINT TRUST & FINANCIAL SERVICES, N.A.
/s/ Eugene M. Jordan, II
Eugene M. Jordan, II
President and Chief Executive Officer
March 10, 2017
Date
/s/ Laurie D. Grabow
Employee
- 5 -
CHANGE OF CONTROL SEVERANCE AGREEMENT
Exhibit 10.26
THIS CHANGE OF CONTROL SEVERANCE AGREEMENT (the “Agreement”), effective this 22nd day of February, 2018, by and
between The Old Point National Bank of Phoebus (the “Bank”) and Donald S. Buckless (“Employee”).
WHEREAS, Employee is a valuable employee of the Bank;
W I T N E S S E T H:
WHEREAS , the Bank wishes to encourage Employee to continue Employee’s career and services with the Bank and to remain with the Bank during any
potential change of control of the Bank; and
WHEREAS , the Bank and Employee have agreed to enter into this Agreement to set forth the terms on which Employee may be entitled to severance
pay from the Bank following a Change of Control (as defined below).
NOW, THEREFORE, it is hereby agreed by and between the parties hereto as follows:
1. Definitions .
(a) “Cause” shall mean:
(i) Employee’s misconduct in connection with the performance of Employee’s duties;
(ii) Employee’s misappropriation or embezzlement of funds or property of the Bank or any affiliate;
(iii) Employee’s fraud or dishonesty with respect to the Bank or any affiliate;
respect to any felony or any misdemeanor involving moral turpitude; or
(iv) Employee’s conviction of, indictment for (or the procedural equivalent), or entering of a guilty plea or plea of no contest with
(v) Employee’s breach of a material term of this Agreement, failure to perform the material duties and responsibilities of
Employee's position or violation in any material respect of any policy, code or standard of behavior generally applicable to officers or employees of the
Bank, after being advised in writing of such breach or violation and being given a reasonable opportunity and period (as determined by the Bank) to
remedy such breach or violation (if such breach or violation is deemed by the Bank to be capable of being remedied) which period shall be not less than
thirty (30) days;
(vi) Employee’s material breach of any fiduciary duty owed to the Bank; or
(vii) Employee’s engaging in conduct that, if it became known by any regulatory or governmental agency or the public, would be
or is reasonably likely to result, in the good faith judgment of the Bank, in injury to the Bank, monetarily or otherwise.
(b) “Change of Control” shall mean the date any one of the following events occurs after the effective date of this Agreement:
(i) any one person, or more than one person acting as a group, acquires ownership of stock of Old Point Financial Corporation
(“Old Point”) that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting
power of the stock of Old Point. However, if any one person or group, is considered to own more than fifty percent (50%) of the total fair market value or
total voting power of the stock of Old Point, the acquisition of additional stock by the same person or group is not considered to cause a Change of
Control. An increase in the percentage of stock owned by any one person or group, as a result of a transaction in which Old Point acquires its stock in
exchange for property will be treated as an acquisition of stock. This applies only when there is a transfer of stock of Old Point (or issuance of stock of
Old Point) and stock in Old Point remains outstanding after the transaction.
(ii) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending
on the date of the most recent acquisition by such person or group) ownership of stock of Old Point possessing thirty percent (30%) or more of the total
voting power of the stock of Old Point.
(iii) a majority of members of Old Point’s Board of Directors is replaced during any twelve-month period by directors whose
appointment or election is not endorsed by a majority of the members of Old Point’s Board of Directors prior to the date of the appointment or election.
(iv) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending
on the date of the most recent acquisition by such person or group) assets from Old Point that have a total gross fair market value equal to or more than
forty percent (40%) of the total gross fair market value of all of the assets of Old Point immediately prior to such acquisition or acquisitions. For this
purpose, “gross fair market value” shall mean the value of the assets of Old Point, or the value of the assets being disposed of, determined without regard
to any liabilities associated with such assets. A transfer of assets by Old Point shall not be treated as a Change of Control if the assets are transferred to:
(A) a shareholder of Old Point (immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or
more of the total value or voting power of which is owned, directly or indirectly, by Old Point; (C) a person, or more than one person acting as a group,
that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of Old Point; or (D) a n entity,
at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 1(b)(iv)(C) above
. A person’s status is determined immediately after the transfer of the assets. For example, a transfer to a corporation in which Old Point has no ownership
interest before the transaction, but which is a majority-owned subsidiary of Old Point after the transaction is not treated as a Change of Control.
2
For purposes of Section 1(b)(ii) and (iii) above, if any one person or more than one person acting as a group is considered to effectively control Old Point (within
the meaning of Section 1(b)(ii) or (iii) above), the acquisition of additional control of Old Point by the same person or group is not considered to cause a Change of
Control. For purposes of this Section 1, "more than one person acting as a group" shall include the owners of a corporation that enters into a merger, consolidation,
purchase or acquisition of stock or assets, or similar business transaction with Old Point. If a person, including an entity, owns stock in both corporations that enter
into a merger, consolidation, purchase or acquisition of stock or assets, or similar transaction, such shareholder is considered to be acting as a group with other
shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the
ownership interest in the other corporation. Persons will not be considered to be acting as a group solely because they (I) purchase or own stock of the same
corporation at the same time, or as a result of the same public offering, or (II) purchase assets of the same corporation at the same time.
(c) “Good Reason” shall mean within twenty-four (24) months after a Change of Control:
(i) a material diminution in Employee’s authority, duties or responsibilities; or
in Hampton, Virginia, without Employee’s express written consent to such relocation; or
(ii) the relocation of Employee to any other primary place of employment more than fifty (50) miles from the Bank headquarters
(iii) a material breach of this Agreement by the Bank involving Employee’s base salary.
Employee is required to provide notice to the Bank of the existence of a condition described in Section 1(c) above within a sixty (60) day period of the initial
existence of the condition, and the Bank shall have thirty (30) days after notice to remedy the condition without liability. If not remedied by the Bank, Employee
shall have thirty (30) days after the end of such remedy period to terminate employment for Good Reason.
(d) “Incapacity” shall mean Employee is suffering a physical or mental impairment that renders the Executive unable to perform the essential
functions of the Position, and such impairment exists for six months within any twelve-month period, as determined by the Bank and in compliance with the
requirements of the Americans with Disabilities Act.
3
2. Severance Payments and Other Matters Related to Termination within Two (2) Years After a Change of Control .
(a) Without Cause or for Good Reason . If Employee’s employment is involuntarily terminated without Cause (and other than due to
Employee's death or Incapacity) within two (2) years after a Change of Control shall have occurred or if Employee resigns for Good Reason within two (2) years
after a Change of Control shall have occurred, then the Bank shall pay to Employee (subject to any applicable payroll or other taxes required to be withheld), (i)
(A) any unpaid base salary for time worked through the date of termination payable in a lump sum as soon as administratively feasible following termination, but
not later than thirty (30) days thereafter; (B) any annual incentive compensation earned during the calendar year preceding the calendar year of termination, but not
yet paid as of the date of termination, payable on the earlier of the thirtieth (30 th ) day after the date of termination, or when otherwise due; and (C) any benefits or
awards vested, due and owing pursuant to the terms of any other plans, policies or programs, payable when otherwise due (hereinafter subsections (a)(i)(A) – (C)
collectively are referred to as the “Accrued Obligations”) and (ii) subject to Employee’s signing, delivering and not revoking the Release attached as Exhibit A,
which Release must be signed, delivered and not revoked within the time period set forth therein, the following:
(A) An amount equal to 1.50 times Employee’s base salary as in effect at the time of termination, payable over a period of twelve
(12) months in accordance with the regular pay periods of Old Point (but not less frequently than monthly and in equal installments) beginning on the first
payroll following the date of termination of employment, provided, however, that all payments otherwise due during the first sixty (60) days following
termination of employment shall be accumulated and, if the Release requirements have been met, paid on the sixtieth (60 th ) day following termination of
employment.
(B) An amount equal to 1.50 times the average annual bonus payable for the five years preceding the calendar year in which the
termination occurs (or the average for the number of years the Agreement has been in effect if less than five (5) years.) If the Agreement was in effect and
no bonus was paid for a calendar year, then the amount to be used for that year in computing the average shall be zero. The bonus amount shall be payable
over a period of twelve (12) months in accordance with the regular pay periods of the Bank (but not less frequently than monthly and in equal
installments), payable in the same manner and at the same time as the payments in Section 2(a)(A).
(C) An amount equal to the product of twenty-four (24) times the monthly rate of the Bank’s subsidy for coverage in its medical,
dental and vision plans for active employees (including any applicable coverage for spouses and dependents) in effect on the date of termination, payable
in a lump sum on the sixtieth (60 th ) day following termination of employment.
(b) Modified Cutback of Compensation Deemed to be Contingent on a Change of Control . If any benefits or payments are to be made
under the terms of this Agreement or any other agreement between Employee and Old Point or a subsidiary following a transaction that constitutes a change in the
ownership or effective control of Old Point or in the ownership of a substantial portion of the assets of Old Point such that the provisions of Section 280G of the
Internal Revenue Code of 1986, as amended, and any regulations thereunder (“Code Section 280G”) or Section 4999 of the Internal Revenue Code and any
regulations thereunder could potentially apply to such compensation, then the following provisions shall be applicable:
4
(i) In the event the independent accountants serving as auditors for Old Point on the date of a change of control within the
meaning of Code Section 280G (or any other accounting firm designated by Old Point) determine that some or all of the payments or benefits scheduled
under this Agreement, as well as any other payments or benefits on such change of control, would be nondeductible by Old Point or a subsidiary under
Code Section 280G, then the payments scheduled under this Agreement and all other agreements between Employee and Old Point or a subsidiary will be
reduced to one dollar less than the maximum amount which may be paid without causing any such payment or benefit to be nondeductible. Any reduction
of benefits or payments required to be made under this Section 2(b)(i) shall be taken in the following order: first from cash compensation and then from
payments or benefits not payable in cash, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from
the date of determination.
(ii) Notwithstanding the foregoing Section 2(b)(i), in the event the independent accountants serving as auditors for Old Point on
the date of a change of control within the meaning of Code Section 280G (or any other accounting firm designated by Old Point) determine that the net
economic benefit to Employee after payment of all income and excise taxes is greater without giving effect to Section 2(b)(i) than Employee’s net
economic benefit after a reduction by reason of the application of Section 2(b)(i), then Section 2(b)(i) shall be a nullity and without any force or effect.
Any decisions regarding the requirement or implementation of the reductions to compensation described in Section 2(b)(i) shall be made by the
independent accountants serving as auditors for Old Point on the date of a change of control within the meaning of Code Section 280G (or any other
accounting firm designated by Old Point), shall be made at Old Point’s expense and shall be binding on the parties.
(c) Other Terminations . If Employee’s employment is terminated for Cause or due to Employee's death or Incapacity or if Employee
voluntarily terminates his employment other than for Good Reason, within two (2) years after a Change of Control shall have occurred, this Agreement shall
terminate without any further obligation of the Bank to Employee other than the payment to Employee of any unpaid base salary for the time worked through the
date of termination as soon as administratively feasible after termination but not later than thirty (30) days thereafter and the payment of any benefits vested, due
and owing pursuant to the terms of any plans, policies or programs, payable when otherwise due.
5
3. Covenants .
(a) Non-Competition . Notwithstanding the foregoing, all such payments and benefits otherwise due under Section 2(a) shall cease to be
paid, and the Bank shall have no further obligation due with respect thereto, in the event Employee engages in any conduct prohibited in this Section 3. In
exchange for this Agreement and other valuable consideration, Employee agrees that Employee will not engage in Competition for a period of twelve (12) months
after Employee’s employment with the Bank ceases for any reason, regardless of whether any benefits are due under Section 2(a). For purposes hereof,
“Competition” means Employee’s performing duties that are the same as or substantially similar to those duties performed by Employee for the Bank during the
last twelve (12) months of Employee’s employment, as an officer, a director, an employee, a partner or in any other capacity, within twenty-five (25) miles of the
headquarters of the Bank (or any Virginia headquarters of any successor) or any branch office of the Bank (or any successor (as to its Virginia branches only) as
they are located as of the date Employee’s employment ceases, if those duties are performed for a bank of other financial institution that provides products or
services that are the same as or substantially similar to, and competitive with, any of the products or services provided by the Bank at the time Employee’s
employment ceases.
(b) Non-Piracy. In exchange for the benefits promised in this Agreement and other valuable consideration, Employee agrees that for a
period of twelve (12) months after Employee’s employment ceases for any reason, Employee will not, directly or indirectly, solicit, divert from the Bank or Old
Point or do business with any “Customer” of the Bank with whom Employee had “Material Contact” during the last twelve (12) months of Employee’s
employment or about whom Employee obtained information while acting within the scope of his or her employment during the last twelve (12) months of
employment, if the purpose of such solicitation, diversion or transaction is to provide products or services that are the same as or substantially similar to those
offered by the Bank at the time Employee’s employment ceases. “Material Contact” means that Employee personally communicated with the Customer, either
orally or in writing, for the purpose of providing, offering to provide or assisting in providing products or services of the Bank. “Customer” means any person or
entity with whom the Bank had a depository or other contractual relationship, pursuant to which the Bank provided products or services during the last twelve (12)
months of Employee’s employment.
(c) Non-Solicitation. In exchange for the benefits promised in this Agreement and other valuable consideration, Employee agrees that for
a period of twelve (12) months after employment ceases, for any reason, Employee will not, directly or indirectly, hire or solicit for hire or induce any person to
terminate his or her employment with the Bank, if the purpose is to compete with the Bank.
(d) Confidentiality. As an employee of the Bank, Employee will have access to and may participate in the origination of non-public,
proprietary and confidential information relating to the Bank and/or its affiliates, and Employee acknowledges a fiduciary duty owed to the Bank and its affiliates
not to disclose impermissibly any such information. Confidential information may include, but is not limited to, trade secrets, customer lists and information,
internal corporate planning, methods of marketing and operation, and other data or information of or concerning the Bank or its customers that is not generally
known to the public or generally in the banking industry. Employee agrees that during employment and for a period of five (5) years following the cessation of
employment, Employee will not use or disclose to any third party any such confidential information, either directly or indirectly, except as may be authorized in
writing specifically by the Bank; provided, however that to the extent the information covered by this Section 8 is otherwise protected by the law, such as “trade
secrets,” as defined by the Virginia Uniform Trade Secrets Act, or customer information protected by banking privacy laws, that information shall not be disclosed
or used for however long the legal protections applicable to such information remain in effect.
6
Notwithstanding the foregoing, nothing in this Agreement is intended to prohibit Employee from performing any duty or obligation that shall
arise as a matter of law or limit Employee’s right to communicate with a government agency, as provided for, protected under or warranted by applicable law.
Specifically, Employee shall continue to be under a duty to truthfully respond to any legal and valid subpoena or other legal process. In the event Employee is
requested to disclose confidential information by subpoena or other legal process or lawful exercise of authority, Employee shall promptly provide the Bank with
notice of the same and cooperate with the Bank in the Bank's effort, at its sole expense, to avoid disclosure.
Federal law provides certain protections to individuals who disclose a trade secret to their attorney, a court, or a government official in certain,
confidential circumstances. Specifically, federal law provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret
law for the disclosure of a trade secret under either of the following conditions:
·
·
Where the disclosure is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an
attorney; and (B) solely for the purpose of reporting or investigating a suspected violation of law; or
Where the disclosure is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
Federal law also provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade
secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade
secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.
(e) Remedies . Employee acknowledges that the covenants set forth in Section 3 of this Agreement are just, reasonable, and necessary to
protect the legitimate business interests of the Bank. Employee further acknowledges that if Employee breaches or threatens to breach any provision of Section 3,
the Bank’s remedies at law will be inadequate, and the Bank will be irreparably harmed. Accordingly, the Bank shall be entitled to its attorney’s fees, costs and an
injunction, both preliminary and permanent, restraining Employee from such breach or threatened breach, such injunctive relief not to preclude the Bank from
pursuing all available legal and equitable remedies.
7
4. Documents. All documents, records, tapes and other media of any kind or description relating to the business of the Bank or any of its affiliates
(the “Documents”), whether or not prepared by Employee, shall be the sole and exclusive property of the Bank. The Documents (and any copies) shall be returned
to the Bank upon Employee’s termination of employment for any reason or at such earlier time or times as the Board of Directors of the Bank or its designee may
specify.
5. Severability. If any provision of this Agreement, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be
severable from the remainder of this Agreement and shall not invalidate or affect the other provisions of this Agreement, which shall remain in full force and effect
and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands
independently.
6. Governing Law/Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. The
parties further agree that venue in the event of any dispute shall be exclusively in the Circuit Court of the City of Hampton, Virginia, or the Norfolk federal court,
at the sole option of the Bank, and Employee agrees not to object to venue.
7. Notices. All written notices required by this Agreement shall be deemed given when delivered personally or sent by registered or certified mail,
return receipt requested, to the parties at their addresses set forth on the signature page of this Agreement. Each party may, from time to time, designate a different
address to which notices should be sent.
8. Amendment. This Agreement may not be varied, altered, modified or in any way amended except by an instrument in writing executed by the
parties hereto or their legal representatives.
9. Binding Effect. This Agreement shall be binding upon Employee and on the Bank, its successors and assigns, effective on the date first above
written subject to the approval by the Boards of Directors of the Bank. The Bank will require any successor to all or substantially all of the business and/or assets
of the Bank to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if
no such succession had taken place. This Agreement shall be freely assignable by the Bank.
10. No Construction Against Any Party. This Agreement is the product of informed negotiations between Employee and the Bank. If any part of
this Agreement is deemed to be unclear or ambiguous, it shall be construed as if it were drafted jointly by all parties. Employee and the Bank agree that neither
party was in a superior bargaining position regarding the substantive terms of this Agreement.
11. Code Section 409A Compliance.
(a) The intent of the parties is that payments and benefits under this Agreement comply with Section 409A of the Internal Revenue Code
of 1986, as amended, and applicable guidance thereunder (“Code Section 409A”) or comply with an exemption from the application of Code Section 409A and,
accordingly, all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section
409A.
8
(b) Neither Employee nor the Bank shall take any action to accelerate or delay the payment of any monies and/or provision of any
benefits in any matter which would not be in compliance with Code Section 409A.
(c) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the
form or timing of payment of any amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service”
(within the meaning of Code Section 409A) and, for purposes of any such provision of this Agreement under which (and to the extent) deferred compensation
subject to Code Section 409A is paid, references to a “termination” or “termination of employment” or like references shall mean separation from service. A
“separation from service” shall not occur under Code Section 409A unless such Employee has completely severed Employee’s relationship with the Bank or
Employee has permanently decreased Employee’s services to twenty percent (20%) or less of the average level of bona fide services over the immediately
preceding thirty-six (36) month period (or the full period if Employee has been providing services for less than thirty-six (36) months). A leave of absence shall
only trigger a termination of employment that constitutes a separation from service at the time required under Code Section 409A. If Employee is deemed on the
date of separation from service with the Bank to be a “specified employee”, within the meaning of that term under Code Section 409A(a)(2)(B) and using the
identification methodology selected by the Bank from time to time, or if none, the default methodology, then with regard to any payment or benefit that is required
to be delayed in compliance with Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the
six-month period measured from the date of Employee’s separation from service or (ii) the date of Employee’s death. In the case of benefits required to be delayed
under Code Section 409A, however, Employee may pay the cost of benefit coverage, and thereby obtain benefits, during such six-month delay period and then be
reimbursed by the Bank thereafter when delayed payments are made pursuant to the next sentence. On the first day of the seventh month following the date of
Employee’s separation from service or, if earlier, on the date of Employee’s death, all payments delayed pursuant to this Section 11(c) (whether they would have
otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Employee in a lump sum, and any remaining
payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. If any cash
payment is delayed under this Section 11(c), then interest shall be paid on the amount delayed calculated at the prime rate reported in The Wall Street Journal for
the date of Employee’s termination to the date of payment.
(d) With regard to any provision herein that provides for reimbursement of expenses or in-kind benefits subject to Code Section 409A,
except as permitted by Code Section 409A, (i) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, and (ii)
the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement,
or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under
any arrangement covered by Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect. All
reimbursements shall be reimbursed in accordance with the Bank’s reimbursement policies but in no event later than the calendar year following the calendar year
in which the related expense is incurred.
9
(e) If under this Agreement, an amount is to be paid in two or more installments, for purposes of Code Section 409A, each installment
shall be treated as a separate payment. In the event any payment payable upon termination of employment would be exempt from Code Section 409A under Treas.
Reg. § 1.409A-1(b)(9)(iii) but for the amount of such payment, the determination of the payments to Employee that are exempt under such provision shall be made
by applying the exemption to payments based on chronological order beginning with the payments paid closest in time on or after such termination of employment.
(f) When, if ever, a payment under this Agreement specifies a payment period with reference to a number of days (e.g., “payment shall be
made within ten (10) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Bank.
(g) Notwithstanding any of the provisions of this Agreement, the Bank shall not be liable to Employee if any payment or benefit which is
to be provided pursuant to this Agreement and which is considered deferred compensation subject to Code Section 409A otherwise fails to comply with, or be
exempt from, the requirements of Code Section 409A.
12. Regulatory Limitation. Notwithstanding any other provision of this Agreement, neither the Bank nor any affiliate shall be obligated to make,
and Employee shall have no right to receive, any payment, benefit or amount under this Agreement that would violate any law, regulation or regulatory order
applicable to the Bank or the affiliate at the time such payment is due, including without limitation, any regulation or order of the Federal Deposit Insurance
Corporation or the Board of Governors of the Federal Reserve System or the Office of the Comptroller of the Currency.
13. Entire Agreement. Except as otherwise provided herein, this Agreement constitutes the entire agreement of the parties with respect to the
matters addressed herein and it supersedes all other prior agreements and understandings, both written and oral, express or implied, with respect to the subject
matter of this Agreement. It is further specifically agreed and acknowledged that, except as provided herein, Employee shall not be entitled to severance payments
or benefits under any severance or similar plan, program, arrangement or agreement of or the Bank for any cessation of employment occurring while this
Agreement is in effect.
14. Survivability. The provisions of Section 3 shall survive the termination of this Agreement other than due to the expiration or non-renewal of
this Agreement.
15. Title. The titles and sub-headings of each Section and Sub-Section in the Agreement are for convenience only and should not be considered
part of the Agreement to aid in interpretation or construction.
10
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by an officer thereunto duly authorized, and Employee has
signed this Agreement, all effective as of the date first above written.
THE OLD POINT NATIONAL BANK OF PHOEBUS
DONALD S. BUCKLESS
By
Title
11
RELEASE
EXHIBIT A
For good and valuable consideration, the receipt of which is hereby acknowledged, Donald S. Buckless (“Employee”), hereby irrevocably and
unconditionally releases, acquits, and forever discharges Old Point Financial Corporation and The Old Point National Bank of Phoebus (collectively, “the Bank”)
and each of its agents, directors, members, affiliated entities, officers, employees, former employees, attorneys, successors, predecessors, parents, subsidiaries and
all persons acting by, through, under or in concert with any of them (collectively “Releasees”) from any and all charges, complaints, claims, liabilities, grievances,
obligations, promises, agreements, controversies, damages, policies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature
whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, any rights arising out of alleged violations or breaches of any contracts,
express or implied, or any tort, or any legal restrictions on the Bank right to terminate employees, or any federal, state or other governmental statute, regulation,
law or ordinance, including without limitation (1) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991; (2) the Americans with
Disabilities Act; (3) 42 U.S.C. § 1981; (4) the federal Age Discrimination in Employment Act (age discrimination); (5) the Older Workers Benefit Protection Act;
(6) the Equal Pay Act; (7) the Family and Medical Leave Act; and (8) the Employee Retirement Income Security Act (“ERISA”) (“Claim” or “Claims”), which
Employee now has, owns or holds, or claims to have, own or hold, or which Employee at any time heretofore had owned or held, or claimed to have owned or
held, against each or any of the Releasees at any time up to and including the date of the execution of this Release.
Employee hereby acknowledges and agrees that the execution of this Release and the cessation of Employee’s employment and all actions taken in
connection therewith are in compliance with the federal Age Discrimination in Employment Act and the Older Workers Benefit Protection Act and that the
releases set forth above shall be applicable, without limitation, to any claims brought under these Acts. Employee further acknowledges and agrees that:
a. The Release given by Employee is given solely in exchange for the consideration set forth in Section 2 of the Change of Control
Severance Agreement by and between the Bank and Employee to which this Release was initially attached and such consideration is in addition to
anything of value which Employee was entitled to receive prior to entering into this Release;
b. By entering into this Release, Employee does not waive rights or claims that may arise after the date this Release is executed;
c. Employee has been advised to consult an attorney prior to entering into this Release, and this provision of the Release satisfies the
requirements of the Older Workers Benefit Protection Act that Employee be so advised in writing;
d. Employee has been offered twenty-one (21) days [or forty-five (45) days, as applicable] from receipt of this Release within which to
consider whether to sign this Release; and
e. For a period of seven (7) days following Employee’s execution of this Release, Employee may revoke this Release and it shall not
become effective or enforceable until such seven (7) day period has expired.
This Release shall be binding upon the heirs and personal representatives of Employee and shall inure to the benefit of the successors and assigns of the
Bank.
Date
Employee
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-211800, 333-211799, 333-65684, 333-83175) on Form S-8 and (No. 333-
222356) on Form S-4 of Old Point Financial Corporation and Subsidiaries of our report dated March 15, 2018, relating to our audit of the consolidated financial
statements, which appear in this Annual Report on Form 10-K of Old Point Financial Corporation and Subsidiaries for the year ended December 31, 2017.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 15, 2018
Old Point Financial Corporation
Power of Attorney
I, Stephen C. Adams, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom
acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to
act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in
respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended
December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or
attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
EXHIBIT 24
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Stephen C. Adams
Stephen C. Adams
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, James Reade Chisman, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ James Reade Chisman
James Reade Chisman
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Russell S. Evans, Jr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Russell S. Evans, Jr.
Russell S. Evans, Jr.
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Michael A. Glasser, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Michael A. Glasser
Michael A. Glasser
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Dr. Arthur D. Greene, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Dr. Arthur D. Greene
Dr. Arthur D. Greene
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, John Cabot Ishon, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom
acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to
act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in
respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended
December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or
attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ John Cabot Ishon
John Cabot Ishon
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, William F. Keefe, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom
acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to
act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in
respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended
December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or
attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ William F. Keefe
William F. Keefe
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Tom B. Langley, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom
acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to
act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in
respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended
December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or
attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Tom B. Langley
Tom B. Langley
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Dr. H. Robert Schappert, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Dr. H. Robert Schappert
Dr. H. Robert Schappert
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Robert F. Shuford, Sr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Robert F. Shuford, Sr.
Robert F. Shuford, Sr.
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Robert F. Shuford, Jr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Robert F. Shuford, Jr.
Robert F. Shuford, Jr.
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Ellen Clark Thacker, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of
whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the
"Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with
the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the
"Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the
year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such
attorneys or attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Ellen Clark Thacker
Ellen Clark Thacker
(SEAL)
Old Point Financial Corporation
Power of Attorney
I, Joseph R. Witt, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom
acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to
act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities
Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in
respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended
December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or
attorney deem necessary or appropriate.
I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.
WITNESS my execution hereof this 12th day of December, 2017.
/s/ Joseph R. Witt
Joseph R. Witt
(SEAL)
Exhibit 31.1
I, Robert F. Shuford, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of Old Point Financial Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2018
/s/Robert F. Shuford, Sr.
Robert F. Shuford, Sr.
Chairman, President & Chief Executive Officer
Exhibit 31.2
I, Jeffrey W. Farrar, certify that:
1. I have reviewed this annual report on Form 10-K of Old Point Financial Corporation;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2018
/s/Jeffrey W. Farrar
Jeffrey W. Farrar
Chief Financial Officer & Senior Vice President/Finance
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Old Point Financial Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2017 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer and Chief Financial Officer of the
Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge
and belief:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and
for the periods covered in the Report.
/s/Robert F. Shuford, Sr.
Robert F. Shuford, Sr.
Chairman, President & Chief Executive Officer
March 15, 2018
/s/Jeffrey W. Farrar
Jeffrey W. Farrar
Chief Financial Officer & Senior Vice President/Finance
March 15, 2018