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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 the quarterly period ended June 30, 2004

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number: 0-12896

OLD POINT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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 July 31, 2004.

OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

PART II - OTHER INFORMATION

 (i) 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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Pro forma disclosure SFAS No. 123 as amended by SFAS No. 148

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

Earnings Summary

Net income for the second quarter of 2004 increased 18.85% to $2.31 million from $1.94 million for the comparable period in 2003. Basic earnings per share were $0.58 in the second quarter of 2004 compared with $0.49 in 2003. Diluted earnings per share were $0.57 in the second quarter of 2004 compared with $0.47 in 2003.

For the six months ended June 30, 2004 net income increased 12.98% to $4.40 million from $3.89 million in 2003. Basic earnings per share were $1.10 for the first six months of 2004 compared with $.99 in 2003. Diluted earnings per share were $1.08 for the first six months of 2004 compared with $0.95 in 2003.

Return on average assets was 1.39% for the second quarter of 2004 and 1.31% for the comparable period in 2003. Return on average equity was 14.33% for the second quarter of 2004 and 12.62% for the second quarter of 2003.

For the six months ended June 30, 2004 and 2003 return on average assets was 1.35% and 1.33% respectively. Return on average equity was 13.56% in 2004 and 12.87% in 2003.

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 $1 thousand, or 0.02%, for the second quarter of 2004 over 2003. Average earning assets increased 12.42% in the second quarter of 2004 from 2003.

For the six months ended June 30, 2004 net interest income on a fully tax equivalent basis increased $177 thousand, or 1.44%, over the comparable period in 2003. Comparing the first six months of 2004 to 2003, average loans increased $25.77 million or 6.72% while investment securities increased $38.06 million or 25.63%. Average earning assets increased 11.09% and the net interest yield decreased from 4.48% in 2003 to 4.09% in 2004.

Interest expense decreased $227 thousand or 9.11% in the second quarter of 2004 from the second quarter of 2003. Interest bearing liabilities increased $46.27 million or 10.72 % in the second quarter of 2004 over the same period in 2003. The cost of funding those liabilities decreased 41 basis points from 2003. For the six months ended June 30, 2004 interest expense decreased $654 thousand, or 12.80% over the same period in 2003.

Page 9 shows an analysis of average earning assets, interest bearing liabilities and rates and yields.

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* 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

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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 $350 thousand for the first six months of 2004, down from $600 thousand in the comparable period in 2003. Loans charged off (net of recoveries) in the first six months of 2004 were $439 thousand compared with loans charged off (net of recoveries) of $288 thousand in the first six months of 2003. On an annualized basis net loan charge-offs were .21% of total net loans for the first half of 2004 compared with 0.15% for the same period in 2003.

On June 30, 2004 nonperforming assets totaled $1.48 million compared with $1.48 million on June 30, 2003. The June 2004 total consisted of $47 thousand in foreclosed real estate, $165 thousand in a former branch site now listed for sale, $326 thousand in nonaccrual loans and $941 thousand in restructured loans. The June 2003 total consisted of $531 thousand in foreclosed real estate, $165 thousand in a former branch site listed for sale and $781 thousand in nonaccrual loans. Loans still accruing interest but past due 90 days or more increased to $597 thousand as of June 30, 2004 compared with $543 thousand as of June 30, 2003.

The allowance for loan losses on June 30, 2004 was $4.74 million compared with $4.88 million on June 30, 2003. It represented a multiple of 3.21 times nonperforming assets and 3.74 times nonperforming loans. Nonperforming loans includes nonaccrual and restructured loans. The allowance for loan losses was 1.12% and 1.25% of total loans on June 30, 2004 and 2003 respectively.

Other Income

For the second quarter of 2004 other income increased $645.83 thousand, or 33.81%, and for the six months ended June 30, 2004 other income increased $992 thousand or 26.74% over the same periods in 2003. The increase in income is attributed to increases in income from fiduciary activities, service charges on deposit accounts and securities gains. The increase in fiduciary income can be attributed to fee increases that were implemented in 2004. Service charges on deposit accounts increased due to the fees associated with a new service called Old Point Overdraft Privilege, which began in April 2004.

Other Expenses

For the second quarter of 2004 other expenses increased $321 thousand or 6.51% over the second quarter of 2003. For the six months ending June 2004 other expenses increased $783 thousand or 8.16% over the same period in 2003. For the six months ended June 30, 2004, salaries and employee benefits increased $563 thousand or 9.54% over the same period in 2003. The increase is attributed to staffing expenses for a new branch that was opened in late 2003. Occupancy expenses increased $49 thousand or 8.04%.

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Assets

At June 30, 2004 total assets were $675.34 million, up 4.56% from $645.92 million at December 31, 2003. Total net loans grew $17.23 million or 4.30%.

Investment securities increased by $17.32 million, 9.35%, in 2004. Bank owned life insurance increased $766 thousand due to increases in the cash value and the purchase of policies in 2004. Total deposits increased $22.50 million, or 4.59% in 2004. Advances from the FHLB increased $10.00 million, or 20.00% in 2004. Securities sold under agreement to repurchase decreased $5.01 million, or 13.18% in 2004.

Capital Ratios

The Company’s capital position remains strong as evidenced by the regulatory capital measurements. At June 30, 2004 the Tier I capital ratio was 14.19%, the total capital ratio was 15.21% and the leverage ratio was 9.86%. These ratios were all well above the regulatory minimum levels of 4.00%, 8.00%, and 3.00%, respectively.

Capital Resources

The Company purchased an existing building in June 2004 for an additional branch location in Virginia Beach. The branch is expected to open in late 2004 or early 2005.

The Company purchased land in April of 2004 for an additional branch location in Isle of Wight. The branch is anticipated to open in early 2005.

The Company purchased a vacant building located in Hampton in October 2003. The building is being renovated and will be used as office space for bank personnel. The renovations are expected to be completed in the early portion of the third quarter of 2004.

An additional branch location in Williamsburg is expected to open in late 2004 or early 2005 on land purchased by the Company in 2000.

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 that exceeded targeted projections and loan growth that was slightly above the targeted projections in the first half of 2004. 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.

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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.

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:

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

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Allowance for Loan Losses (con’t)

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.

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.

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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 June 30, 2004. There were $178 million more in liabilities than assets subject to repricing within three months. As of December 31, 2003, the Company had $130 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 $182 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 the impact from the liability sensitivity position as discussed below.

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 assets 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 1.53% decrease in net income. The rate shock model reveals that a 100 basis point rise in rates would cause approximately a 0.37% increase in net income and that a 200 basis point rise in rates would cause approximately a 0.62% increase in net income at June 30, 2004.

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Item 4. Controls and Procedures

As of the date of this quarterly 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.

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PART II — OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table presents the monthly share repurchases during the quarter ended June 30, 2004:

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Item 6. Exhibits and Reports on Form 8-K

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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

August 9, 2004

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