OLD POINT FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐	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		54-1265373
(State or other jurisdiction of incorporation or organization)		(I.R.S. 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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $5.00 par value	OPOF	The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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	☐	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 Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

5,199,169 shares of common stock ($5.00 par value) outstanding as of November 5, 2019

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

		Page

Item 1.	Financial Statements	1

	Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	1

	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2019 and 2018	2

	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2019 and 2018	3

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2019 and 2018	4

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2019 and 2018	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

	Signatures	46

Index

GLOSSARY OF DEFINED TERMS

2018 Annual Report on Form 10-K	Annual Report on Form 10-K for the year ended December 31, 2018
ALLL	Allowance for Loan and Lease Losses
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	The Old Point National Bank of Phoebus
CET1	Common Equity Tier 1
Citizens	Citizens National Bank
Company	Old Point Financial Corporation and its subsidiaries
ESPP	Employee Stock Purchase Plan
EVE	Economic Value of Equity
FASB	Financial Accounting Standards Board
FHLB	Federal Home Loan Bank
Federal Reserve	Board of Governors of the Federal Reserve System
FRB	Federal Reserve Bank
U.S. GAAP	Generally Accepted Accounting Principles
Incentive Stock Plan	Old Point Financial Corporation 2016 Incentive Stock Plan
OAEM	Other Assets Especially Mentioned
OCC	Office of the Comptroller of the Currency
OPM	Old Point Mortgage
OREO	Other Real Estate Owned
SEC	Securities and Exchange Commission
TDR	Troubled Debt Restructuring
Trust	Old Point Trust & Financial Services N.A.

Index

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

Old Point Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share data)	September 30, 2019		December 31, 2018
	(unaudited)
Assets

Cash and due from banks	$	31,897	$	19,915
Interest-bearing due from banks		58,591		20,000
Federal funds sold		719		2,302
Cash and cash equivalents		91,207		42,217
Securities available-for-sale, at fair value		146,486		148,247
Restricted securities, at cost		3,351		3,853
Loans held for sale		1,578		479
Loans, net		730,198		763,898
Premises and equipment, net		36,361		36,738
Bank-owned life insurance		27,355		26,763
Other real estate owned, net		-		83
Goodwill		1,650		1,650
Core deposit intangible, net		374		407
Other assets		12,035		13,848
Total assets	$	1,050,595	$	1,038,183

Liabilities & Stockholders’ Equity

Deposits:
Noninterest-bearing deposits	$	251,419	$	246,265
Savings deposits		380,178		367,915
Time deposits		232,973		228,964
Total deposits		864,570		843,144
Overnight repurchase agreements		23,732		25,775
Federal Home Loan Bank advances		47,000		60,000
Other borrowings		2,100		2,550
Accrued expenses and other liabilities		4,130		4,708
Total liabilities		941,532		936,177

Stockholders’ equity:
Common stock, $5 par value, 10,000,000 shares authorized; 5,199,169 and 5,184,289 shares outstanding (includes 19,933 and 13,689 of nonvested restricted stock, respectively)		25,896		25,853
Additional paid-in capital		20,876		20,698
Retained earnings		61,625		57,611
Accumulated other comprehensive income(loss), net		666		(2,156	)
Total stockholders’ equity		109,063		102,006
Total liabilities and stockholders’ equity	$	1,050,595	$	1,038,183

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Income

	Three Months Ended September 30,				Nine Months Ended September 30,
(unaudited, dollars in thousands, except per share data)	2019		2018		2019			2018
Interest and Dividend Income:
Loans, including fees	$	8,972	$	8,865	$	26,909		$	25,448
Due from banks		257		68		425			94
Federal funds sold		10		5		23			15
Securities:
Taxable		770		510		2,038			1,503
Tax-exempt		146		291		646			937
Dividends and interest on all other securities		53		64		176			192
Total interest and dividend income		10,208		9,803		30,217			28,189

Interest Expense:
Checking and savings deposits		291		164		817			409
Time deposits		1,012		774		2,829			2,088
Federal funds purchased, securities sold under agreements to repurchase and other borrowings		32		41		105			93
Federal Home Loan Bank advances		321		320		1,024			931
Total interest expense		1,656		1,299		4,775			3,521
Net interest income		8,552		8,504		25,442			24,668
Provision for loan losses		-		749		1,013			1,849
Net interest income after provision for loan losses		8,552		7,755		24,429			22,819

Noninterest Income:
Fiduciary and asset management fees		949		904		2,837			2,803
Service charges on deposit accounts		1,001		1,095		3,082			3,043
Other service charges, commissions and fees		1,047		873		2,998			2,668
Bank-owned life insurance income		201		202		591			584
Mortgage banking income		204		240		722			617
Gain on sale of available-for-sale securities, net		286		-		312			120
Other operating income		49		70		184			122
Total noninterest income		3,737		3,384		10,726			9,957

Noninterest Expense:
Salaries and employee benefits		5,991		5,608		17,617			17,020
Occupancy and equipment		1,484		1,557		4,282			4,521
Data processing		460		317		1,243			993
Customer development		137		143		450			460
Professional services		652		482		1,726			1,507
Employee professional development		181		195		597			595
Other taxes		146		134		445			446
ATM and other losses		57		103		172			357
Loss (gain) on other real estate owned		-		-		(2	)		86
Merger expenses		-		48		-			644
Other operating expenses		588		840		1,965			2,432
Total noninterest expense		9,696		9,427		28,495			29,061
Income before income taxes		2,593		1,712		6,660			3,715
Income tax expense		361		115		775			184
Net income	$	2,232	$	1,597	$	5,885		$	3,531

Basic Earnings per Share:
Weighted average shares outstanding		5,198,634		5,182,181		5,195,912			5,127,090
Net income per share of common stock	$	0.43	$	0.31	$	1.13		$	0.69

Diluted Earnings per Share:
Weighted average shares outstanding		5,198,656		5,182,181		5,195,962			5,127,113
Net income per share of common stock	$	0.43	$	0.31	$	1.13		$	0.69

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation

Consolidated Statements of Comprehensive Income

	Three Months Ended September 30,						Nine Months Ended September 30,
(unaudited, dollars in thousands)	2019			2018			2019			2018

Net income	$	2,232		$	1,597		$	5,885		$	3,531
Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on available-for-sale securities		212			(803	)		3,068			(2,674	)
Reclassification for gain included in net income		(225	)		-			(246	)		(95	)
Other comprehensive income (loss), net of tax		(13	)		(803	)		2,822			(2,769	)
Comprehensive income	$	2,219		$	794		$	8,707		$	762

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in thousands,except share and per share data)	Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
THREE MONTHS ENDED SEPTEMBER 30, 2019

Balance at June 30, 2019		5,178,339	$	25,892		$	20,838		$	60,016		$	679		$	107,425
Net income		-		-			-			2,232			-			2,232
Other comprehensive income, net of tax		-		-			-			-			(13	)		(13	)
Employee Stock Purchase Plan share issuance		897		4			16			-			-			20
Stock-based compensation expense		-		-			22			-			-			22
Cash dividends ($0.12 per share)		-		-			-			(623	)		-			(623	)

Balance at end of period		5,179,236	$	25,896		$	20,876		$	61,625		$	666		$	109,063

THREE MONTHS ENDED SEPTEMBER 30, 2018

Balance at June 30, 2018		5,169,023	$	25,847		$	20,568		$	55,767		$	(2,889	)	$	99,293
Net income		-		-			-			1,597			-			1,597
Other comprehensive loss, net of tax		-		-			-			-			(803	)		(803	)
Issuance of common stock related to acquisition		-		(2	)		(8	)		-			-			(10	)
Employee Stock Purchase Plan share issuance		704		4			14			-			-			18
Stock-based compensation expense		-		-			50			-			-			50
Cash dividends ($0.11 per share)		-		-			-			(570	)		-			(570	)

Balance at end of period		5,169,727	$	25,849		$	20,624		$	56,794		$	(3,692	)	$	99,575

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, dollars in thousands,except share and per share data)	Shares of Common Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
NINE MONTHS ENDED SEPTEMBER 30, 2019

Balance at December 31, 2018		5,170,600	$	25,853	$	20,698		$	57,611		$	(2,156	)	$	102,006
Net income		-		-		-			5,885			-			5,885
Other comprehensive income, net of tax		-		-		-			-			2,822			2,822
Employee Stock Purchase Plan share issuance		2,797		14		46			-			-			60
Restricted stock vested		5,839		29		(29	)		-			-			-
Stock-based compensation expense		-		-		161			-			-			161
Cash dividends ($.36 per share)		-		-		-			(1,871	)		-			(1,871	)

Balance at end of period		5,179,236	$	25,896	$	20,876		$	61,625		$	666		$	109,063

NINE MONTHS ENDED SEPTEMBER 30, 2018

Balance at December 31, 2017		5,017,458	$	25,087	$	17,270		$	54,738		$	(707	)	$	96,388
Net income		-		-		-			3,531			-			3,531
Other comprehensive loss, net of tax		-		-		-			-			(2,769	)		(2,769	)
Issuance of common stock related to acquisition		149,625		748		3,199			-			-			3,947
Reclassification of the stranded income tax effects of the Tax Cuts and Jobs Act from AOCI		-		-		-			139			(139	)		-
Reclassification of net unrealized gains on equity securities from AOCI per ASU 2016-01		-		-		-			77			(77	)		-
Employee Stock Purchase Plan share issuance		2,644		14		52			-			-			66
Stock-based compensation expense		-		-		103			-			-			103
Cash dividends ($.33 per share)		-		-		-			(1,691	)		-			(1,691	)

Balance at end of period		5,169,727	$	25,849	$	20,624		$	56,794		$	(3,692	)	$	99,575

See Notes to Consolidated Financial Statements.

Index

Old Point Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
(unaudited, dollars in thousands)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,885		$	3,531
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,672			1,870
Accretion related to acquisition, net		(192	)		(199	)
Provision for loan losses		1,013			1,849
Gain on sale of securities, net		(312	)		(120	)
Net amortization of securities		911			1,331
Increase in loans held for sale, net		(1,099	)		(254	)
Net gain on disposal of premises and equipment		-			9
Net (gain) loss on write-down/sale of other real estate owned		(2	)		86
Income from bank owned life insurance		(591	)		(584	)
Stock compensation expense		161			103
Deferred tax benefit		1,339			-
(Increase) decrease in other assets		(276	)		182
Decrease in accrued expenses and other liabilities		(578	)		(387	)
Net cash provided by operating activities		7,931			7,417

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(73,940	)		(16,582	)
Proceeds from redemption of restricted securities, net		502			254
Proceeds from maturities and calls of available-for-sale securities		22,145			8,750
Proceeds from sales of available-for-sale securities		47,749			12,139
Paydowns on available-for-sale securities		8,779			7,672
Proceeds from sale of loans held for investment		-			8,930
Net decrease (increase) in loans held for investment		32,796			(8,228	)
Proceeds from sales of other real estate owned		85			211
Purchases of premises and equipment		(1,295	)		(439	)
Cash paid in acquisition		-			(3,164	)
Cash acquired in acquisition		-			2,304
Net cash provided by investing activities		36,821			11,847

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits		5,154			8,499
Increase in savings deposits		12,263			14,657
Increase (decrease) in time deposits		4,125			(9,361	)
Decrease in federal funds purchased, repurchase agreements and other borrowings, net		(2,493	)		(9,727	)
Increase in Federal Home Loan Bank advances		10,000			88,000
Repayment of Federal Home Loan Bank advances		(23,000	)		(95,500	)
Proceeds from ESPP issuance		60			66
Cash dividends paid on common stock		(1,871	)		(1,691	)
Net cash provided by (used in) financing activities		4,238			(5,057	)

Net increase in cash and cash equivalents		48,990			14,207
Cash and cash equivalents at beginning of period		42,217			14,412
Cash and cash equivalents at end of period	$	91,207		$	28,619

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	4,708		$	3,332

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Unrealized gain (loss) on securities available-for-sale	$	3,572		$	(3,603	)
Loans transferred to other real estate owned	$	-		$	203
Right of use lease asset and liability	$	751		$	-

TRANSACTIONS RELATED TO ACQUISITIONS
Assets acquired	$	-		$	50,406
Liabilities assumed	$	-		$	44,324
Common stock issued in acquisition	$	-		$	3,947

See Notes to Consolidated Financial Statements.

Index

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Accounting Policies

The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (NASDAQ: OPOF) (the Company) and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at September 30, 2019 and December 31, 2018, the statements of income, comprehensive income, and changes in stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and the statements of cash flows for the nine months ended September 30, 2019 and 2018. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of 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.

BUSINESS COMBINATIONS

On April 1, 2018, the Company acquired Citizens National Bank (Citizens) based in Windsor, Virginia. Refer to Note 2 for further discussion.

NATURE OF OPERATIONS

Old Point Financial Corporation is a holding company that conducts substantially all of its operations through two subsidiaries, the Bank and Trust. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of September 30, 2019, the Bank had 19 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 Old Point Mortgage. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In 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. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. Based on the proposed ASU, the Company expects this ASU will be effective for the Company beginning on January 1, 2023. The Company has formed a committee to oversee the adoption of the new standard, has engaged a third party to assist with implementation, has performed data fit gap and loss driver analyses, intends to run parallel models beginning with fourth quarter data, and is continuing to evaluate the impact that ASU 2016-13 will have on its consolidated financial statements.

In 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 U.S. Securities and Exchange Commission (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.

Index

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group (or TRG) Meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the consolidated balance sheet. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

ACCOUNTING STANDARDS ADOPTED IN 2019

In 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. 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 FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases”) and ASU 2018-11 (“Leases (Topic 842): Targeted Improvements”). Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current U.S. GAAP (Topic 840, Leases). The Company adopted ASU 2018-11 on January 1, 2019 using the optional transition method. As the Company owns the majority of its buildings, the adoption of this ASU did not have a material impact on its consolidated financial statements. Refer to Note 5 for further discussion.

In 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. Adoption of this standard did not have a material impact to the consolidation financial statements, and as a result, a cumulative effects adjustment was not necessary.

Index

Note 2. Acquisitions

On April 1, 2018, the Company acquired Citizens. Under the terms of the merger agreement, Citizens stockholders received 0.1041 shares of the Company’s common stock and $2.19 in cash for each share of Citizens common stock, resulting in the Company issuing 149,625 shares of the Company’s common stock at a fair value of $3.9 million, for a total purchase price of $7.1 million.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. The following table provides an assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):

	As Recorded by Citizens		Fair Value Adjustments			As Recorded by the Company
Consideration paid:
Cash						$	3,164
Old Point common stock							3,947
Total purchase price						$	7,111

Identifiable assets acquired:
Cash and cash equivalents	$	2,304	$	-		$	2,304
Securities available for sale		1,959		-			1,959
Restricted securities, at cost		278		-			278
Loans, net		42,824		(34	)		42,790
Premises and equipment		1,070		450			1,520
Other real estate owned		237		(61	)		176
Core deposit intangibles		-		440			440
Other assets		1,055		(116	)		939
Total assets	$	49,727	$	679		$	50,406

Identifiable liabilities assumed:
Deposits	$	43,754	$	246		$	44,000
Other liabilities		324		-			324
Total liabilities	$	44,078	$	246		$	44,324

Net assets acquired						$	6,082
Goodwill						$	1,029

Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. Purchased intangible assets subject to amortization, such as the core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

The acquired loans were recorded at fair value at the acquisition date without carryover of Citizens’ allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on call code with other key inputs identified such as payment structure, rate type, remaining maturity, and credit risk characteristics including risk rating groups (pass rated loans and adversely classified loans), and past due status.

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (purchased credit-impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (purchased performing). The fair values of the purchased performing loans were $42.1 million and the fair value of the purchased credit-impaired loans were $710 thousand.

Index

The following table presents the purchased credit-impaired loans receivable at the acquisition date (dollars in thousands):

Contractually required principal and interest payments	$	1,031
Nonaccretable difference		(211	)
Cash flows expected to be collected		820
Accretable yield		(110	)
Fair value of purchased credit-impaired loans	$	710

The amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments related to the Citizens acquisition had the following impact on the Consolidated Statements of Income during the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,
(dollars in thousands)	2019			2018
Purchased performing loans	$	25		$	52
Purchased credit-impaired loans		7			(2	)
Certificate of deposit valuation		39			39
Amortization of core deposit intangible		(11	)		(11	)
Net impact to income before taxes	$	60		$	78

	Nine Months Ended September 30,
		2019			2018
Purchased performing loans	$	104		$	144
Purchased credit-impaired loans		5			(1	)
Certificate of deposit valuation		116			78
Amortization of core deposit intangible		(33	)		(22	)
Net impact to income before taxes	$	192		$	199

Note 3. Securities

Amortized costs and fair values, with gross unrealized gains and losses, of securities available-for-sale as of the dates indicated are as follows:

	September 30, 2019
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. Treasury securities	$	9,905	$	82	$	-		$	9,987
Obligations of U.S. Government agencies		28,401		14		(138	)		28,277
Obligations of state and policitcal subdivisions		24,519		557		(69	)		25,007
Mortgage-backed securities		75,455		686		(376	)		75,765
Money market investments		3,821		-		-			3,821
Corporate bonds and other securities		3,542		90		(3	)		3,629
	$	145,643	$	1,429	$	(586	)	$	146,486

	December 31, 2018
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Value
U.S. Treasury securities	$	12,323	$	6	$	(1	)	$	12,328
Obligations of U.S. Government agencies		10,868		2		(156	)		10,714
Obligations of state and policitcal subdivisions		49,194		155		(512	)		48,837
Mortbage-backed securities		73,444		93		(2,346	)		71,191
Money market investments		1,897		-		-			1,897
Corporate bonds and other securities		3,250		42		(12	)		3,280
	$	150,976	$	298	$	(3,027	)	$	148,247

Index

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.

The Company has not recorded impairment charges through income on securities for the three or nine months ended September 30, 2019 or the year ended December 31, 2018.

The following table summarizes net realized gains and losses on the sale of investment securities during the periods indicated:

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2019			2018		2019			2018
Securities Available-for-sale
Realized gains on sales of securities	$	479		$	-	$	515		$	131
Realized losses on sales of securities		(193	)		-		(203	)		(11	)
Net realized gain	$	286		$	-	$	312		$	120

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:

	September 30, 2019
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Obligations of U.S. Government agencies	$	88	$	20,068	$	50	$	2,872	$	138	$	22,940
Obligations of state and policitcal subdivisions		69		3,191		-		-		69		3,191
Mortgage-backed securities		197		28,929		179		22,281		376		51,210
Corporate bonds and other securities		-		-		3		197		3		197
Total securities available-for-sale	$	354	$	52,188	$	232	$	25,350	$	586	$	77,538

	December 31, 2018
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	1	$	2,484	$	-	$	-	$	1	$	2,484
Obligations of U.S. Government agencies		47		6,014		109		3,206		156		9,220
Obligations of state and policitcal subdivisions		10		5,829		502		23,727		512		29,556
Mortgage-backed securities		-		-		2,346		63,930		2,346		63,930
Corporate bonds and other securities		1		100		11		389		12		489
Total securities available-for-sale	$	59	$	14,427	$	2,968	$	91,252	$	3,027	$	105,679

The number of investments at an unrealized loss position as of September 30, 2019 and December 31, 2018 were 35 and 88, respectively. Certain investments within the Company’s portfolio had unrealized losses for more than twelve months at September 30, 2019 and December 31, 2018, as shown in the tables above. The unrealized losses were caused by changes in market interest rates. 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 September 30, 2019 or December 31, 2018.

Restricted Securities

The restricted security category is comprised of stock in the Federal Home Loan Bank of Atlanta (FHLB), the Federal Reserve Bank (FRB), and Community Bankers’ Bank (CBB). 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, FRB, and CBB stock are 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.

Index

Note 4. Loans and the Allowance for Loan Losses

The following is a summary of the balances in each class of the Company’s portfolio of loans held for investment as of the dates indicated:

(dollars in thousands)	September 30, 2019		December 31, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	113,634	$	110,009
Commercial - owner occupied		137,949		155,245
Commercial - non-owner occupied		135,069		131,287
Multifamily		26,556		28,954
Construction		40,196		32,383
Second mortgages		15,058		17,297
Equity lines of credit		51,481		57,649
Total mortgage loans on real estate		519,943		532,824
Commercial and industrial loans		69,712		63,398
Consumer automobile loans		101,192		120,796
Other consumer loans		40,429		48,342
Other		9,534		8,649
Total loans, net of deferred fees		740,810		774,009
Less: Allowance for loan losses		10,612		10,111
Loans, net of allowance and deferred fees ⁽¹⁾	$	730,198	$	763,898

(1)

Net deferred loan fees totaled $630 thousand and $864 thousand at September 30, 2019 and December 31, 2018, respectively.

Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts, excluding internal use accounts, totaled $515 thousand and $628 thousand at September 30, 2019 and December 31, 2018, respectively.

Acquired Loans

The outstanding principal balance and the carrying amount of total acquired loans included in the consolidated balance sheet as of September 30, 2019 and December 31, 2018 are as follows:

(dollars in thousands)	September 30, 2019		December 31, 2018
Outstanding principal balance	$	25,188	$	31,940
Carrying amount		24,854		31,497

The outstanding principal balance and related carrying amount of purchased credit-impaired loans, for which the Company applies FASB ASC 310-30 to account for interest earned, as of September 30, 2019 and December 31, 2018 are as follows:

(dollars in thousands)	September 30, 2019		December 31, 2018
Outstanding principal balance	$	232	$	246
Carrying amount		83		91

The following table presents changes in the accretable yield on purchased credit-impaired loans, for which the Company applies FASB ASC 310-30, at September 30, 2019:

(dollars in thousands)	September 30, 2019
Balance at January 1, 2019	$	12
Accretion		5
Balance at end of period		17

Index

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 identified for charge-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:

Credit Quality Information As of September 30, 2019
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	112,117	$	-	$	1,517	$	-	$	113,634
Commercial - owner occupied		126,810		3,133		8,006		-		137,949
Commercial - non-owner occupied		131,173		2,543		1,353		-		135,069
Multifamily		26,556		-		-		-		26,556
Construction		40,196		-		-		-		40,196
Second mortgages		14,954		-		104		-		15,058
Equity lines of credit		51,481		-		-		-		51,481
Total mortgage loans on real estate	$	503,287	$	5,676	$	10,980	$	-	$	519,943
Commercial and industrial loans		69,221		75		416		-		69,712
Consumer automobile loans		100,497		-		695		-		101,192
Other consumer loans		40,388		-		41		-		40,429
Other		9,534		-		-		-		9,534
Total	$	722,927	$	5,751	$	12,132	$	-	$	740,810

Credit Quality Information As of December 31, 2018
(dollars in thousands)	Pass		OAEM		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	108,274	$	-	$	1,735	$	-	$	110,009
Commercial - owner occupied		140,664		4,067		10,514		-		155,245
Commercial - non-owner occupied		121,523		3,937		5,827		-		131,287
Multifamily		28,954		-		-		-		28,954
Construction		31,896		71		416		-		32,383
Second mortgages		17,007		-		290		-		17,297
Equity lines of credit		56,893		-		756		-		57,649
Total mortgage loans on real estate	$	505,211	$	8,075	$	19,538	$	-	$	532,824
Commercial and industrial loans		60,967		1,987		444		-		63,398
Consumer automobile loans		120,365		-		431		-		120,796
Other consumer loans		48,298		-		44		-		48,342
Other		8,649		-		-		-		8,649
Total	$	743,490	$	10,062	$	20,457	$	-	$	774,009

Index

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.

Age Analysis of Past Due Loans as of September 30, 2019
(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		PCI		Nonaccrual ⁽¹⁾		Total Current Loans⁽²⁾		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	189	$	-	$	-	$	-	$	1,269	$	112,176	$	113,634
Commercial - owner occupied		-		-		-		83		4,856		133,010		137,949
Commercial - non-owner occupied		-		-		-		-		1,353		133,716		135,069
Multifamily		-		-		-		-		-		26,556		26,556
Construction		-		-		-		-		-		40,196		40,196
Second mortgages		-		-		-		-		104		14,954		15,058
Equity lines of credit		65		-		-		-		-		51,416		51,481
Total mortgage loans on real estate	$	254	$	-	$	-	$	83	$	7,582	$	512,024	$	519,943
Commercial and industrial loans		4		-		-		-		416		69,292		69,712
Consumer automobile loans		1,115		165		172		-		-		99,740		101,192
Other consumer loans		728		512		905		-		-		38,284		40,429
Other		57		6		19		-		-		9,452		9,534
Total	$	2,158	$	683	$	1,096	$	83	$	7,998	$	728,792	$	740,810

⁽¹⁾	Includes past due loans in non-accrual status of $3.5 million.

⁽²⁾	For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

In the table above, the past due totals 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 $1.8 million at September 30, 2019.

Age Analysis of Past Due Loans as of December 31, 2018
(dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due and still Accruing		PCI		Nonaccrual ⁽¹⁾		Total Current Loans⁽²⁾		Total Loans
Mortgage loans on real estate:
Residential 1-4 family	$	1,165	$	553	$	180	$	-	$	1,386	$	106,725	$	110,009
Commercial - owner occupied		1,059		83		-		91		5,283		148,729		155,245
Commercial - non-owner occupied		-		-		-		-		4,371		126,916		131,287
Multifamily		-		-		-		-		-		28,954		28,954
Construction		-		-		205		-		417		31,761		32,383
Second mortgages		17		-		135		-		155		16,990		17,297
Equity lines of credit		60		-		-		-		231		57,358		57,649
Total mortgage loans on real estate	$	2,301	$	636	$	520	$	91	$	11,843	$	517,433	$	532,824
Commercial and industrial loans		1,595		-		-		-		298		61,505		63,398
Consumer automobile loans		1,645		291		114		-		-		118,746		120,796
Other consumer loans		1,333		621		1,851		-		-		44,537		48,342
Other		133		8		12		-		-		8,496		8,649
Total	$	7,007	$	1,556	$	2,497	$	91	$	12,141	$	750,717	$	774,009

⁽¹⁾	Includes past due loans in non-accrual status of $3.8 million.

⁽²⁾	For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

Index

In the table above, the other consumer loans category includes student and small business loans with principal and interest amounts that are 97 - 100% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.0 million at December 31, 2018.

Although the portions of the student and small business loan portfolios that are 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because 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 of September 30, 2019, management does not expect significant increases in delinquencies of these loans to have a material effect on the Company.

NONACCRUAL LOANS

The Company generally places commercial and industrial 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.

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 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:

(dollars in thousands)	September 30, 2019		December 31, 2018
Mortgage loans on real estate:
Residential 1-4 family	$	1,269	$	1,386
Commercial - owner occupied		4,856		5,283
Commercial - non-owner occupied		1,353		4,371
Construction		-		417
Second mortgages		104		155
Equity lines of credit		-		231
Total mortgage loans on real estate	$	7,582	$	11,843
Commercial and industrial loans		416		298
Total	$	7,998	$	12,141

No purchased credit-impaired loans were on nonaccrual status at September 30, 2019.

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:

	Nine Months Ended September 30,
(dollars in thousand)	2019		2018
Interest income that would have been recorded under original loan terms	$	198	$	388
Actual interest income recorded for the period		101		249
Reduction in interest income on nonaccrual loans	$	97	$	139

Index

TROUBLED DEBT RESTRUCTURINGS

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), 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 stated in the impaired loan section below.

There were three TDRs in the nine months ended September 30, 2019 and no TDRs in the nine months ended September 30, 2018.

At September 30, 2019 and December 31, 2018, the Company had no outstanding commitments to disburse additional funds on any TDR. The Company had no loans secured by residential 1 - 4 family real estate in the process of foreclosure at September 30, 2019 or December 31, 2018.

In the three and nine months ended September 30, 2019 and 2018, 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 all amounts when due from the borrower in accordance with the contractual terms of the loan. 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 a specific allocation in the allowance 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.

The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans, exclusive of purchased credit-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.

Index

Impaired Loans by Class

	As of September 30, 2019								For the nine months ended September 30, 2019
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	1,522	$	1,330	$	89	$	44	$	1,427	$	5
Commercial		10,065		4,918		4,236		714		9,222		114
Construction		89		-		89		15		90		3
Second mortgages		247		-		247		101		248		4
Equity lines of credit		-		-		-		-		-		-
Total mortgage loans on real estate		11,923		6,248		4,661		874		10,987		126
Commercial and industrial loans		516		430		-		-		439		5
Other consumer loans		22		22		-		-		23		1
Total	$	12,461	$	6,700	$	4,661	$	874	$	11,449	$	132

Impaired Loans by Class

	As of December 31, 2018								For the Year Ended December 31, 2018
(Dollars in thousands)	Unpaid Principal Balance		Without Valuation Allowance		With Valuation Allowance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Mortgage loans on real estate:
Residential 1-4 family	$	2,057	$	1,686	$	239	$	51	$	2,073	$	66
Commercial		15,254		12,721		-		-		14,232		455
Construction		509		417		92		18		665		7
Second mortgages		496		347		148		33		508		15
Equity lines of credit		232		-		232		3		301		1
Total mortgage loans on real estate		18,548		15,171		711		105		17,779		544
Commercial and industrial loans		384		78		220		11		446		5
Other consumer loans		38		-		-		-		43		-
Total	$	18,970	$	15,249	$	931	$	116	$	18,268	$	549

ALLOWANCE FOR LOAN LOSSES

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and probable losses inherent in the loan portfolio. The Company segments the loan portfolio into categories as defined by Schedule RC-C of the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report). Loans are segmented into the following pools: commercial, real estate-construction, real estate-mortgage, consumer and other loans. The Company also sub-segments the real estate-mortgage segment into six classes: residential 1-4 family, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multifamily, second mortgages and equity lines of credit.

The Company uses an internally developed risk evaluation model in the estimation of the credit risk process. The model and assumptions used to determine the allowance are independently validated and reviewed to ensure that the theoretical foundation, assumptions, data integrity, computational processes and reporting practices are appropriate and properly documented.

Each portfolio segment has risk characteristics as follows:

•

Commercial and industrial: Commercial and industrial 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.

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. Consumer 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 September 30, 2019 and December 31, 2018 management used eight twelve-quarter migration periods.

Management also provides an allocated component of the allowance for loans that are specifically identified that may be impaired, and are individually analyzed for impairment. An allocated allowance is established when the present 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.

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.

Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired or purchased performing.

Purchased credit-impaired loans reflect credit quality deterioration since origination, as it is probable at acquisition that the Company will not be able to collect all contractually required payments. These purchased credit-impaired loans are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. The purchased credit-impaired loans are segregated into pools based on loan type and credit risk. Loan type is determined based on collateral type, purpose, and lien position. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure. Purchased credit-impaired loans are written down at acquisition to fair value using an estimate of cash flows deemed to be collectible. Accordingly, such loans are no longer classified as nonaccrual even though they may be contractually past due because the Company expects to fully collect the new carrying values of such loans, which is the new cost basis arising from purchase accounting.

ALLOWANCE FOR LOAN LOSSES BY SEGMENT

The total allowance reflects management’s estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $10.6 million adequate to cover probable loan losses inherent in the loan portfolio at September 30, 2019.

Index

The following tables present, 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
For the nine months ended September 30, 2019
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction		Real Estate - Mortgage ⁽¹⁾			Consumer ⁽²⁾			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	2,340		$	156	$	5,956		$	1,354		$	305		$	-	$	10,111
Charge-offs		-			-		(166	)		(512	)		(327	)		-		(1,005	)
Recoveries		8			-		190			244			51			-		493
Provision for loan losses		(1,022	)		99		337			677			697			225		1,013
Ending Balance	$	1,326		$	255	$	6,317		$	1,763		$	726		$	225	$	10,612

Individually evaluated for impairment	$	-		$	15	$	859		$	-		$	-		$	-	$	874
Collectively evaluated for impairment		1,326			240		5,458			1,763			726			225		9,738
Purchased credit-impaired loans		-			-		-			-			-					-
Ending Balance	$	1,326		$	255	$	6,317		$	1,763		$	726		$	225	$	10,612

Loans Balances:
Individually evaluated for impairment		430			89		10,820			22			-			-		11,361
Collectively evaluated for impairment		69,199			40,107		468,927			141,599			9,534			-		729,366
Purchased credit-impaired loans		83			-		-			-			-					83
Ending Balance	$	69,712		$	40,196	$	479,747		$	141,621		$	9,534		$	-	$	740,810

For the Year ended December 31, 2018
(Dollars in thousands)	Commercial and Industrial			Real Estate Construction			Real Estate - Mortgage ⁽¹⁾			Consumer ⁽²⁾			Other			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	1,889		$	541		$	5,217		$	1,644		$	157		$	-	$	9,448
Charge-offs		(81	)		-			(1,625	)		(769	)		(367	)		-		(2,842	)
Recoveries		140			-			158			262			84			-		644
Provision for loan losses		392			(385	)		2,206			217			431			-		2,861
Ending Balance	$	2,340		$	156		$	5,956		$	1,354		$	305		$	-	$	10,111

Individually evaluated for impairment	$	11		$	18		$	87		$	-		$	-		$	-	$	116
Collectively evaluated for impairment		2,329			138			5,869			1,354			305			-		9,995
Purchased credit-impaired loans		-			-			-			-			-					-
Ending Balance	$	2,340		$	156		$	5,956		$	1,354		$	305		$	-	$	10,111

Loans Balances:
Individually evaluated for impairment		298			509			15,373			-			-			-		16,180
Collectively evaluated for impairment		63,009			31,874			485,068			169,138			8,649			-		757,738
Purchased credit-impaired loans		91			-			-			-			-					91
Ending Balance	$	63,398		$	32,383		$	500,441		$	169,138		$	8,649		$	-	$	774,009

⁽¹⁾	The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.

⁽²⁾	The consumer segment includes consumer automobile loans.

Index

Note 5. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transition method provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2018 Form 10-K, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $751 thousand at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the consolidated balance sheets.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases:

(Dollars in thousands)	September 30, 2019
Lease liabilities	$	550
Right-of-use assets	$	546
Weighted average remaining lease term	2.23 years
Weighted average discount rate		2.77	%

Lease cost (in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	82	$	253
Total lease cost	$	82	$	253

Cash paid for amounts included in the measurement of lease liabilities	$	81	$	250

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

Lease payments due (in thousands)	As of September 30, 2019
Three months ending December 31, 2019	$	82
Twelve months ending December 31, 2020		291
Twelve months ending December 31, 2021		111
Twelve months ending December 31, 2022		83
Total undiscounted cash flows	$	567
Discount		(17	)
Lease liabilities	$	550

Note 6. Low-Income Housing Tax Credits

The Company was invested in 4 separate housing equity funds at both September 30, 2019 and December 31, 2018. 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 $3.0 million and $3.2 million at September 30, 2019 and December 31, 2018, respectively. The expected terms of these investments and the related tax benefits run through 2033. Total projected tax credits to be received for 2019 are $441 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $50 thousand at September 30, 2019 and $248 thousand at December 31, 2018, respectively, and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.

Index

	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item on
	2019		2018		2019		2018		Consolidated Income Statement
Tax credits and other benefits
Amortization of operating losses	$	46	$	80	$	171	$	240	ATM and other losses
Tax benefit of operating losses*		10		16		36		50	Income tax expense (benefit)
Tax credits		106		137		335		384	Income tax expense (benefit)
Total tax benefits	$	116	$	153	$	371	$	434

*	Computed using a 21% tax rate.

Note 7. Borrowings

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 September 30, 2019 and December 31, 2018, the remaining credit available from these lines totaled $55.0 million. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $260.0 million and $245.9 as of September 30, 2019 and December 31, 2018, respectively.

SHORT-TERM BORROWINGS

The following table presents total short-term borrowings as of the dates indicated:

(dollar in thousands)	September 30, 2019			December 31, 2018
Overnight repurchase agreements	$	23,732		$	25,775
Federal Home Loan Bank advances		-			13,000
Total short-term borrowings	$	23,732		$	38,775

Maximum month-end outstanding balance	$	38,138		$	99,898
Average outstanding balance during the period	$	30,993		$	62,887
Average interest rate (year-to-date)		0.83	%		1.11	%
Average interest rate at end of period		0.10	%		0.93	%

LONG-TERM BORROWINGS

The Company had long-term FHLB advances totaling $47.0 million outstanding at September 30, 2019 and $47.0 million outstanding at December 31, 2018. Scheduled maturity dates of the advances at September 30, 2019 range from November 15, 2019 to August 27, 2021, and the interest rates range from 1.90% to 2.92%.

The Company also obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms of the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At September 30, 2019 the outstanding balance was $2.1 million as compared to $2.6 million at December 31, 2018, and the then-current interest rate was 4.52%.

The loan agreement with the lender contains financial covenants including minimum return on average asset ratio and Bank capital leverage ratio, maintenance of a well-capitalized position as defined by regulatory guidance and a maximum level of non-performing assets as a percentage of capital plus the allowance for loan losses. The Company was in compliance with each covenant at September 30, 2019.

Note 8. 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.

Index

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 September 30, 2019 and December 31, 2018:

(dollars in thousands)	September 30, 2019		December 31, 2018
Commitments to extend credit:
Home equity lines of credit	$	63,095	$	61,014
Commercial real estate, construction and development loans committed but not funded		18,982		12,165
Other lines of credit (principally commercial)		74,979		74,058
Total	$	157,056	$	147,237

Letters of credit	$	7,756	$	8,230

Note 9. 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 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. As of September 30, 2019 only restricted stock has been granted under the Incentive Stock Plan.

Restricted stock activity for the nine months ended September 30, 2019 is summarized below:

	Shares			Weighted Average Grant Date Fair Value
Nonvested, January 1, 2019		13,689		$	27.51
Issued		16,661			21.68
Vested		(5,839	)		27.97
Forfeited		(4,578	)		26.63
Nonvested, September 30, 2019		19,933		$	22.70

The weighted average period over which nonvested awards are expected to be recognized is 1.64 years.

The fair value of restricted stock granted during the nine months ended September 30, 2019 was $361 thousand.

The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $286 thousand as of September 30, 2019.

Stock-based compensation expense was $22 thousand and $50 thousand for the three months ended September 30, 2019 and 2018, and $161 thousand and $103 thousand for the nine months ended September 30, 2019 and 2018, respectively.

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 was set at 5% for 2018 and for the first nine months of 2019.

2,797 shares were purchased under the ESPP during the nine months ended September 30, 2019. At September 30, 2019, the Company had 239,139 remaining shares reserved for issuance under the ESPP.

Index

Note 10. Stockholders’ Equity and Earnings per Share

STOCKHOLDERS’ EQUITY – Accumulated 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:

	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item on
(dollars in thousands)	2019		2018		2019		2018		Consolidated Statement of Income
Available-for-sale securities
Realized gains on sales of securities	$	286	$	-	$	312	$	120	Gain on sale of available-for-sale securities, net
Tax effect		61		-		66		25	Income tax expense
	$	225	$	-	$	246	$	95

The following tables present the changes in accumulated other comprehensive income (loss), by category, net of tax, for the periods indicated:

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive Income (Loss)

Three Months Ended September 30, 2019
Balance at beginning of period	$	679		$	679
Net other comprehensive loss		(13	)		(13	)
Balance at end of period	$	666		$	666

Three Months Ended September 30, 2018
Balance at beginning of period	$	(2,889	)	$	(2,889	)
Net other cmprehensive loss		(803	)		(803	)
Balance at end of period	$	(3,692	)	$	(3,692	)

(dollars in thousands)	Unrealized Gains (Losses) on Available-for-Sale Securities			Accumulated Other Comprehensive Income (Loss)

Nine Months Ended September 30, 2019
Balance at beginning of period	$	(2,156	)	$	(2,156	)
Net other comprehensive income		2,822			2,822
Balance at end of period	$	666		$	666

Nine Months Ended September 30, 2018
Balance at beginning of period	$	(707	)	$	(707	)
Net other comprehensive loss		(2,769	)		(2,769	)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI		(139	)		(139	)
Reclassification of net unrealized gains on equity securities from AOCI per ASU 2016-01		(77	)		(77	)
Balance at end of period	$	(3,692	)	$	(3,692	)

Index

The following tables present the change in each component of accumulated other comprehensive income (loss) on a pre-tax and after-tax basis for the periods indicated.

	Three Months Ended September 30, 2019
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding gains arising during the period	$	270		$	58		$	212
Reclassification adjustment for gains recognized in income		(286	)		(61	)		(225	)

Total change in accumulated other comprehensive income, net	$	(16	)	$	(3	)	$	(13	)

	Three Months Ended September 30, 2018
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(1,017	)	$	(214	)	$	(803	)

Total change in accumulated other comprehensive loss, net	$	(1,017	)	$	(214	)	$	(803	)

	Nine Months Ended September 30, 2019
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period	$	3,884		$	816		$	3,068
Reclassification adjustment for gains recognized in income		(312	)		(66	)		(246	)

Total change in accumulated other comprehensive income, net	$	3,572		$	750		$	2,822

	Nine Months Ended September 30, 2018
(dollars in thousands)	Pretax			Tax			Net-of-Tax
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period	$	(3,385	)	$	(711	)	$	(2,674	)
Reclassification adjustment for gains recognized in income		(120	)		(25	)		(95	)

Total change in accumulated other comprehensive loss, net	$	(3,505	)	$	(736	)	$	(2,769	)

Index

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 the employee stock purchase plan.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2019 and 2018:

(dollars in thousands except per share data)	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
Three Months Ended September 30, 2019
Net income, basic	$	2,232		5,199	$	0.43
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	2,232		5,199	$	0.43

Three Months Ended September 30, 2018
Net income, basic	$	1,597		5,182	$	0.31
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	1,597		5,182	$	0.31

Nine Months Ended September 30, 2019
Net income, basic	$	5,885		5,196	$	1.13
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	5,885		5,196	$	1.13

Nine Months Ended September 30, 2018
Net income, basic	$	3,531		5,127	$	0.69
Potentially dilutive common shares - employee stock purchase program		-		-		-
Diluted	$	3,531		5,127	$	0.69

The Company had no antidilutive shares outstanding in the nine months ended September 30, 2019 and 2018, respectively. Nonvested 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.

Note 11. Fair Value Measurements

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, FASB ASU 2011-04, and FASB ASU 2016-01, 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 (an exit price) in the principal or most advantageous market for the asset or 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 the principal or most advantageous market 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 sources. The first source is the Company’s bond accounting service provider, which uses a model to determine 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. The second source is a third party vendor the Company utilizes to provide fair value exit pricing for loans and interest bearing deposits in accordance with guidance.

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 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.

The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:

			Fair Value Measurements at September 30, 2019 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	9,987	$	-	$	9,987	$	-
Obligations of U.S. Government agencies		28,277		-		28,277		-
Obligations of state and political subdivisions		25,007		-		25,007		-
Mortgage-backed securities		75,765		-		75,765		-
Money market investments		3,821		-		3,821		-
Corporate bonds and other securities		3,629		-		3,629		-
Total available-for-sale securities	$	146,486	$	-	$	146,486	$	-

Index

			Fair Value Measurements at December 31, 2018 Using
(dollars in thousands)	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	12,328	$	-	$	12,328	$	-
Obligations of U.S. Government agencies		10,714		-		10,714		-
Obligations of state and political subdivisions		48,837		-		48,837		-
Mortgage-backed securities		71,191		-		71,191		-
Money market investments		1,897		-		1,897		-
Corporate bonds and other securities		3,280		-		3,280		-
Total available-for-sale securities	$	148,247	$	-	$	148,247	$	-

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 all amounts when due from the borrower in accordance with 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.

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 Income.

Other Real Estate Owned (OREO)

Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of gain or loss associated with OREO 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 OREO below the original book value are recorded in the period incurred and expensed against current earnings.

Index

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 reported on a separate line item on the Company’s Consolidated Statements of Income.

The following table presents the assets carried in 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 rather than at a market rate. These loans are not carried in the consolidated balance sheets at fair value and, as such, are not included in the tables below.

			Carrying Value at September 30, 2019
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Mortgage loans on real estate:
Residential 1-4 family	$	80	$	-	$	-	$	80
Commercial		2,009		-		-		2,009
Construction		74		-		-		74
Total mortgage loans on real estate	$	2,163	$	-	$	-	$	2,163
Commercial loans		-		-		-		-
Total	$	2,163	$	-	$	-	$	2,163

Loans
Loans held for sale	$	1,578	$	-	$	1,578	$	-

			Carrying Value at December 31, 2018 Using
(dollars in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans
Mortgage loans on real estate:
Residential 1-4 family	$	188	$	-	$	-	$	188
Construction		74		-		-		74
Equity lines of credit		229		-		-		229
Total mortgage loans on real estate		491		-		-		491
Total	$	491	$	-	$	-	$	491

Loans
Loans held for sale	$	479	$	-	$	479	$	-

Other real estate owned
Construction	$	83	$	-	$	-	$	83
Total	$	83	$	-	$	-	$	83

Index

The following tables display quantitative information about Level 3 Fair Value Measurements as of the dates indicated:

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at September 30, 2019		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Residential 1-4 family real estate	$	80	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%
Commercial real estate	$	2,009	Market comparables	Selling costs		6.00	%
				Liquidation discount		35.00	%
Construction	$	74	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%

			Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at December 31, 2018		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans
Residential 1-4 family real estate	$	188	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%
Construction	$	74	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%
Equity lines of credit	$	229	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%

Other real estate owned
Construction	$	83	Market comparables	Selling costs		7.25	%
				Liquidation discount		4.00	%

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 September 30, 2019 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	91,207	$	91,207	$	-	$	-
Securities available-for-sale		146,486		-		146,486		-
Restricted securities		3,351		-		3,351		-
Loans held for sale		1,578		-		1,578		-
Loans, net of allowances for loan losses		730,198		-		-		723,532
Bank owned life insurance		27,355		-		27,355		-
Accrued interest receivable		2,701		-		2,701		-

Liabilities
Deposits	$	864,570	$	-	$	868,303	$	-
Overnight repurchase agreements		23,732		-		23,732		-
Federal Home Loan Bank advances		47,000		-		50,347		-
Other borrowings		2,100		-		2,250		-
Accrued interest payable		661		-		661		-

			Fair Value Measurements at December 31, 2018 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	42,217	$	42,217	$	-	$	-
Securities available-for-sale		148,247		-		148,247		-
Restricted securities		3,853		-		3,853		-
Loans held for sale		479		-		479		-
Loans, net of allowances for loan losses		763,898		-		-		749,848
Bank owned life insurance		26,763		-		26,763		-
Accrued interest receivable		3,095		-		3,095		-

Liabilities
Deposits	$	843,144	$	-	$	843,818	$	-
Overnight repurchase agreements		25,775		-		25,775		-
Federal Home Loan Bank advances		60,000		-		59,975		-
Other borrowings		2,550		-		2,550		-
Accrued interest payable		594		-		594		-

Note 12. Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: The Old Point National Bank of Phoebus (the Bank), Old Point Trust & Financial Services, N. A. (Trust), and the Company as a separate segment (for purposes of this Note, 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 activities. The Parent’s revenues are mainly fees 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.

Index

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 follows:

	Three Months Ended September 30, 2019
(dollars in thousands)	Bank		Trust		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	10,177	$	32	$	2,371		$	(2,372	)	$	10,208
Income from fiduciary activities		-		949		-			-			949
Other income		2,573		229		51			(65	)		2,788
Total operating income		12,750		1,210		2,422			(2,437	)		13,945

Expenses
Interest expense		1,629		-		27			-			1,656
Provision for loan losses		-		-		-			-			-
Salaries and employee benefits		5,099		777		115			-			5,991
Other expenses		3,432		253		85			(65	)		3,705
Total operating expenses		10,160		1,030		227			(65	)		11,352

Income before taxes		2,590		180		2,195			(2,372	)		2,593

Income tax expense (benefit)		359		39		(37	)		-			361

Net income	$	2,231	$	141	$	2,232		$	(2,372	)	$	2,232

Capital expenditures	$	614	$	2	$	-		$	-		$	616

Total assets	$	1,044,249	$	6,531	$	111,188		$	(111,373	)	$	1,050,595

	Three Months Ended September 30, 2018
(dollars in thousands)	Bank		Trust			Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	9,777	$	26		$	1,766		$	(1,766	)	$	9,803
Income from fiduciary activities		-		904			-			-			904
Other income		2,269		227			50			(66	)		2,480
Total operating income		12,046		1,157			1,816			(1,832	)		13,187

Expenses
Interest expense		1,266		-			33			-			1,299
Provision for loan losses		749		-			-			-			749
Salaries and employee benefits		4,753		748			107			-			5,608
Other expenses		3,485		287			112			(65	)		3,819
Total operating expenses		10,253		1,035			252			(65	)		11,475

Income before taxes		1,793		122			1,564			(1,767	)		1,712

Income tax expense (benefit)		122		26			(33	)		-			115

Net income	$	1,671	$	96		$	1,597		$	(1,767	)	$	1,597

Capital expenditures	$	123	$	(1	)	$	-		$	-		$	122

Total assets	$	1,019,780	$	6,084		$	102,459		$	(102,883	)	$	1,025,440

Index

	Nine Months Ended September 30, 2019
(dollars in thousands)	Bank		Trust		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	30,124	$	94	$	6,326		$	(6,327	)	$	30,217
Income from fiduciary activities		-		2,837		-			-			2,837
Other income		7,114		820		151			(196	)		7,889
Total operating income		37,238		3,751		6,477			(6,523	)		40,943

Expenses
Interest expense		4,686		-		89			-			4,775
Provision for loan losses		1,013		-		-			-			1,013
Salaries and employee benefits		14,972		2,300		345			-			17,617
Other expenses		10,039		760		275			(196	)		10,878
Total operating expenses		30,710		3,060		709			(196	)		34,283

Income before taxes		6,528		691		5,768			(6,327	)		6,660

Income tax expense (benefit)		744		148		(117	)		-			775

Net income	$	5,784	$	543	$	5,885		$	(6,327	)	$	5,885

Capital expenditures	$	1,269	$	26	$	-		$	-		$	1,295

Total assets	$	1,044,249	$	6,531	$	111,188		$	(111,373	)	$	1,050,595

	Nine Months Ended September 30, 2018
(dollars in thousands)	Bank		Trust		Parent			Eliminations			Consolidated
Revenues
Interest and dividend income	$	28,118	$	69	$	4,578		$	(4,576	)	$	28,189
Income from fiduciary activities		-		2,803		-			-			2,803
Other income		6,422		748		180			(196	)		7,154
Total operating income		34,540		3,620		4,758			(4,772	)		38,146

Expenses
Interest expense		3,455		-		66			-			3,521
Provision for loan losses		1,849		-		-			-			1,849
Salaries and employee benefits		14,455		2,242		323			-			17,020
Other expenses		10,470		822		945			(196	)		12,041
Total operating expenses		30,229		3,064		1,334			(196	)		34,431

Income before taxes		4,311		556		3,424			(4,576	)		3,715

Income tax expense (benefit)		173		118		(107	)		-			184

Net income	$	4,138	$	438	$	3,531		$	(4,576	)	$	3,531

Capital expenditures	$	439	$	-	$	-		$	-		$	439

Total assets	$	1,019,780	$	6,084	$	102,459		$	(102,883	)	$	1,025,440

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 2018 Annual Report on Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.

Index

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s 2018 Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2018. Highlighted in the discussion are material changes from prior reporting periods and certain identifiable trends affecting the Company. Results of operations for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

Caution About Forward-Looking Statements

In addition to historical information, certain statements in this report which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may identify 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 are based on the beliefs of the Company’s management, as well as estimates and assumptions made by, and information currently available to, management. These statements are inherently uncertain, and there can be no assurance that the underlying estimates, assumptions or beliefs will prove to be accurate. Actual results could differ materially from historical results or those anticipated by such statements. Forward-looking statements in this report may include, without limitation: statements regarding future financial performance and profitability; the acquisition of Citizens and the performance of the purchased loan portfolio; performance of the investment and loan portfolios, including performance of the purchased student loan portfolio and expected trends in the quality of the loan portfolio; the effects of diversifying the loan portfolio; strategic business and growth initiatives; management’s efforts to reposition the balance sheet; deposit growth; levels and sources of liquidity; the securities portfolio; use of proceeds from the sale of securities; future levels of charge-offs or net recoveries; the impact of changes in NPAs on future earnings; write-downs and expected sales of other real estate owned; income taxes; monetary policy actions of the Federal Open Market Committee; and changes in interest rates.

Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in: interest rates and yields; general economic and business conditions, including unemployment levels; demand for loan products; future levels of government defense spending particularly in the Company’s service area; uncertainty over future federal spending or budget priorities of the current administration, particularly in connection with the Department of Defense, on the Company’s service area; the performance of the Company’s dealer lending program; the legislative/regulatory climate; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board and any changes associated with the current administration; the quality or composition of the loan or securities portfolios; changes in 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 U.S. government’s guarantee of repayment of student or small business loans purchased by the Company; the level of net charge-offs on loans; deposit flows; competition; demand for financial services in the Company’s market area; implementation of new technologies; the Company’s ability to develop and maintain secure and reliable electronic systems; 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; the use of inaccurate assumptions in management’s modeling systems; technological risks and developments and cyber-attacks, threats and events; the real estate market; accounting principles, policies and guidelines; and other factors detailed in the Company’s publicly filed documents, including the Company’s 2018 Annual Report on Form 10-K. 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, which speak only as of date of the report.

These risks and uncertainties, in addition to the risks and uncertainties identified in the Company’s 2018 Annual Report on Form 10-K, should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results. We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.

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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-Q or other SEC filings. The information available on the Company’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.

About Old Point Financial Corporation

The Company is the parent company of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County. The Bank currently has 19 branch offices. Trust is a wealth management services provider.

On April 1, 2018, the Company acquired Citizens National Bank (Citizens). Under the terms of the merger agreement, Citizens stockholders received 0.1041 shares of Company stock and $2.19 in cash for each share of Citizens stock. Systems integration was completed in May 2018.

Critical Accounting Policies and Estimates

The accounting and reporting policies of the Company are in accordance with U.S. 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 Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.

The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, acquired loans, and goodwill and intangible assets. Accordingly, the Company’s significant accounting policies are discussed in Note 4 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company’s 2018 Annual Report on Form 10-K.

Executive Overview

The Company’s net income for the quarter ended September 30, 2019 was $2.2 million, or $0.43 per diluted share, which compares to net income of $1.6 million, or $0.31 per diluted share, for the third quarter of 2018. This increase was principally attributable to the increased noninterest income, a slight increase in net interest income, as well as a reduction in provison for loan loss expense, offset slightly by an increase in noninterest expense in the quarter ended September 30, 2019.

For the nine months ended September 30, 2019 net income was $5.9 million, or $1.13 per diluted share. This compares to net income of $3.5 million, or $0.69 per diluted share, for the first nine months of 2018. This increase was also driven by having no merger expenses or losses on other real estate owned for the first nine months of 2019, which totaled $644 thousand and $86 thousand, respectively, for the first nine months of 2018. The increase in net income for the first nine months of 2019 was also driven by a reduction in the provison for loan loss expense of $836 thousand, as well as increased net interest income and noninterest income in the first nine months of 2019 as compared to the first nine months of 2018.

Highlights are as follows:

•

Net interest income held steady at $8.6 million for the third and second quarters of 2019 as well as the third quarter of 2018. Net interest income year to date 2019 was $25.4 million, increasing $774 thousand or 3.1%, over the comparative 2018 period of $24.7 million.

•

Annualized return on average assets for the third quarter of 2019 was 0.85% compared to 0.61% for the third quarter of 2018. Annualized return on average assets for the nine months ended September 30, 2019 was 0.76% compared to 0.47% for the first nine months of 2018.

•

The net interest margin (on a fully tax-equivalent basis) for the third quarter of 2019 compressed to 3.58% from 3.64% for the same period of 2018. The net interest margin for the nine months ended September 30, 2019 was 3.65% which compares to 3.61% for the first nine months of 2018.

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•

Non-performing assets totaled $9.1 million as of September 30, 2019, down from $17.5 million at September 30, 2018. Non-performing assets as a percentage of total assets improved to 0.87% at September 30, 2019 which compared to 1.42% at December 31, 2018.

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.

For the third quarter of 2019, net interest income was $8.6 million, an increase of $48 thousand or 0.6% from the third quarter of 2018. Net interest income, on a fully tax-equivalent basis, for the third quarters of 2019 and 2018 was $8.6 million. Higher average earning asset balances and higher yields on earning assets were partially offset by higher funding costs. Average earning assets for the third quarter of 2019 increased $14.7 million, or 1.6%, compared to the third quarter of 2018. The average tax-equivalent yield on earning assets for the third quarter of 2019 increased by 8 basis points compared to the same period of 2018. The average rate on interest-bearing liabilities for the quarter ended September 30, 2019 was 0.96%, up from 0.75% for the same period of 2018. Higher deposit and borrowing rates are responsible for this increase. The tax-equivalent net interest margin for the third quarter of 2019 was 3.58%, down from 3.64% in the third quarter of 2018.

For the nine months ended September 30, 2019, net interest income was $25.4 million, an increase of $774 thousand or 3.1% compared to the prior year period. Net interest income, on a fully tax-equivalent basis, was $25.7 million for the nine months ended September 30, 2019, compared to $25.0 million for the nine months ended September 30, 2018, an increase of 2.7%. The increases were driven principally by increased earning asset yields as well as higher average earning asset balances relative to the first nine months of 2018. This was partially offset by a higher cost of funds. Average earning assets for the nine months ended September 30, 2019 increased $15.4 million, or 1.7%, compared to the first nine months of 2018. The average tax-equivalent yield increased to 4.32% compared to 4.12% for the first nine months of 2018. Higher rates on deposits and borrowings lead to an increase of 25 basis points in the average rate on interest-bearing liabilities when comparing the first nine months of 2019 to 2018. The tax-equivalent net interest margin for the first nine months of 2019 was 3.65% which compares to 3.61% for the same period of 2018.

The following tables show analyses of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.

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AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

	For the quarter ended September 30,
	2019								2018
(dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate**			Average Balance			Interest Income/ Expense		Yield/ Rate**
ASSETS
Loans*	$	750,908		$	8,986		4.75	%	$	777,179		$	8,880		4.53	%
Investment securities:
Taxable		126,055			770		2.42	%		94,674			510		2.14	%
Tax-exempt*		21,117			185		3.48	%		47,458			368		3.08	%
Total investment securities		147,172			955		2.57	%		142,132			878		2.45	%
Interest-bearing due from banks		48,997			257		2.08	%		13,389			68		2.01	%
Federal funds sold		1,688			10		2.12	%		950			5		2.09	%
Other investments		3,433			53		6.13	%		3,869			75		7.69	%
Total earning assets		952,198		$	10,261		4.27	%		937,519		$	9,906		4.19	%
Allowance for loan losses		(10,951	)							(10,184	)
Other non-earning assets		104,939								103,231
Total assets	$	1,046,186							$	1,030,566

LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	33,320		$	3		0.04	%	$	28,001		$	2		0.03	%
Money market deposit accounts		257,627			266		0.41	%		243,556			140		0.23	%
Savings accounts		86,133			22		0.10	%		88,345			22		0.10	%
Time deposits		234,841			1,012		1.71	%		235,443			774		1.30	%
Total time and savings deposits		611,921			1,303		0.84	%		595,345			938		0.63	%
Federal funds purchased, repurchase agreements and other borrowings		22,114			32		0.57	%		32,800			41		0.50	%
Federal Home Loan Bank advances		48,924			321		2.61	%		60,000			320		2.12	%
Total interest-bearing liabilities		682,959			1,656		0.96	%		688,145			1,299		0.75	%
Demand deposits		250,634								238,592
Other liabilities		3,647								3,382
Stockholders’ equity		108,946								100,447
Total liabilities and stockholders’ equity	$	1,046,186							$	1,030,566
Net interest margin				$	8,605		3.58	%				$	8,607		3.64	%

*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $53 thousand and $103 thousand, respectively.

**Annualized

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AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES

	For the nine months ended September 30,
	2019								2018
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
(dollars in thousands)	Balance			Expense		Rate**			Balance			Expense		Rate**
ASSETS
Loans*	$	763,074		$	26,949		4.72	%	$	767,101		$	25,492		4.44	%
Investment securities:
Taxable		112,543			2,038		2.42	%		94,907			1,503		2.12	%
Tax-exempt*		34,339			818		3.17	%		51,717			1,186		3.07	%
Total investment securities		146,882			2,856		2.60	%		146,624			2,689		2.45	%
Interest-bearing due from banks		26,005			425		2.19	%		6,481			94		1.94	%
Federal funds sold		1,320			23		2.28	%		1,164			15		1.72	%
Other investments		3,603			176		6.52	%		4,160			210		6.75	%
Total earning assets		940,884		$	30,429		4.32	%		925,530		$	28,500		4.12	%
Allowance for loan losses		(10,583	)							(10,052	)
Other nonearning assets		103,901								98,819
Total assets	$	1,034,202							$	1,014,297

LIABILITIES AND STOCKHOLDERS’ EQUITY
Time and savings deposits:
Interest-bearing transaction accounts	$	30,858		$	8		0.03	%	$	28,159		$	8		0.04	%
Money market deposit accounts		254,564			743		0.39	%		238,520			347		0.19	%
Savings accounts		87,292			66		0.10	%		87,596			54		0.08	%
Time deposits		232,517			2,829		1.63	%		227,914			2,088		1.22	%
Total time and savings deposits		605,231			3,646		0.81	%		582,189			2,497		0.57	%
Federal funds purchased, repurchase agreements and other borrowings		23,456			105		0.60	%		30,442			93		0.41	%
Federal Home Loan Bank advances		53,264			1,024		2.57	%		68,223			931		1.82	%
Total interest-bearing liabilities		681,951			4,775		0.94	%		680,854			3,521		0.69	%
Demand deposits		241,924								231,916
Other liabilities		4,003								3,243
Stockholders’ equity		106,324								98,284
Total liabilities and stockholders’ equity	$	1,034,202							$	1,014,297
Net interest margin				$	25,654		3.65	%				$	24,979		3.61	%

*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $212 thousand and $311 thousand, respectively.

**Annualized

Provision for Loan Losses

The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management’s evaluation of the portfolio. This expense is based on management’s estimate of probable credit losses inherent to 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 loan loss provision. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate.

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For the three months ended September 30, 2019, the Company did not recognize any provision for loan losses because, (i) net loans declined $20.2 million during the third quarter and (ii) one large classified relationship was upgraded to a pass rating. In the third quarter of 2018, the Company recorded $749 thousand for the provision for loan losses. The provision for loan losses was $1.0 million in the first nine months of 2019, compared to $1.8 million in the first nine months of 2018. While improving credit metrics would suggest a lower allowance as a percentage of the total loan portfolio rather than an increase for the quarter, the ratio of ALLL as a percentage of loans held for investment has increased to 1.43% for the quarter ended September 30, 2019 compared to 1.31% at the 2018 comparable period. Overall improving asset quality combined with the decline in net loans during the third quarter of 2019 resulted in a 5 basis point reduction in the historical loss rate as a percentage of loans evaluated collectively for impairment overall. The overall qualitative factor components for loans evaluated collectively for impairment increased 2 basis points during the third quarter of 2019 based on adjustments for volume, concentrations, economic conditions, and past due and non-accrual levels. Problem credit resolution as evidenced by the decline in past due loans as well as adversely classified, non-performing loans contributed to reduced year over year comparative provision expense.

In the three months ended September 30, 2019 and 2018, net loans charged off as a percent of average loans on an annualized basis were 0.08% and 0.20%, respectively. Net loans charged off as a percent of average loans on an annualized basis were 0.09% for the first nine months of 2019, or $683 thousand, compared to 0.19%, or $1.4 million, in the first nine months of 2018.

Noninterest Income

Noninterest income was $3.7 million and $10.7 million, respectively, in the three and nine months ended September 30, 2019, an increase of $353 thousand or 10.4% from the third quarter of 2018 and an increase of $769 thousand or 7.7% from the nine months ended September 30, 2018. The increase for the third quarter of 2019 was primarily driven by higher fiduciary and asset management fees and other service charges, commissions and fees, partially offset by fluctuations in service charges on deposit accounts and decreased mortgage banking income. The increase for the first nine months of 2019 relative to the first nine months of 2018 was primarily driven by higher mortgage banking income, other service charges, commissions and fees and gain on sale of available-for-sale securities.

Service charges on deposit accounts declined $94 thousand, or 8.6%, when comparing the third quarters of 2019 and 2018 and increased $39 thousand, or 1.3%. when comparing the nine months ended September 30, 2019 and 2018. The year over year increase is primarily attributable to personal checking service charges. Other service charges, commissions, and fees increased $174 thousand, or 19.9%, when comparing the third quarters of 2019 and 2018 and increased $330 thousand, or 12.4%, when comparing the first nine months of 2019 and 2018, the majority of which were attributable to increased debit card income and merchant processing fee income. Mortgage banking income decreased $36 thousand, or 15.0%, when comparing the third quarters of 2019 and 2018 and increased $105 thousand, or 17.0%, when comparing the nine months ended September 30, 2019 and 2018 due to increased volume. Net gains on sales of securities in the third quarter of 2019 were $286 thousand. There were no gains or losses on sales of securities in the third quarter of 2018. Net gains on sales of securities totaled $312 thousand for the first nine months of 2019 compared to $120 thousand for the comparable 2018 period.

Noninterest Expense

Noninterest expense increased $269 thousand or 2.9% when comparing the third quarters of 2019 and 2018 and decreased $566 thousand or 1.9% when comparing the nine months ended September 30, 2019 to the same period in 2018. A major contributor to the year over year decline was the absence of merger expenses in the 2019 periods, as the Citizens acquisition and integration was completed in the second quarter of 2018. The Company also benefited from lower expenses for occupancy and equipment, FDIC insurance, and ATM and other losses.

Merger expenses totaled $48 thousand for the third quarter of 2018 and $644 thousand for the first nine months of 2018. There were no merger expenses for the comparative periods of 2019.

Total salaries and benefits costs increased $383 thousand, or 6.8%, when comparing the third quarters of 2019 and 2018 and increased $597 thousand, or 3.5%, when comparing the first nine months of 2019 and 2018. The year over year increase was primarily impacted by the addition of quality staff in lending and credit management in 2019 as well as the full nine month inclusion of staff added in connection with the Citizens acquisition. Occupancy and equipment expenses decreased $73 thousand, or 4.7%, in the third quarter of 2019 relative to the third quarter of 2018 and decreased $239 thousand, or 5.3%, in the nine months ended September 30, 2019 compared to the same period in 2018, resulting from higher than normal expense in the prior year periods due to costs related to the Citizens acquisition, as well as reduced depreciation expense in 2019 as a number of assets became fully depreciated. FDIC insurance expense decreased $170 thousand, or 106.3%, in the third quarter of 2019 relative to the same period of 2018 and declined $290 thousand, or 53.4%, when comparing the first nine months of 2019 and 2018. Trailing twelve month earnings and levels of non-performing assets are significant factors in the insurance assessment rate, so the improvements in both of these metrics in recent quarters positively impacted the premium calculations. Additionally, the Deposit Insurance Fund (DIF) reserve ratio as of June 30, 2019 was 1.40 percent, exceeding the 1.38 percent reserve target level. The FDIC determined Small Bank Assessment Credits would be awarded which also reduced FDIC insurance expense for 2019. ATM and other losses declined $46 thousand, or 44.7% in the third quarter of 2019 compared to the same period of 2018 and declined $185 thousand, or 51.8%, in the first nine months of 2019 compared to first nine months of 2018, primarily due to a single loss event in 2018

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The Company’s income tax expense for the third quarter and first nine months of 2019 increased $246 thousand and $591 thousand, respectively, when compared to the same periods in 2018. In addition to overall higher net income, the increases were due to lower tax-exempt income in 2019. The Company’s effective tax rate remains low due to its investments in tax-exempt securities and bank-owned life insurance and its receipt of federal income tax credits for its investment in certain housing projects. The effective federal income tax rates for the three and nine months ended September 30, 2019 were 13.9% and 11.6%, respectively; the effective tax rates for the three and nine months ended September 30, 2018 were 6.7% and 5.0%, respectively.

Balance Sheet Review

Unless otherwise noted, all comparisons in this section are between balances at December 31, 2018 and September 30, 2019.

Total assets as of September 30, 2019 were $1.1 billion, a slight increase of 1.2% from December 31, 2018 at $1.0 billion. Net loans held for investment decreased $33.7 million, or 4.4%. The Company has experienced accelerated payoffs in 2019 of performing credits as well as resolution of non-performing credits. Cash and cash equivalents increased $49.0 million, or 116.0%, and securities available-for-sale decreased $1.8 million, or 1.2%.

Total deposits increased $21.4 million, or 2.5%, to $864.6 million at September 30, 2019. Noninterest-bearing deposits increased $5.2 million, or 2.1%, savings deposits increased $12.3 million, or 3.3%, and time deposits increased $4.0 million, or 1.8%. Total borrowings decreased $15.5 million, or 17.5% due primarily to repayment of FHLB advances.

Average assets for the first nine months of 2019 increased $19.9 million, or 2.0%, compared to the first nine months of 2018. Comparing the first nine months of 2019 to the first nine months of 2018, average loans decreased $4.0 million, and average investment securities increased $258 thousand. Total average deposits increased $33.1 million, and average borrowings decreased $21.9 million.

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. The Company’s internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of September 30, 2019, the Bank’s unpledged, available-for-sale securities totaled $73.1 million. The Company’s primary external source of liquidity is advances from the FHLB.

A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB. As of the end of the third quarter of 2019, the Company had $94.9 million in additional FHLB borrowing availability based on loans and securities currently available for pledging, less advances currently outstanding. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the third quarter of 2019, the Company had $55.0 million available in federal funds lines to address any short-term borrowing needs.

As disclosed in the Company’s consolidated statements of cash flows, net cash provided by operating activities was $7.9 million, net cash provided by investing activities was $36.8 million, and net cash provided by financing activities was $4.2 million for the nine months ended September 30, 2019. Combined, this contributed to a $49.0 million increase in cash and cash equivalents for the nine months ended September 30, 2019.

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, capital resources or operations.

Based on the Company’s management of liquid assets, the availability of borrowed funds, and the Company’s 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.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. OREO consists of real estate from a foreclosure on loan collateral. The Company had no OREO as of September 30, 2019.

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The majority of the loans past due 90 days or more and accruing interest at September 30, 2019 are student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. When a loan changes from “past due 90 days or more and accruing interest” status to “nonaccrual” status, the loan is reviewed for impairment. In most cases, if the loan is considered impaired, then the difference between the value of the collateral and the principal amount outstanding on the loan is charged off. If the Company is waiting on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, management allocates funds to the allowance for loan losses to cover the anticipated deficiency, based on information available to management at that time.

In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower’s ability to repay the modified loan.

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

NONPERFORMING ASSETS

	September 30,		December 31,		Increase
(dollars in thousands)	2019		2018		(Decrease)
Nonaccrual loans
Commercial and industrial	$	416	$	298	$	118
Real estate-construction		-		417		(417	)
Real estate-mortgage (1)		7,582		11,426		(3,844	)
Consumer loans		-		-		-
Total nonaccrual loans	$	7,998	$	12,141	$	(4,143	)

Loans past due 90 days or more and accruing interest
Commercial and industrial	$	-	$	-	$	-
Real estate-construction		-		205		(205	)
Real estate-mortgage (1)		-		315		(315	)
Consumer loans (2)		1,077		1,965		(888	)
Other		19		12		7
Total loans past due 90 days or more and accruing interest	$	1,096	$	2,497	$	(1,401	)

Restructured loans
Commercial and industrial	$	261	$	217	$	44
Real estate-construction		89		92		(3	)
Real estate-mortgage (1)		7,759		12,098		(4,339	)
Consumer loans		-		-		-
Total restructured loans	$	8,109	$	12,407	$	(4,298	)
Less nonaccrual restructured loans (included above)		4,782		8,454		(3,672	)
Less restructured loans currently in compliance (3)		3,327		3,953		(626	)
Net nonperforming, accruing restructured loans	$	-	$	-	$	-
Nonperforming loans	$	9,094	$	14,638	$	(5,544	)

Other real estate owned
Construction, land development, and other land	$	-	$	83	$	(83	)
Total other real estate owned	$	-	$	83	$	(83	)

Total nonperforming assets	$	9,094	$	14,721	$	(5,627	)

(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 portion of these guaranteed loans that is past due 90 days or more totaled $905 thousand at September 30, 2019 and $1.7 million at December 31, 2018.

(3) As of September 30, 2019 and December 31, 2018, all of the Company’s restructured accruing loans were performing in compliance with their modified terms.

Nonperforming assets as of September 30, 2019 were $9.1 million, $5.6 million lower than nonperforming assets as of December 31, 2018. Nonaccrual loans decreased $4.1 million when comparing the balances as of September 30, 2019 to December 31, 2018. This decrease was primarily related to resolution of two large credit relationships, which represented $3.1 million of the decrease. See Note 4 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for additional information about the change in nonaccrual loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regarding the cash flow, anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.

Index

The majority of the balance of nonaccrual loans at September 30, 2019 was related to a few large credit relationships. Of the $8.0 million of nonaccrual loans at September 30, 2019, $6.7 million, or approximately 83.9%, 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.

Loans past due 90 days or more and accruing interest decreased $1.4 million. As of September 30, 2019, $905 thousand of the $1.1 million of loans past due 90 days or more and accruing interest were government-guaranteed student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company.

Total restructured loans decreased by $4.3 million from December 31, 2018 to September 30, 2019 primarily due to paydowns and pay-offs. All accruing TDRs are performing in accordance with their modified terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

Management believes the Company has excellent credit quality review processes in place to identify problem loans quickly. This allows management to work with problem loan relationships to identify any payment shortfall and assist these borrowers to improve performance or correct the problems.

Allowance for Loan Losses

The allowance for loan losses is based on several components. The first component of the allowance for loan losses is determined based on specifically identified loans that may become 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 is waiting on an appraisal to determine the collateral’s value or is in negotiations with the borrower or other parties that may affect the value of the collateral, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of September 30, 2019 and December 31, 2018, the impaired loan component of the allowance for loan losses was $874 thousand and $116 thousand, respectively. The increase in the impaired loan component was primarily due to specific impairments on three commercial credit relationships arising in the second quarter of 2019; two of which were existing troubled credits that experienced a deterioration in collateral position while the third was as a result of deteriorated ability to service debt, creating a potentially collateral dependent position.

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.

Historical loss is the final component of the allowance for loan losses and is calculated based on the migration of loans from performing to charge-off over a period of time that management deems appropriate to provide a reasonable estimate of losses inherent in the loan portfolio. Historical loss is based on eight migration periods of twelve quarters each.

Both the historical loss and qualitative factor components of the allowance are applied to loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the call report applicable to the Bank. 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), or are 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 (OAEM, 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 September 30, 2019 and December 31, 2018 the Company had no loans in these categories. The qualitative factor components remain stable and materially unchanged from December 31, 2018 to September 30, 2019, increasing 7 basis points as a percentage of loans evaluated collectively for impairment overall; however there have been adjustments for volume, concentrations, past due and non-accrual levels, and economic conditions. For the same period, the overall historical loss rate as a percentage of loans evaluated collectively for impairment has improved by 9 basis points.

Index

On a combined basis, the historical loss and qualitative factor components amounted to $9.7 million and $10.0 million as of September 30, 2019 and December 31, 2018, respectively. The allowance for loan losses at September 30, 2019 included $225 thousand, or 2.1%, of unallocated reserve, which is within Company policy. Management felt the unallocated reserve was prudent as of September 30, 2019 pending expected resolution of two large problem credit relationships during the fourth quarter of 2019. Management will continue to monitor the sustainability of the improving asset quality trends experienced in the third quarter of 2019 as it relates to reserve levels and the ratio of the allowance for loan losses as a percentage of the portfolio.

The allowance for loan losses was 1.43% of total loans on September 30, 2019 and 1.31% on December 31, 2018. While improving credit metrics would suggest a lower allowance as a percentage of the total loan portfolio rather than an increase for the quarter, the ratio increased due to a $20.2 million decline in net loans in the third quarter of 2019 while one large classified relationship was upgraded to a pass rating in the third quarter of 2019. As of September 30, 2019, the allowance for loan losses was 116.7% of both nonperforming loans and nonperforming assets; this compares to 69.1% of nonperforming loans and 68.7% of nonperforming assets as of December 31, 2018. Management believes it has provided an adequate reserve for nonperforming loans at September 30, 2019.

Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either purchased credit-impaired (or PCI) or purchased performing.

A PCI loan will be removed from a pool (at its carrying value) only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan. For purposes of removing the loan from the pool, the carrying value is deemed to equal the amount of principal cash flows received in lieu of the loan balance. This treatment ensures that the percentage yield calculation used to recognize accretable yield on the pool of loans is not affected.

Quarterly, management will evaluate purchased credit-impaired loans based on updated future expected cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows; these changes are disclosed in Note 4 “Loans and Allowance for Loan Losses.”

The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference, which represents the estimate of credit losses expected to occur and was considered in determining the fair value of loan at the acquisition date. Any subsequent increases in expected cash flows over those expected at the acquisition date in excess of fair value are adjusted through an increase in the accretable yield on a prospective basis; any decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.

The Company’s policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by the quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for the pool because there is no difference between the amount received at resolution and the contractual amount of the loan.

The purchased credit-impaired loans are and will continue to be subject to the Company’s internal and external credit review and monitoring. If further credit deterioration is experienced, such deterioration will be measured and the provision for loan losses will be increased.

Purchased performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the purchased performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used. The adequacy of the remaining discount as compared to the reserve that would be required under the Company’s allowance for loan loss methodology is evaluated quarterly. Should the methodology reserve exceed the remaining discount, additional provision would be recognized.

Index

Capital Resources

Total stockholders’ equity as of September 30, 2019 was $109.1 million, an increase of $7.1 million or 6.9% from $102.0 million at December 31, 2018. The increase was the result of increased retained earnings and the reversal of the net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. The improvement in the unrealized gain/loss position was driven by changes in market rates and continued execution of our portfolio repositioning strategy related to tax-exempt and short term, low yielding investments during the quarter.

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the board approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total for the Bank capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA), enacted in May 2018, contains a variety of provisions that will affect regulations applicable to the Company and the Bank. Certain provisions of the EGRRCPA were effective immediately, while others depend upon future rulemaking by federal banking regulatory agencies. The EGRRCPA required action by the Federal Reserve Board to expand the applicability of its small bank holding company policy statement, which, among other things, exempts certain bank holding companies from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements that apply to other bank holding companies. In August 2018, the Federal Reserve Board issued an interim final rule provisionally expanding the applicability of the small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3 billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, which was effective upon its issuance, the Company expects that it will be treated as a small bank holding company and will no longer be subject to regulatory capital requirements. At September 30, 2019, the Company’s capital ratios exceed all minimum capital requirements that would apply to the Company if it were not a small bank holding company.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the EGRRCoPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework will be available for banks to use in their March 31, 2020, Call Report. The Company is currently evaluating whether to opt into the CBLR framework.

The following is a summary of the Bank’s capital ratios at September 30, 2019. As shown below, these ratios were all well above the recommended regulatory minimum levels.

	2019 Regulatory Minimums			September 30, 2019
Common Equity Tier 1 Capital to Risk-Weighted Assets		4.500	%		11.62	%
Tier 1 Capital to Risk-Weighted Assets		6.000	%		11.62	%
Tier 1 Leverage to Average Assets		4.000	%		9.66	%
Total Capital to Risk-Weighted Assets		8.000	%		12.86	%
Capital Conservation Buffer		2.500	%		4.86	%
Risk-Weighted Assets (in thousands)				$	862,124

Book value per share was $20.98 at September 30, 2019 as compared to $19.26 at September 30, 2018. Cash dividends were $1.9 million or $0.36 per share in the first nine months of 2019 and $1.7 million or $0.33 per share in the first nine months of 2018.

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 cash outflows.

Index

The Company obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms of the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At September 30, 2019 the outstanding balance was $2.1 million, and the then-current interest rate was 4.52%.

As of September 30, 2019, there have been no material changes outside the ordinary course of business in the Company’s contractual obligations disclosed in the Company’s 2018 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As of September 30, 2019, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2018 Annual Report on Form 10-K.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4.

Controls and Procedures.

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.

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) under the Exchange Act). No changes in the Company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 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.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

There are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A.

Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2018 Annual Report on Form 10-K.

Index

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards 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 awards. During the three months ended September 30, 2019, the Company did not repurchase any shares related to the exercise of awards.

During the three months ended September 30, 2019, the Company did not repurchase any shares pursuant to the Company’s stock repurchase program. The Company is authorized 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.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

The Company has made no changes to the process by which security holders may recommend nominees to its board of directors, which is discussed in the Company’s Proxy Statement for the Company’s 2019 Annual Meeting of Stockholders.

Index

Item 6.

Exhibits.

Exhibit No.	Description
2.1	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	Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009)

3.1.1	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)

3.2	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)

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited for September 30, 2019), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)

SIGNATURES

Pursuant to the requirements 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

November 12, 2019	/s/ Robert F. Shuford, Sr.
	Robert F. Shuford, Sr.
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)

November 12, 2019	/s/ Elizabeth T. Beale
	Elizabeth T. Beale
	Chief Financial Officer & Senior Vice President
	(Principal Financial & Accounting Officer)