OLD POINT FINANCIAL CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period Ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
Commission File No. 0-12896 (1934 Act)

OLD POINT FINANCIAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)

Virginia 54-1265373
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

1 West Mellen Street, Hampton, Va. 23663
------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (757) 722-7451

Not Applicable
--------------

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

Check whether the registrant (1) has filed all reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act 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 X No

Indicate by check mark whether the registrant is an accelerated
filer (as defined by Rule 12b-2 of the Exchange Act)
Yes No X

State the number of shares outstanding of each of the issuer's
classes of common stock as of October 31, 2003.

Class Outstanding at October 31, 2003
----- -------------------------------
Common Stock, $5.00 par value 3,973,769 shares

OLD POINT FINANCIAL CORPORATION
FORM 10-Q

INDEX
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PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements...............................................1

Consolidated Balance Sheets
September 30, 2003 and December 31, 2002....................1

Consolidated Statement of Earnings
Three months ended September 30, 2003 and 2002..............2
Nine months ended September 30, 2003 and 2002...............2

Consolidated Statement of Cash Flows
Nine months ended September 30, 2003 and 2002...............3

Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 2003 and 2002...............4

Notes to Consolidated Financial Statements.........................5

Parent Only Balance Sheets
September 30, 2003 and December 31, 2002.............7

Parent Only Statement of Earnings
Three months ended September 30, 2003 and 2002.......7
Nine months ended September 30, 2003 and 2002........7

Parent Only Statement of Cash Flows
Nine months ended September 30, 2003 and 2002........8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................9

Analysis of Changes in Net Interest Income.................10

Item 3. Quantitative and Qualitative Disclosures about Market Risk........15

Item 4. Disclosure Controls and Procedures................................16

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K..................................17

(i)

See accompanying notes
3

See accompanying notes

4

OLD POINT FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The accounting and reporting policies of the Registrant
conform to generally accepted accounting principles and to
the general practices within the banking industry. The
interim financial statements have not been audited;
however, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated
financial statements have been included. These adjustments
include estimated provisions for bonus, profit sharing and
pension plans that are settled at year-end. These
financial statements should be read in conjunction with the
financial statements included in the Registrant's 2002
Annual Report to Shareholders and Form 10-K.

2. Basic earnings per common share outstanding are computed by
dividing income by the weighted average number of
outstanding common shares for each period presented.
Diluted earnings per share are computed using the treasury
stock method.

3. Certain amounts in the financial statements have been
reclassified to conform with classifications adopted in the
current year.

4. At September 30, 2003 the Company had two stock option plans.
The Company has elected to continue to apply the provisions
of APB No. 25 and related interpretations in accounting for
stock options and to continue to provide the pro forma
disclosure requirements of SFAS No. 123, as amended by SFAS
No. 148, "Accounting For Stock-Based Compensation - Transition
and Disclosure", in the table below. Under APB No. 25,
compensation cost for stock options is measured as the excess,
if any, of the fair market value of the Company's common stock
at the date of grant over the amount the employee or director
must pay to acquire the stock. Because the Company's stock
option plans provide for the issuance of stock options at a
price of no less than the fair market value at the date of the
grant, no compensation cost is required to be recognized for
the Company's stock option plans.

Had compensation costs for the stock option plans been determined
based upon the fair value at the date of grant consistent with
SFAS No. 123, net income and earnings per share would have been
reduced to the pro forma amounts indicated in the following table
on page 6.

5

8

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Earnings Summary
- ----------------
Net income for the third quarter of 2003 increased 13.48% to
$1.96 million from $1.73 million for the comparable period in
2002. Basic earnings per share were $0.50 in the third quarter
of 2003 compared with $0.44 in 2002.

For the nine months ended September 30, 2003 net income increased
12.63% to $5.86 million from $5.20 million in 2002. Basic
earnings per share were $1.48 for the first nine months of 2003
compared with $1.33 in 2002.

Return on average assets was 1.31% for the third quarter of 2003
and 1.25% for the comparable period in 2002. Return on average
equity was 12.90% for the third quarter of 2003 and 12.30% for
the third quarter of 2002.

For the nine months ended September 30, 2003 and 2002 return on
average assets was 1.32% and 1.30% respectively. Return on
average equity was 12.88% in 2003 and 12.77% in 2002.

Net Interest Income
- -------------------
The principal source of earnings for the Company is net interest
income. Net interest income is the difference between interest
and fees generated by earning assets and interest expense paid to
fund them. Net interest income, on a fully tax equivalent basis,
increased $209 thousand, or 3.54%, for the third quarter of 2003
over 2002. Average earning assets increased 8.19% in the third
quarter of 2003 from 2002.

For the nine months ended September 30, 2003 net interest income
on a fully tax equivalent basis increased $1.11 million, or
6.45%, over the comparable period in 2002. Comparing the first
nine months of 2003 to 2002, average loans increased $26.44
million or 7.37% while investment securities increased $23.05
million or 17.86%. Average earning assets increased 10.10% and the
net interest yield decreased from 4.59% in 2002 to 4.43% in 2003.

Interest expense decreased $685 thousand or 22.82% in the third
quarter of 2003 from the third quarter of 2002. Interest bearing
liabilities increased $24.02 million or 5.85% in the third
quarter of 2003 over the same period in 2002. The cost of
funding those liabilities decreased 79 basis points from 2002.
For the nine months ended September 30, 2003 interest expense
decreased $1.74 million, or 18.98% over the same period in 2002.

Page 10 shows an analysis of average earning assets, interest
bearing liabilities and rates and yields.

9

* Tax equivalent yields based on 34% tax rate.
** Nonaccrual loans are included in the average
loan balances and income on such loans is
recognized on a cash basis.

10

Provision/Allowance 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.

The provision for loan losses was $900 thousand for the first
nine months of 2003, down from $1.30 million in the comparable
period in 2002. Loans charged off (net of recoveries) were $605
thousand compared with loans charged off (net of recoveries) of
$655 thousand in the first nine months of 2002. On an annualized
basis net loan charge-offs were 0.21% of total loans for the
first nine months of 2003 compared with 0.23% for the same
period in 2002.

On September 30, 2003 nonperforming assets totaled $453 thousand
compared with $2.11 million on September 30, 2002. The September
2003 total consisted of $25 thousand in foreclosed real estate,
$165 thousand in a former branch site now listed for sale, and
$263 thousand in nonaccrual loans. The September 2002 total
consisted of $1.33 million in foreclosed real estate, $165
thousand in a former branch site listed for sale and $611
thousand in nonaccrual loans. Loans still accruing interest but
past due 90 days or more increased to $1.01 million as of
September 30, 2003 compared with $546 thousand as of September
30, 2002.

The allowance for loan losses on September 30, 2003 was $4.86
million compared with $4.54 million on September 30, 2002. It
represented a multiple of 10.72 times nonperforming assets and 18.49
times nonperforming loans. The allowance for loan losses was
1.24% and 1.22% of loans on September 30, 2003 and 2002
respectively.

Other Income
- ------------
For the third quarter of 2003 other income increased $133
thousand, or 7.43%, and for the nine months ended September 30,
2003 other income increased $334 thousand or 6.31%. In both
periods, the increase in income is attributed to increases in
other service charges, commissions and fees, mortgage
brokerage income and bank owned life insurance income.

Other Expenses
- --------------
For the third quarter of 2003 other expenses increased $343
thousand or 7.56% over the third quarter of 2002. For the nine
months ending September 2003 other expenses increased $1.02
million or 7.55% over the same period in 2002. For the nine
months ended September 30, 2003, salaries and employee benefits
increased $858 thousand or 10.59%. Occupancy expenses increased
$66 thousand or 7.78%.

Assets
- ------
At September 30, 2003 total assets were $596.06 million, up 3.37%
from $576.62 million at December 31, 2002. Total loans grew
$12.83 million or 3.40%.

Investment securities and federal funds sold increased by $4.49
million, or 2.72%, in 2003. Bank owned life insurance increased
$1.46 million due to the purchase of policies in 2003. Total
deposits increased $14.75 million, or 3.25% in 2003. Advances
from the FHLB increased $5.00 million, or 14.29% in 2003. Securities
sold under agreement to repurchase increased $824 thousand, or 3.87%
in 2003.

11

Capital Ratios
- --------------
The Company's capital position remains strong as evidenced by the
regulatory capital measurements. At September 30, 2003 the Tier
I capital ratio was 14.38%, the total capital ratio was 15.55%
and the leverage ratio was 9.97%. These ratios were all well
above the regulatory minimum levels of 4.00%, 8.00%, and 3.00%,
respectively.

Capital Resources
- -----------------
The Company purchased land in the third quarter of 2002 for an
additional branch location in Chesapeake. Ground breaking for the
new branch began in April 2003. The branch opened in October 2003.

The Company purchased a vacant building in October 2003. The
building will be renovated and used as office space for bank
personnel. The renovations are expected to be completed in the
later portion of the 2nd quarter of 2004.

The Company believes that it has adequate internal and external
resources available to fund its capital expenditure requirements.

Liquidity
- ---------
Liquidity is the ability of the Company to meet present and
future obligations to depositors and borrowers. The Company
experienced deposit growth and loan growth that was slightly less
than targeted projections in the first nine months of 2003. The
Company continues to monitor and seek investment opportunities
in the current rate environment.

Effects of Inflation
- --------------------
Management believes that the key to achieving satisfactory
performance is its ability to maintain or improve its net
interest margin and to generate additional fee income. The
Company's policy of investing in and funding with interest
sensitive assets and liabilities is intended to reduce the risks
inherent in a volatile economy.

Critical Accounting Policies
- ----------------------------
The Company's consolidated financial statements and accompanying
notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods.

The Company continually evaluates the accounting policies and
estimates it uses to prepare the consolidated financial
statements. In general, management's estimates are based on
historical experience, on information from third party
professionals and on various other assumptions that are believed
to be reasonable under the facts and circumstances. Actual
results could differ from those estimates made by management.

12

Allowance for Loan Losses
- -------------------------
The allowance for loan losses is an estimate of the losses that
may be sustained in our loan portfolio. The allowance is based
on two basic principles of accounting. (1) Statement of
Financial Accounting Standards (SFAS) No. 5 "Accounting for
Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which
requires that losses be accrued based on the differences between
that value of collateral, present value of future cash flows or
values that are observable in the secondary market and the loan
balance.

In evaluating the adequacy of the allowance for loan losses, the
Company has divided the loan portfolio into six pools of loans.
Allocation percentages are applied to the loan pools utilizing
the following factors:

1. economic trends and conditions
2. trends in volume and terms of loans
3. delinquency and non-accruals
4. lending policies
5. lending management and staff
6. concentrations of credit

The Company also maintains a four-year loss experience history on
each category of loan. Using the six factors listed above,
management can modify the allocation from the four-year
historical average.

Changes in the financial condition of individual borrowers, in
economic conditions, in historical loss experience and in the
conditions of the various markets in which collateral may be sold
all affect the required level of the allowance for loan losses
and the associated provision for loan losses.

Deferred Loan Fees / Costs
- --------------------------
As part of the lending process, the Company receives fees from
borrowers or potential borrowers related to loans underwritten.
All origination fees received in the origination of a loan that
are not pass-through fees, and certain direct origination costs
are deferred and amortized over the life of the loan.

Other Real Estate Owned
- -----------------------
The Company records Other Real Estate Owned on the financial
statement at fair value. Fair value is typically determined
based on appraisals by third parties, less estimated costs to
sell. The Company monitors the fair value of Other Real Estate
Owned and adjusts the carrying value on the financial statement
accordingly.

13

Income Taxes
- ------------
The Company recognizes expense for federal income and state bank
franchise taxes payable as well as deferred federal income taxes
for estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in
the consolidated financial statements. Income and franchise tax
returns are subject to audit by the IRS and state taxing
authorities. Income and franchise tax expense for current and
prior periods is subject to adjustment based on the outcome of
such audits. The Company believes it has adequately provided for
all taxes payable.

14

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Sensitivity
- --------------------
Old Point Financial Corporation does not have any risk sensitive
instruments entered into for trading purposes.

Trading market risk is the risk to net income from changes in the
fair values of assets and liabilities that are marked-to-market
through the income statement. The Company does not carry a
trading portfolio and is currently not exposed to trading risk.

Old Point Financial Corporation does have risk sensitive
instruments entered into for other than trading purposes. Based
on scheduled maturities, the Company was liability sensitive as
of September 30, 2003. There were $114 million more in
liabilities than assets subject to repricing within three months.
As of December 31, 2002, the Company had $109 million more in
liabilities than assets subject to repricing within three months.

When the company is liability sensitive, net interest income
should improve if interest rates fall since liabilities will
reprice faster than assets. Conversely, if interest rates rise,
net interest income should decline. It should be noted, however,
that deposits totaling $167.48 million; which consist of interest
checking, money market, and savings accounts; are less interest
sensitive than other market driven deposits. In a rising rate
environment these deposit rates have historically lagged behind
the changes in earning asset rates, thus mitigating somewhat the
impact from the liability sensitivity position.

Market risk is the risk of loss due to changes in instrument
values or earnings variations caused by changes in interest
rates, commodity prices and market variables such as equity price
risk. Old Point Financial Corporation's equity price risk is
immaterial and the company's primary exposure is to interest rate
risk.

Non-trading market risk is the risk to net income from changes in
interest rates on asset and liabilities, other than trading. The
risk arises through the potential mismatch resulting from timing
differences in repricing of loans and deposits. Old Point
Financial Corporation monitors this risk by reviewing the timing
differences and using a portfolio rate shock model that projects
various changes in interest income under a changing rate
environment of up to plus or minus 300 basis points. The rate
shock model reveals that a 100 basis point drop in rates would
cause approximately a 2.35% decrease in net income. The rate
shock model reveals that a 100 basis point rise in rates would
cause approximately a 3.40% increase in net income and that a 200
basis point rise in rates would cause approximately a 4.98%
increase in net income at September 30, 2003.

15

Item 4. DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 day period prior to filing of this report, an
evaluation was carried out under the supervision and with the
participation of Old Point Financial Corporation's management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule [13a-14(c) /15d-14(c)] under the
Securities Exchange Act of 1934). Based on their evaluation, our
Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures
are, to the best of their knowledge, effective to ensure that
information required to be disclosed by Old Point Financial
Corporation in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms. Subsequent to the date of their
evaluation, the Company did not make any significant changes in,
nor take any corrective actions regarding its internal controls
or other factors that could significantly affect these controls.

16

PART II - OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

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

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Executive Officer

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 from the Company's Chief Financial Officer

(b) Two reports on Form 8-K were filed during the third quarter
of 2003.

August 14, 2003, a Form 8-K, which included two press releases,
both dated August 13, 2003. The first press release announced
the election of James Reade Chisman to the Board of Directors
of Old Point National Bank of Phoebus. The second press
release announced the declaration of a cash dividend in the
amount of $0.15 per share of common stock.

July 15, 2003, a Form 8-K, which included a press release,
dated July 10, 2003 announcing earnings and other financial
results for the second quarter of 2003.

17

SIGNATURES
----------

In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

OLD POINT FINANCIAL CORPORATION
November 7, 2003

By: /s/Robert F. Shuford
------------------
Robert F. Shuford
President and Chief Executive Officer

By: /s/Laurie D. Grabow
-------------------
Laurie D. Grabow
Senior Vice President and CFO