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

FORM 10-K
 
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number 000-12896
 
 
OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Virginia
 
54-1265373
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

1 West Mellen Street, Hampton, Virginia 23663
(Address of principal executive offices) (Zip Code)

(757) 728-1200
(Registrant's telephone number, including area code)
 

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

Common Stock, $5 par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.   Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File req uired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
☐
 
Accelerated filer
☐
     
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
 
Smaller reporting company
☒
         
      Emerging Growth Company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ☐   No ☒

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2017 was $116,156,427 based on the closing sales price on the NASDAQ Capital Market of $32.88.

There were 5,019,703 shares of common stock outstanding as of March 13, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Company's Annual Meeting of Stockholders to be held on May 22, 2018, are incorporated by reference in Part III of this report.
 
OLD POINT FINANCIAL CORPORATION

FORM 10-K

INDEX

PART I
 
Page
     
Item 1.
1
Item 1A.
11
Item 1B.
20
Item 2.
20
Item 3.
21
Item 4.
21
     
PART II
   
     
Item 5.
24
Item 6.
25
Item 7.
26
Item 7A.
57
Item 8.
57
Item 9.
109
Item 9A.
109
Item 9B.
111
     
PART III    
     
Item 10.
111
Item 11.
111
Item 12.
112
Item 13.
112
Item 14.
112
     
PART IV    
     
Item 15.
113
 
113
 
113
Item 16.
115
 
116
 
- i -
Part I
Item 1.
Business

GENERAL

Old Point Financial Corporation (the Company) was incorporated under the laws of Virginia on February 16, 1984, for the purpose of acquiring all the outstanding common stock of The Old Point National Bank of Phoebus (the Bank), in connection with the reorganization of the Bank into a one-bank holding company structure. At the annual meeting of the stockholders on March 27, 1984, the proposed reorganization was approved by the requisite stockholder vote. At the effective date of the reorganization on October 1, 1984, the Bank merged into a newly formed national bank as a wholly-owned subsidiary of the Company, with each outstanding share of common stock of the Bank being converted into five shares of common stock of the Company.

The Company completed a spin-off of its trust department as of April 1, 1999. The organization is chartered as Old Point Trust & Financial Services, N.A. (Trust). Trust is a nationally chartered trust company. The purpose of the spin-off was to have a corporate structure more ready to compete in the field of wealth management. Trust is a wholly-owned subsidiary of the Company.

The Bank is a national banking association that was founded in 1922. As of the end of 2017, the Bank had 18 branch offices serving the Hampton Roads localities of Hampton, Newport News, Norfolk, Virginia Beach, Chesapeake, Williamsburg/James City County, York County and Isle of Wight County. The Bank offers a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial customers.

The Company's primary activity is as a holding company for the common stock of the Bank and Trust. The principal business of the Company is conducted through its subsidiaries, which continue to conduct business in substantially the same manner as before the reorganization and spin-off.

As of December 31, 2017, the Company had assets of $981.8 million, gross loans of $738.5 million, deposits of $783.6 million, and stockholders' equity of $96.4 million. At year-end, the Company and its subsidiaries had a total of 301 employees, 15 of whom were part-time.

STRATEGIC ACQUISITION

On October 27, 2017, Citizens National Bank ("Citizens National") entered into an agreement and plan of reorganization (the merger agreement) with the Company and the Bank that provides for the merger of Citizens National into the Bank, with the Bank surviving, in a stock and cash transaction for total consideration valued at approximately $7.9 million. The shareholders of Citizens National approved the merger on March 13, 2018, and the transaction is expected to be completed in the second quarter of 2018, subject to customary regulatory approvals and other closing conditions. Under the terms of the merger agreement, Citizens National shareholders will receive 0.1041 shares of Old Point common stock and $2.19 in cash for each Citizens National common share outstanding.

MARKET AREA AND COMPETITION

The Company's market area is located in Hampton Roads, situated in the southeastern corner of Virginia and boasting the world's largest natural deepwater harbor. The Hampton Roads Metropolitan Statistical Area (MSA) is the 37th most populous MSA in the United States according to the U.S. Census Bureau's 2010 census and the third largest deposit market in Virginia, after Richmond and the Washington Metropolitan area, according to the Federal Deposit Insurance Corporation (FDIC). Hampton Roads includes the cities of Chesapeake, Hampton, Newport News, Norfolk, Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg, and the counties of Isle of Wight, Gloucester, James City, Mathews, York and Surry. The market area is serviced by 60 banks, savings institutions and credit unions and, in addition, branches of virtually every major brokerage house serve the Company's market area.
 
The banking business in Virginia, and in the Company's primary service areas in the Hampton Roads MSA, is highly competitive and dominated by a relatively small number of large banks with many offices operating over a wide geographic area. Among the advantages such large banks have over the Company is their ability to finance wide-ranging advertising campaigns, and by virtue of their greater total capitalization, to have substantially higher lending limits than the Company. Factors such as interest rates offered, the number and location of branches and the types of products offered, as well as the reputation of the institution affect competition for deposits and loans. The Company competes by emphasizing customer service and technology, establishing long-term customer relationships and building customer loyalty, and providing products and services to address the specific needs of the Company's customers. The Company targets individual and small-to-medium size business customers.

Since adding a corporate banking group and expanding its business product offerings in 2009, the Company continues to build a stronger presence in the business banking market, where greater opportunities for fee-based revenues and cross-selling exist. In 2017, the Company purchased full ownership of Old Point Mortgage and launched Old Point Insurance, LLC. Through these business banking capabilities and new lines of business, the Company is able to service a highly lucrative market that offers increased opportunities to identify new revenue streams and cross sell additional products.

Personal assets held by non-banks are difficult to track at a local level, so research relies on deposits reported by governmental agencies to measure market share. In 2017, the Company held tenth place with 2.58% market share of all Hampton Roads deposits, as compared to 2.60% market share in 2016. On the Peninsula, the Company retains first place in Hampton with 26.83% market share and saw an increase in deposits from 2016 of $17.2 million. The Company also saw deposit growth from 2016 for all other Peninsula markets, with an increase of $5.1 million in James City County, $4.4 million in Williamsburg, $1.8 million in Newport News, and $1.4 million in York County.

In Southside Hampton Roads, the Company increased deposit share in Virginia Beach by $14.5 million, in Chesapeake by $7.2 million, and in Norfolk by $4.9 million from 2016. In the Isle of Wight County market, however, deposits decreased from 2016 by $6.0 million. In late 2017, the Company announced an agreement to acquire Citizens National Bank, which has one location in the town of Windsor, Virginia. Upon its expected completion in 2018, this will expand the Company's footprint and market share in Isle of Wight County. Combined with heightened marketing efforts, the staff in the Company's newer locations continues to work diligently to increase the Company's name recognition in their respective regions of the Hampton Roads MSA.

The Company also faces competitive pressure from credit unions. The three largest credit unions headquartered in the Hampton Roads MSA are Langley Federal Credit Union, Chartway Federal Credit Union, and Newport News Shipbuilding Employees' Credit Union with deposits totaling approximately $2.0 billion, $2.0 billion and $1.3 billion respectively, all of which posted a positive growth rate for 2017.

AVAILABLE INFORMATION

The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company's Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or other SEC filings. The information available at the Company's Internet address is not part of this Form 10-K or any other report filed by the Company with the SEC. The public may read and copy any documents the Company files at the SEC's Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company's SEC filings can also be obtained on the SEC's website on the Internet at www.sec.gov.

REGULATION AND SUPERVISION

Set forth below is a brief description of some of the material laws and regulations that affect the Company. The description of these statutes and regulations is only a summary and is not a complete discussion or analysis. This discussion is qualified in its entirety by reference to the statutes and regulations summarized below. No assurance can be given that these statutes or regulations will not change in the future.
 
General. The Company continues to experience a period of rapidly changing regulations and an environment of constant regulatory reform. These regulatory changes have had and will continue to have a significant impact on how the Company conducts its business. The most significant of these laws is the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), adopted on July 21, 2010, to implement significant structural reforms to the financial services industry. The full extent of the Dodd-Frank Act and other potential regulatory reforms cannot yet be fully determined and will depend to a large extent on regulations that will be adopted in the future.

As a public company, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), which include, but are not limited to, the filing of annual, quarterly and other reports with the SEC. The Company is also required to comply with other laws and regulations of the SEC applicable to public companies.

The Company is also a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the BHCA) and is registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System (the FRB). Generally, a bank holding company is required to obtain the approval of the FRB before acquiring direct or indirect ownership or control of more than five percent of the voting shares of a bank or engaging in an activity considered to be a non-banking activity, either directly or through a subsidiary. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
 
As a national bank, the Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency (the Comptroller). The prior approval of the Comptroller or other appropriate bank regulatory authority is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the constituent organizations and the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant's performance record under the Community Reinvestment Act (the CRA) and fair housing initiatives, the data security and cybersecurity infrastructure of the constituent organizations and the combined organization, and the effectiveness of the subject organizations in combating money laundering activities. Each depositor's account with the Bank is insured by the FDIC to the maximum amount permitted by law. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted by federal banking law.

As a non-depository national banking association, Trust is subject to regulation, supervision and regular examination by the Comptroller. Trust's exercise of fiduciary powers must comply with Regulation 9 promulgated by the Comptroller and with Virginia law.

The regulations of the FRB, the Comptroller and the FDIC govern most aspects of the Company's business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, and numerous other matters.  Further, the federal bank regulatory agencies have adopted guidelines and released interpretive materials that establish operational and managerial standards to promote the safe and sound operation of banks and bank holding companies.  These standards relate to the institution's key operating functions, including but not limited to internal controls, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation of management, information systems, data security and cybersecurity, and risk management.  As a consequence of the extensive regulation of commercial banking activities in the United States, the Company's business is particularly susceptible to changes in state and federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.

The Bank Holding Company Act. As a bank holding company, the Company is subject to the BHCA and regulation and supervision by the FRB. A bank holding company is required to obtain the approval of the FRB before making certain acquisitions or engaging in certain activities. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.

A bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5 percent of the voting shares of such bank. The approval of the FRB is also required for the merger or consolidation of bank holding companies.

Pursuant to the BHCA, the FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

The Company is required to file periodic reports with the FRB and provide any additional information the FRB may require. The FRB also has the authority to examine the Company and its subsidiaries, as well as any arrangements between the Company and its subsidiaries, with the cost of any such examinations to be borne by the Company.  Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates.
 
The Dodd-Frank Act. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including changes that will affect all bank holding companies and banks, including the Company and the Bank. Among other provisions, the Dodd-Frank Act:

·
changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital. The Dodd-Frank Act also made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000;

·
repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

·
created and centralized significant aspects of consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (CFPB), which is discussed in more detail below;

·
imposed limits for debit card interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees collected by financial institutions with less than $10 billion in assets;

·
restricted the preemption of state law by federal law and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption;

·
imposed comprehensive regulation of the over-the-counter derivatives market subject to significant rulemaking processes, to include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself;

·
required loan originators to retain 5 percent of any loan sold or securitized, unless it is a "qualified residential mortgage", subject to certain restrictions;

·
prohibited banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (the Volcker Rule); and

·
implemented corporate governance revisions that apply to all public companies, not just financial institutions.

Some of the rules that have been adopted or proposed to comply with Dodd-Frank Act mandates are discussed in more detail below.

Capital Requirements and Prompt Corrective Action. The FRB, the Comptroller and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and the Basel III Capital Accords. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources" in Item 7 of this report on Form 10-K.
 
The federal banking agencies have broad powers to take prompt corrective action to resolve problems of insured depository institutions.  Under the FDICIA, there are five capital categories applicable to bank holding companies and insured institutions, each with specific regulatory consequences. The extent of the agencies' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized."  These terms are defined under uniform regulations issued by each of the federal banking agencies.  If the appropriate federal banking agency determines that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to a lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject the Company and its subsidiaries to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.  In addition, an institution may not make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if the making of such dividend would cause the Bank to become undercapitalized, it could not pay a dividend to the Company.
 
Basel III Capital Framework. The federal bank regulatory agencies have adopted rules to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the Basel III Final Rules).  For purposes of these capital rules, (i) common equity Tier 1 capital (CET1) consists principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stock and trust preferred securities; and (iii) Tier 2 capital consists principally of Tier 1 capital plus qualifying subordinated debt and preferred stock, and limited amounts of an institution's allowance for loan losses.  Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules.  The Basel III Final Rules also establish risk weightings that are applied to many classes of assets held by community banks, including, importantly, applying higher risk weightings to certain commercial real estate loans.

The Basel III Final Rules were effective on January 1, 2015, and the Basel III Final Rules' capital conservation buffer (as described below) is being phased in beginning January 1, 2016 through 2019.  When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, and primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital rules.  For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.  These deductions from and adjustments to regulatory capital are generally subject to a phase in period, which began in 2015 and will continue through 2018.

The Basel III Final Rules also implement a "countercyclical capital buffer," generally designed to absorb losses during periods of economic stress and to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. This buffer is a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).

Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC. The basic limit on FDIC deposit insurance coverage is $250,000 per depositor.

Under the Federal Deposit Insurance Act (FDIA), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes.

The DIF is funded by assessments on banks and other depository institutions calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital). As required by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target "designated reserve ratio" (described in more detail below) of 2 percent for the DIF, and established a lower assessment rate schedule when the reserve ratio reaches 1.15 percent and, in lieu of dividends, provides for a lower assessment rate schedule, when the reserve ratio reaches 2 percent and 2.5 percent.
 
An institution's assessment rate is based on a statistical analysis of financial ratios that estimates the likelihood of failure over a three year period, which considers the institution's weighted average CAMELS component rating, and is subject to further adjustments including related to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets).  At December 31, 2016, total base assessment rates institutions that have been insured for at least five years range from 1.5 to 40 basis points, with rates of 1.5 to 30 basis points applying to banks with less than $10 billion in assets.
 
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the "designated reserve ratio." Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion of raising the designated reserve ratio from 1.15 percent to 1.35 percent – which requirement was met through rules adopted by the FDIC during 2016. On June 30, 2016, the designated reserve ratio rose to 1.17 percent, which triggered three major changes to deposit insurance assessments for the third quarter of 2016: (i) the range of initial assessment rates for all institutions declined from 5 to 35 basis points to 3 to 30 basis points (which are included in the total base assessment rates in the above paragraph); (ii) surcharges equal to an annual rate of 4.5 basis points began for insured depository institutions with total consolidated assets of $10 billion or more; and (iii) the revised assessment method described above was implemented. The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. The FDIC has adopted a DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act.

Incentive Compensation. The FRB, the Comptroller and the FDIC have issued regulatory guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." The findings will be included in reports of examination, and deficiencies will be incorporated into the organization's supervisory ratings. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, in 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution.  The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward.  The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements.  The comment period for these proposed rules has closed and a final rule has not yet been published.

Community Reinvestment Act. The Company is subject to the requirements of the CRA, which imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution's efforts in meeting community credit needs are currently assessed based on specified factors.  These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility.

Confidentiality and Required Disclosures of Consumer Information. The Company is subject to various laws and regulations that address the privacy of nonpublic personal financial information of consumers. The Gramm-Leach-Bliley Act and certain regulations issued thereunder protect against the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.  In 2016, the CFPB proposed rules that provide an exception to the requirement to deliver an annual privacy notice if a financial institution only provides nonpublic personal information to unaffiliated third parties under limited exceptions under the Gramm-Leach-Bliley Act and related regulations, and has not changed its policies and practices regarding disclosure of nonpublic personal financial information from those disclosed in the most recent privacy notice provided to the customer.
 
The Company is also subject to various laws and regulations that attempt to combat money laundering and terrorist financing. The Bank Secrecy Act requires all financial institutions to, among other things, create a system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping and reporting requirements. The USA Patriot Act facilitates information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering, and requires financial institutions to establish anti-money laundering programs. The Office of Foreign Assets Control (OFAC), which is a division of the U.S. Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with "enemies" of the United States, as defined by various Executive Orders and Acts of Congress. If the Bank finds a name of an "enemy" of the United States on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds into a blocked account, file a suspicious activity report with the Treasury and notify the FBI.

Consumer Laws and Regulations. The Company is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The Company must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.

The CFPB is the federal regulatory agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions. The CFPB supervises and regulates providers of consumer financial products and services and has rulemaking authority in connection with numerous federal consumer financial protection laws (for example, but not limited to, the Truth in Lending Act and the Real Estate Settlement Procedures Act).  As a smaller institution (i.e., with assets of $10 billion or less), most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Company by the FRB and to the Bank and Trust by the Comptroller. However, the CFPB may include its own examiners in regulatory examinations by a smaller institution's prudential regulators and may require smaller institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions taken by the CFPB and administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision of larger bank holding companies and banks, could influence how the FRB and Comptroller apply consumer protection laws and regulations to financial institutions that are not directly supervised by the CFPB. The precise effect of the CFPB's consumer protection activities on the Company cannot be forecast.

Mortgage Banking Regulation .  In connection with making mortgage loans, the Bank is subject to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases, restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.  The Bank's mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth in Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and Home Ownership Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws, regulations and rules.

The Bank's mortgage origination activities are also subject to Regulation Z, which implements the Truth in Lending Act.  Certain provisions of Regulation Z require mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.  Alternatively, a  mortgage  lender  can  originate  "qualified mortgages", which are generally defined as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30 years, and points and fees paid by a consumer equal to or less than 3% of the total loan amount. Higher-priced qualified mortgages (e.g., subprime loans) receive a rebuttable presumption of compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules. The Bank does not originate first mortgage lo ans at this time, and the first mortgages it purchases comply with Regulation Z's "qualified mortgage" rules. The Bank does originate second mortgages, or equity loans, and these loans do not conform to the qualified mortgage criteria but comply with applicable ability-to-repay rules.
 
Volcker Rule . The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the Volcker Rule). The Company believes that its financial condition and its operations are not and will not be significantly impacted by the Volcker Rule or its implementing regulations.  Smaller banks, with total consolidated assets of $10 billion or less, engaged in modest proprietary trading activities for their own accounts are subject to a simplified compliance program under the final rules.  Several portions of the Volcker Rule remain subject to regulatory rulemaking and legislative activity, including to further delay effectiveness of some provisions of the Volcker Rule.  The Company does not expect that any delays in the effectiveness of a portion of the Volcker Rule will significantly impact its financial condition.

Item 1A.
Risk Factors

U.S. and international economic conditions and credit markets pose challenges for the Company and could adversely affect the results of operations, liquidity and financial condition. In recent years, economic growth and business activity in the Company's local markets as well as in the broader national and international economies, has been modest. In addition, uncertainty regarding oil prices, ongoing federal budget negotiations, the implementation of the employer mandate under the Patient Protection and Affordable Care Act, and the level of U.S. debt may present challenges to businesses and have a destabilizing effect on financial markets. Unfavorable or uncertain economic conditions generally could cause a decline in the value of the Company's securities portfolio, and could increase the regulatory scrutiny of financial institutions. Another deterioration of local economic conditions could again lead to declines in real estate values and home sales and increases in the financial stress on borrowers and unemployment rates, all of which could lead to increases in loan delinquencies, problem assets and foreclosures and reductions in loan collateral value. Such a deterioration of local economic conditions could cause the level of loan losses to exceed the level the Company has provided in its allowance for loan losses which, in turn, would reduce the Company's earnings.

Global credit market conditions could return to being disrupted and volatile. Although the Company remains well capitalized and has not suffered any liquidity issues, the cost and availability of funds may be adversely affected by illiquid credit markets. Any future turbulence in the U.S. and international markets and economy may adversely affect the Company's liquidity, financial condition and profitability.

The Company is subject to interest rate risk and variations in interest rates may negatively affect its financial performance. The Company's profitability depends in substantial part on its net interest margin, which is the difference between the rates received on loans and investments and the rates paid for deposits and other sources of funds. The net interest margin depends on many factors that are partly or completely outside of the Company's control, including competition; federal economic, monetary and fiscal policies; and economic conditions. Because of the differences in the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Company's net interest margin and, in turn, its profitability.

The Company generally seeks to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that it may reasonably maintain its net interest margin; however, interest rate fluctuations, loan prepayments, loan production, deposit flows, and competitive pressures are constantly changing and influence the ability to maintain a neutral position. Generally, the Company's earnings will be more sensitive to fluctuations in interest rates depending upon the variance in volume of assets and liabilities that mature and re-price in any period. The extent and duration of the sensitivity will depend on the cumulative variance over time, the velocity and direction of changes in interest rates, shape and slope of the yield curve, and whether the Company is more asset sensitive or liability sensitive. Accordingly, the Company may not be successful in maintaining a neutral position and, as a result, the Company's net interest margin may be affected. For additional details, See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest Sensitivity" in Item 7 of this report on Form 10-K.
 
In addition, any substantial and prolonged increase in market interest rates could reduce the Company's customers' desire to borrow money or adversely affect their ability to repay their outstanding loans by increasing their credit costs. Interest rate changes could also affect the fair value of the Company's financial assets and liabilities. Accordingly, changes in levels of market interest rates could materially and adversely affect the Company's net interest margin, asset quality, loan origination volume, business, financial condition, results of operations and cash flows.

Integrating Citizens National into the Company's operations may be more difficult, costly or time-consuming than expected, and, if the Company does not successfully combine Citizens National's business into its business, the Company's results of operations would be adversely affected. The Company's future success will depend, in part, on its ability to realize the anticipated benefits and cost savings from combining the businesses of the Company and Citizens National and to combine those businesses in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the legacy customer relationships of Citizens National or the Company or decreasing revenues due to loss of customers. However, to realize these anticipated benefits and cost savings, the Company must successfully combine the businesses of the Company and Citizens National. If the Company is not able to achieve these objectives, the anticipated benefits and cost savings of the merger of the Company and Citizens National may not be realized fully, or at all, or may take longer to realize than expected.
 
System failures, interruptions, breaches of security, or the failure of a third-party provider to perform its obligations could adversely impact the Company's business operations and financial condition. Communications and information systems are essential to the conduct of the Company's businesses, as such systems are used to manage customer relationships, general ledger, deposits and loans. While the Company has established policies and procedures to prevent or limit the impact of systems failures, interruptions and security breaches, the Company's information, security, and other systems may stop operating properly or become disabled or damaged as a result of a number of factors, including events beyond the Company's control, such as sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, and cyber-attacks. Information security risks have increased in recent years and hackers, activists and other external parties have become more technically sophisticated and well-resourced. These parties use a variety of methods to attempt to breach security systems and access the data of financial services institutions and their customers.  The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. In addition, any compromise of the security systems could deter customers from using the Bank's website and online banking service, both of which involve the transmission of confidential information. The security and authentication precautions imposed by the Company and the Bank may not protect the systems from compromises or breaches of security, which would adversely affect the Company's results of operations and financial condition.

In addition, the Company outsources certain data processing to certain third-party providers. Accordingly, the Company's operations are exposed to risk that these third-party providers will not perform in accordance with the contracted arrangements under service agreements. If the third-party providers encounter difficulties, or if the Company has difficulty in communicating with them, the Company's ability to adequately process and account for customer transactions could be affected, and the Company's business operations could be adversely impacted. Further, a breach of a third-party provider's technology may cause loss to the Company's customers. Replacing these third-party providers could also create significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failure, interruption or breach of security, or the failure of a third-party provider to perform its obligations, could expose the Company to risks of data loss or data misuse, could result in violations of applicable privacy and other laws, could damage the Company's reputation and result in a loss of customers and business, could subject it to additional regulatory scrutiny or could expose it to civil litigation, possible financial liability and costly response measures. Any of these occurrences could have a material adverse effect on the Company's financial condition and results of operations.

The Company's accounting estimates and risk management processes rely on analytical and forecasting models.   Processes that management uses to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company's earnings performance and liquidity, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.

If the models that management uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures and may be unable to maintain sufficient liquidity. If the models that management uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in management's analytical or forecasting models could have a material adverse effect on the Company's business, financial condition and results of operations.
 
Weaknesses in the commercial real estate markets could negatively affect the Company's financial performance due to the Company's concentration in commercial real estate loans. At December 31, 2017, the Company had $317.2 million, or 42.95%, of total loans concentrated in commercial real estate, which includes, for purposes of this concentration, all construction loans, loans secured by multifamily residential properties, loans secured by farmland and loans secured by nonfarm, nonresidential properties. Commercial real estate loans expose the Company to a greater risk of loss than residential real estate and consumer loans. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Consequently, an adverse development with respect to one commercial real estate loan or credit relationship exposes the Company to a significantly greater risk of loss compared to an adverse development with respect to one residential real estate loan. Commercial real estate loans carry risks associated with the successful operation of a business if the properties are owner occupied. If the properties are non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts. Repayment of commercial real estate loans may, to a greater extent than residential real estate loans, be subject to adverse conditions in the real estate market or economy. Weak economic or market conditions may impair a borrower's business operations, slow the execution of new leases and lead to turnover in existing leases. The combination of these factors could result in deterioration in value of some of the Company's loans. The deterioration of one or more of the Company's significant commercial real estate loans could cause a significant increase in nonaccrual loans. An increase in nonaccrual loans could result in a loss of interest income from those loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's financial performance.

The Company's profitability depends significantly on local economic conditions and changes in the federal government's military or defense spending may negatively affect the local economy. The Company's success depends primarily on the general economic conditions of the markets in which the Company operates. Unlike larger financial institutions that are more geographically diversified, the Company provides banking and financial services to customers primarily in the Hampton Roads MSA. The local economic conditions in this area have a significant impact on the demand for loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond the Company's control could impact these local economic conditions.

In addition, Hampton Roads is home to one of the largest military installations in the world and one of the largest concentrations of Department of Defense personnel in the United States. Some of the Company's customers may be particularly sensitive to the level of federal government spending on the military or on defense-related products. Federal spending is affected by numerous factors, including macroeconomic conditions, presidential administration priorities, and the ability of the federal government to enact relevant appropriations bills and other legislation. Any of these factors could result in future cuts to military or defense spending or increased uncertainty about federal spending, which could have a severe negative impact on individuals and businesses in the Company's primary service area. Any related increase in unemployment rates or reduction in business development activities in the Company's primary service area could lead to reductions in loan demand, increases in loan delinquencies, problem assets and foreclosures and reductions in loan collateral value, which could have a material adverse effect on the Company's operating results and financial condition.

The Company is subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, correspondents or other third parties. The Company relies heavily upon information supplied by third parties, including the information contained in credit applications, employment and income documentation, property appraisals, title information, and equipment pricing and valuation, in deciding which loans to originate, as well as in establishing the terms of those loans. If any of the information upon which the Company relies during the loan approval process is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, the Company may fund a loan that it would not have otherwise funded or the Company may fund a loan on terms that it would not have otherwise extended. Whether a misrepresentation is made by the applicant or by another third party, the Company generally bears the risk of loss associated with the misrepresentation. In addition, a loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentation are often difficult to locate, and it may be difficult to recover any monetary loss the Company may suffer.
 
Declines in loans outstanding could have a material adverse impact on the Company's operating results and financial condition. Growing and diversifying the loan portfolio is part of the Company's strategic initiative.  If quality loan demand does not continue to increase and the Company's loan portfolio begins to decline, the Company expects that excess liquidity will be invested in marketable securities. Because loans typically yield higher returns than the Company's securities portfolio, a shift towards investments in the Company's asset mix would likely result in an overall reduction in net interest income and the net interest margin. The principal source of earnings for the Company is net interest income, and as discussed above, the Company's net interest margin is a major determinant of the Company's profitability. The effects of a reduction in net interest income and the net interest margin may be exacerbated by the intense competition for quality loans in the Company's primary service area and by rate reductions on loans currently held in the portfolio. As a result, a reduction in loans could have a material adverse effect on the Company's operating results and financial condition.

The Company's substantial dependence on dividends from its subsidiaries may prevent it from paying dividends to its stockholders and adversely affect its business, results of operations or financial condition. The Company is a separate legal entity from its subsidiaries and does not have significant operations or revenues of its own. The Company substantially depends on dividends from its subsidiaries to pay dividends to stockholders and to pay its operating expenses. The availability of dividends from the subsidiaries is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Company and other factors, that the Comptroller could assert that payment of dividends by the subsidiaries is an unsafe or unsound practice. In the event the subsidiaries are unable to pay dividends to the Company, the Company may not be able to pay dividends on the Company's common stock, service debt or pay operating expenses. Consequently, the inability to receive dividends from the subsidiaries could adversely affect the Company's financial condition, results of operations, cash flows and limit stockholders' return, if any, to capital appreciation.

The small-to-medium size businesses the Company targets may have fewer financial resources to weather a downturn in the economy, which could materially harm operating results. The Company targets individual and small-to-medium size business customers. Small-to-medium size businesses frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need substantial additional capital to expand and compete and may experience significant volatility in operating results. Any one or more of these factors may impair a borrower's ability to repay a loan. In addition, the success of a small-to-medium size business often depends on the management talents and efforts of one person or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact businesses in the Company's primary service area could have a proportionately greater impact on small-to-medium-size businesses and accordingly could cause the Company to incur substantial credit losses that could negatively affect its results of operations and financial condition.

The ownership of foreclosed property exposes the Company to significant costs, some of which are uncertain. When the Company has to foreclose upon real property held as collateral, the Company is exposed to the risks inherent in the ownership of real estate. The amount that the Company may realize after a loan default is dependent upon factors outside of the Company's control, including environmental cleanup liability, especially with regard to non-residential real estate, neighborhood values, real estate tax rates, operating or maintenance expenses of the foreclosed properties, and supply of and demand for properties. Significant costs associated with the ownership of real estate may exceed the income earned from such real estate, and the Company may have to advance funds to protect its investment or dispose of the real estate at a loss.  These factors may materially and adversely affect the Company's business, financial condition, cash flows and result of operations.
 
The Company and its subsidiaries are subject to extensive regulation which could adversely affect them. The Company is subject to extensive regulation by federal, state and local governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of operations, including those referenced above. Regulations adopted by these agencies, which are generally intended to protect depositors and customers rather than to benefit stockholders, govern a comprehensive range of matters including, without limitation, ownership and control of the Company's shares, acquisition of other companies and businesses, permissible activities that the Company and its subsidiaries may engage in, maintenance of adequate capital levels and other aspects of operations. These regulations could limit the Company's growth by restricting certain of its activities. The laws, rules and regulations applicable to the Company are subject to regular modification and change. Regulatory changes could subject the Company to more demanding regulatory compliance requirements which could affect the Company in unpredictable and adverse ways. Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or damage to the Company's reputation, which could have a material adverse effect on the Company's business, financial condition and results of operations. Legislation and regulatory initiatives containing wide-ranging proposals for altering the structure, regulation and competitive relationship of financial institutions are introduced regularly. The Company cannot predict in what form or whether a proposed statute or regulation will be adopted or the extent to which such adoption may affect its business.

Market risk affects the earnings of Trust. The fee structure of Trust is generally based upon the market value of accounts under administration. Most of these accounts are invested in equities of publicly traded companies and debt obligations of both government agencies and publicly traded companies. As such, fluctuations in the equity and debt markets in general have had a direct impact upon the earnings of Trust.

Compliance with the CFPB regulations aimed at the mortgage banking industry may require substantial changes to mortgage lending systems and processes that may adversely affect income from the Company's residential mortgage activities. The CFPB has finalized a number of significant rules that impact nearly every aspect of the lifecycle of a residential real estate loan. Among other things, the rules adopted by the CFPB require mortgage lenders either to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate "qualified mortgages." In June 2015, the CFPB issued rules that combined disclosures previously established by the Truth in Lending Act and the Real Estate Settlement Procedures Act into a single disclosure referred to as the TILA-RESPA Integrated Disclosure, or TRID. TRID applies to most closed-end mortgage loans and overhauls the manner in which mortgage loan origination disclosures are made.

Although the Company does not originate or sell first mortgage loans at this time, it may elect to do so in the future, and TRID does apply to the mortgages it purchases. TRID also applies to second mortgages originated by the Company (but not to equity lines of credit). During 2015, the Company made significant changes to its residential real estate business, including investments in technology and employee training. These CFPB rules, in addition to other previously-issued and to-be-issued CFPB regulations, could materially affect the Company's ability to originate and sell residential real estate loans or limit the terms on which the Company may offer products, which could adversely affect the Company's financial condition and results of operations.

The Basel III Final Rules require higher levels of capital and liquidity, which could adversely affect the Company's net income and return on equity. The capital adequacy and liquidity guidelines applicable to the Company and the Bank under the Basel III Final Rules began to be phased in beginning in 2015. The Basel III Final Rules, when fully phased in, will require the Company and the Bank to maintain substantially more capital as a result of higher minimum capital levels and more demanding regulatory capital risk-weightings and calculations. The changes to the standardized calculations of risk-weighted assets are complex and may create enormous compliance burdens for the Company and the Bank. The Basel III Final Rules will require the Company and the Bank to substantially change the manner in which they collect and report information to calculate risk-weighted assets, and may increase dramatically risk-weighted assets as a result of applying higher risk weightings to many types of loans and securities. As a result, the Company and the Bank may be forced to limit originations of certain types of commercial and mortgage loans, thereby reducing the amount of credit available to borrowers and limiting opportunities to earn interest income from the loan portfolio, which may have a detrimental impact on the Company's net income.

If the Company were to require additional capital as a result of the Basel III Final Rules, it could be required to access the capital markets on short notice and in relatively weak economic conditions, which could result in raising capital that significantly dilutes existing stockholders. Additionally, the Company may be forced to limit banking operations and activities, and growth of loan portfolios and interest income, to focus on retention of earnings to improve capital levels. Higher capital levels may also lower the Company's return on equity.
 
The Company is dependent on key personnel and the loss of one or more of those key personnel could harm its business. The banking business in Virginia, and in the Company's primary service area in the Hampton Roads MSA, is highly competitive and dominated by a relatively small number of large banks. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the Virginia community banking industry. The Company's success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, administrative, marketing and technical personnel and upon the continued contributions of and customer relationships developed by management and personnel. In particular, the Company's success is highly dependent upon the capabilities of its senior executive management. The Company believes that its management team, comprised of individuals who have worked in the banking industry for many years, is integral to implementing the Company's business plan. The Company has not entered into employment agreements with any of its executive management employees, and the loss of the services of one or more of them could harm the Company's business.

The allowance for loan losses may not be adequate to cover actual losses. A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans and leases. There is no precise method to predict loan losses. Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance. Accounting measurements related to impairment and the allowance for loan losses require significant estimates that are subject to uncertainty and changes relating to new information and changing circumstances.  The allowance for loan losses may not be adequate to cover actual loan losses. In addition, future provisions for loan losses could materially and adversely affect, and have in recent years materially and adversely affected, the Company's operating results.

The allowance for loan losses is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolutions, changes in the size and composition of the loan portfolio and industry information. Also included in management's estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment. The amount of future losses is susceptible to changes in economic and other conditions, including changes in interest rates, that may be beyond the Company's control and these future losses may exceed current estimates. If management's assumptions prove to be incorrect or if the Company experiences significant loan losses in future periods, the current level of the allowance for loan losses may not be adequate to cover actual loan losses and adjustments may be necessary. In addition, federal regulatory agencies, as an integral part of their examination process, review the Company's loans and allowance for loan losses and may require an increase in the allowance for loan losses or recognition of additional loan charge-offs, based on judgments different from those of management. While management believes that the Company's allowance is adequate to cover current losses, the Company cannot assure investors that it will not need to increase the allowance or that regulators will not require the allowance to be increased. Either of these occurrences could materially and adversely affect earnings and profitability.

The Company may be adversely affected by changes in government monetary policy. As a bank holding company, the Company's business is affected by the monetary policies established by the FRB, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. In setting its policy, the FRB may utilize techniques such as the following:

·
Engaging in open market transactions in U.S. Government securities;
·
Setting the discount rate on member bank borrowings; and
·
Determining reserve requirements.

These techniques determine, to a significant extent, the Company's cost of funds for lending and investing. These techniques, all of which are outside the Company's control, may have an adverse effect on deposit levels, net interest margin, loan demand or the Company's business and operations.
 
The Company's future success depends on its ability to compete effectively in the highly competitive financial services industry. The Company faces substantial competition in all phases of its operations from a variety of different competitors. Growth and success depends on the Company's ability to compete effectively in this highly competitive financial services environment. Many competitors offer products and services that are not offered by the Company, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively and may have larger lending limits that would allow them to serve the credit needs of larger customers. In addition, financial technology start-ups are emerging in key areas of banking.  Some of the financial services organizations with which the Company competes are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured national banks, and may have broader geographic services areas and lower cost structures.  As a result, these non-bank competitors have certain advantages over the Company in accessing funding and in providing various services. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Failure to compete effectively to attract new and retain current customers in the Company's markets could cause it to lose market share, slow its growth rate and may have an adverse effect on its financial condition and results of operations.

The Company may not be able to compete effectively without the appropriate use of current technology. The use of technology in the financial services market, including the banking industry, evolves frequently. The Company may be unable to attract and maintain banking relationships with certain customers if it does not offer appropriate technology-driven products and services. In addition to better serving customers, the effective use of technology may increase efficiency and reduce costs. The Company may not be able to effectively implement new technology-driven products or services or be successful in marketing these products and services to its customers. As a result, the Company's ability to compete effectively may be impaired, which could lead to a material adverse effect on the Company's financial condition and results of operations.

Negative public opinion could damage the Company's reputation and adversely impact the Company's business, financial condition and results of operation. Reputation risk, or the risk to the Company's business, financial condition and results of operation from negative public opinion, is inherent in the financial services industry. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending or foreclosure practices, regulatory compliance, corporate governance and sharing or inadequately protecting customer information, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion could adversely affect the Company's ability to keep and attract customers and employees, could expose it to litigation and regulatory action, and could adversely affect its access to the capital markets. Damage to the Company's reputation could adversely affect deposits and loans and otherwise negatively affect the Company's business, financial condition and results of operation.

Deposit insurance premiums could increase in the future, which may adversely affect future financial performance. The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a certain level. Economic conditions from 2008 to 2011 increased the rate of bank failures and expectations for further bank failures, requiring the FDIC to make payments for insured deposits from the DIF. Although the DIF has since been replenished, a similar economic downturn in the future could require measures similar to those implemented during the last financial crisis, such as special assessments or required prepayments of insurance premiums. If the FDIC takes action to replenish the DIF, or if the Bank's asset size increases, the Bank's FDIC insurance premiums could increase, which could have an adverse effect on the Company's results of operations.

The Company may need to raise additional capital in the future and such capital may not be available when needed or at all. The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. Economic conditions and the loss of confidence in financial institutions may increase the Company's cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve Bank's discount window. The Company's ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of the Company's control, and the Company's financial performance.
 
The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets, or a downgrade of the parent company or the Bank's ratings, may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the Company's liquidity, business, financial condition and results of operations.

The Company and its subsidiaries are subject to operational risk, which could adversely affect business, financial condition and results of operation. The Company and its subsidiaries, like all businesses, are subject to operational risk, including the risk of loss resulting from human error, fraud or unauthorized transactions due to inadequate or failed internal processes and systems, and external events that are wholly or partially beyond the Company's control (including, for example, sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, and cyber-attacks). Operational risk also encompasses compliance (legal) risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards. The Company and its subsidiaries have established a system of internal controls to address these risks, but there are inherent limitations to such risk management strategies as there may exist, or develop in the future, risks that are not anticipated, identified or monitored. Any losses resulting from operational risk could take the form of explicit charges, increased operational costs, litigation costs, harm to reputation or forgone opportunities, loss of customer business, or the unauthorized release, misuse, loss or destruction of proprietary information, any and all of which could have a material adverse effect on the Company's business, financial condition and results of operations.

The Company's directors and executive officers own a significant portion of the Company's common stock and can exert significant influence over its business and corporate affairs. The Company's directors and executive officers, as a group, beneficially owned 29.12% of the Company's common stock as of June 30, 2017. Consequently, if they vote their shares in concert, they can significantly influence the outcome of matters submitted to the Company's stockholders for approval, including the election of directors. The interests of the Company's directors and executive officers may conflict with the interests of other holders of the Company's common stock, and the Company's directors and executive officers may take actions affecting the Company with which other holders of the Company's common stock disagree.

Future sales of the Company's common stock by stockholders or the perception that those sales could occur may cause the common stock price to decline. Although the Company's common stock is listed for trading on the NASDAQ stock market, the trading volume in the common stock may be lower than that of other larger financial institutions. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the potential for lower relative trading volume in the common stock, significant sales of the common stock in the public market, or the perception that those sales may occur, could cause the trading price of the Company's common stock to decline or to be lower than it otherwise might be in the absence of these sales or perceptions.

Future issuances of the Company's common stock could adversely affect the market price of the common stock and could be dilutive. The Company may issue additional shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, shares of the Company's common stock. Issuances of a substantial number of shares of common stock, or the expectation that such issuances might occur, could materially adversely affect the market price of the common stock and could be dilutive to stockholders. Any decision the Company makes to issue common stock in the future will depend on market conditions and other factors, and the Company cannot predict or estimate the amount, timing, or nature of possible future issuances of common stock. Accordingly, holders of the Company's common stock bear the risk that future issuances of securities will reduce the market price of the common stock and dilute their stock holdings in the Company.
 
Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

As of December 31, 2017, the Company owned its main office, which includes a branch, located in Hampton, Virginia; the corporate headquarters, which includes a branch; six office buildings; and 12 branches. All of these are owned directly and free of any encumbrances.
 
The land at the Fort Monroe branch is leased by the Company under an agreement that expires in July 2019. Two of the remaining three branches are leased from unrelated parties. The Crown Center branch is leased from Crown Center Associates, LLC, which is indirectly owned by Michael Glasser, a member of the Company's Board of Directors. These three branch leases have renewal options with expiration dates ranging from March 31, 2018 to December 31, 2024.

For more information concerning the commitments under current leasing agreements, see Note 6 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.

Item 3.
Legal Proceedings

Neither the Company nor any of its subsidiaries is a party to any material pending legal proceedings before any court, administrative agency, or other tribunal.

Item 4.
Mine Safety Disclosures

None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT

Name (Age) And Present Position
Served in
Current Position
Since
Principal Occupation During Past Five Years
Robert F. Shuford, Sr. (80)
   
Chairman, President & Chief Executive Officer
Old Point Financial Corporation
1965
Chairman of the Board, President & Chief Executive Officer of the Company
 
Chairman of the Board of the Bank
     
Robert F. Shuford, Jr. (53)
   
Executive Vice President/Bank
Old Point Financial Corporation
2015
Executive Vice President/Bank of the Company since 2015; Chief Operating Officer & Senior Vice President/Operations of the Company from 2003 to 2015
 
President & Chief Executive Officer of the Bank since 2015; Senior Executive Vice President & Chief Operating Officer of the Bank from 2012 to 2015; Executive Vice President & Chief Operating Officer of the Bank from 2003 to 2012
     
Jeffrey W. Farrar (57)
   
Chief Financial Officer & Senior Vice President/Finance
Old Point Financial Corporation
2017
Chief Financial Officer & Senior Vice President/Finance of the Company; a Certified Public Accountant, Mr. Farrar previously spent the past three years as Executive Vice President and Director of Wealth Management, Mortgage and Insurance for Union Bankshares Corporation; and the previous 18 years as Chief Financial Officer for StellarOne Corporation and its predecessor companies.
 
Chief Financial Officer & Executive Vice President of the Bank
     
Eugene M. Jordan, II (63)
   
Secretary to the Board & Executive Vice President/Trust
Old Point Financial Corporation
2003
Secretary to the Board & Executive Vice President/Trust of the Company since 2015; Executive Vice President/ Trust of the Company from 2003 to 2015
 
President and Chief Executive Officer of Trust since 2003
 
Joseph R. Witt (57)
   
Chief Business Development Officer & Senior Vice President
Old Point Financial Corporation
2008
Chief Business Development Officer & Senior Vice President of the Company since 2015; Chief Administrative Officer & Senior Vice President/Administration of the Company from 2012 to 2015; Senior Vice President/ Corporate Banking/Human Resources of the Company from 2010 to 2012; Senior Vice President/Corporate Banking of  the Company from 2008 to 2010
 
Senior Executive Vice President & Chief Business Development Officer of the Bank since 2015; Senior Executive Vice President & Chief Administrative Officer of the Bank from 2012 to 2015; Executive Vice President/ Corporate Banking & Human Resources Director of the Bank from 2010 to 2012
     
Donald S. Buckless (53)
   
Chief Lending Officer & Senior Vice President
Old Point Financial Corporation
2016
Chief Lending Officer & Senior Vice President of the Company since 2016
 
Chief Lending Officer & Executive Vice President of the Bank since 2016; Chief Lending Officer & Senior Vice  President of the Bank from 2015 to 2016; Senior Vice  President/Commercial Lending Officer of the Bank from  May 2012 to 2015; Senior Vice President of SunTrust from December 2000 to May 2012
 
Part II
Item 5.
Market for Reg istrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of t he Company is quoted on the NASDAQ Capital Market under the symbol "OPOF". The approximate number of stockholders of record as of March 13, 2018 was 1,192. On that date, the closing price of the Company's common stock on the NASDAQ Capital Market was $25.85. The range of high and low sale prices and dividends paid per share of the Company's common stock for each quarter during 2017 and 2016 is presented in Item 7 of this report on Form 10-K under "Capital Resources" and is incorporated herein by reference. Additional information related to restrictions on funds available for dividend declaration can be found in Note 17 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.

On January 12, 2010, the Company authorized a program to repurchase during any given calendar year up to an aggregate of 5 percent of the shares of the Company's common stock outstanding as of January 1 of that calendar year. The Company did not repurchase any shares of the Company's common stock under this plan during 2017. There is currently no stated expiration date for this program.

Pursuant to the Company's stock option plans, participants may exercise stock options by surrendering shares of the Company's common stock that the participants already own. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable stock options. No such repurchases occurred during 2017.
 
Item 6.
Selected Financial Data

The following table summarizes the Company's performance for the past five years.

SELECTED FINANCIAL HIGHLIGHTS
                             
                               
Years ended December 31,
 
2017
   
2016
   
2015
   
2014
   
2013
 
(dollars in thousands except per share data)
 
RESULTS OF OPERATIONS
                             
Interest income
 
$
32,934
   
$
29,826
   
$
30,295
   
$
30,289
   
$
29,823
 
Interest expense
   
3,012
     
2,574
     
3,632
     
3,849
     
4,680
 
Net interest income
   
29,922
     
27,252
     
26,663
     
26,440
     
25,143
 
Provision for loan losses
   
4,160
     
1,930
     
1,025
     
600
     
1,300
 
Net interest income after provision for loan losses
   
25,762
     
25,322
     
25,638
     
25,840
     
23,843
 
Noninterest income
   
14,058
     
13,466
     
13,136
     
12,644
     
12,773
 
Noninterest expenses
   
39,946
     
34,831
     
35,086
     
34,172
     
33,105
 
Income before income taxes
   
(126
)
   
3,957
     
3,688
     
4,312
     
3,511
 
Income tax expense
   
(97
)
   
160
     
54
     
196
     
348
 
Net income (loss)
 
$
(29
)
 
$
3,797
   
$
3,634
   
$
4,116
   
$
3,163
 
                                         
FINANCIAL CONDITION
                                       
Total assets
 
$
981,826
   
$
902,966
   
$
896,787
   
$
876,280
   
$
864,288
 
Securities available for sale, at fair value
 
$
157,121
   
$
199,365
   
$
214,192
   
$
139,346
   
$
155,639
 
Loans held for investment, net of deferred fees and costs
 
$
738,540
   
$
603,882
   
$
568,475
   
$
535,994
   
$
500,699
 
Allowance for loan losses
 
$
9,448
   
$
8,245
   
$
7,738
   
$
7,075
   
$
6,831
 
Deposits
 
$
783,594
   
$
784,502
   
$
746,471
   
$
716,654
   
$
725,405
 
Total borrowings
 
$
98,193
   
$
18,704
   
$
50,950
   
$
67,816
   
$
56,586
 
Total liabilities
 
$
885,438
   
$
808,976
   
$
803,611
   
$
787,783
   
$
783,527
 
Stockholders' equity
 
$
96,388
   
$
93,990
   
$
93,176
   
$
88,497
   
$
80,761
 
                                         
PERTINENT RATIOS
                                       
Return on average assets
   
0.00
%
   
0.43
%
   
0.41
%
   
0.47
%
   
0.36
%
Return on average equity
   
(0.03
%)
   
3.99
%
   
4.02
%
   
4.81
%
   
3.73
%
Net interest margin (FTE)
   
3.64
%
   
3.66
%
   
3.56
%
   
3.57
%
   
3.23
%
Efficiency ratio
   
90.83
%
   
85.54
%
   
88.16
%
   
87.43
%
   
87.31
%
Tier 1 capital to risk weighted assets
   
11.18
%
   
13.39
%
   
13.78
%
   
14.36
%
   
14.50
%
Total capital to risk weighted assets
   
12.28
%
   
14.51
%
   
14.89
%
   
15.44
%
   
15.58
%
Leverage ratio
   
9.98
%
   
10.68
%
   
10.93
%
   
10.75
%
   
10.37
%
Tangible common equity / tangible assets
   
9.76
%
   
10.41
%
   
10.39
%
   
10.10
%
   
9.34
%
Cash dividends declared
 
$
0.44
   
$
0.40
   
$
0.34
   
$
0.26
   
$
0.22
 
Book value
 
$
19.20
   
$
18.94
   
$
18.79
   
$
17.85
   
$
16.29
 
                                         
ASSET QUALITY
                                       
Nonaccrual loans
 
$
12,882
   
$
7,159
   
$
4,582
   
$
5,570
   
$
11,324
 
OREO
 
$
-
   
$
1,067
   
$
2,741
   
$
5,106
   
$
6,415
 
ALLL / total outstanding loans
   
1.28
%
   
1.37
%
   
1.36
%
   
1.32
%
   
1.36
%
Nonaccrual loans / total loans
   
1.74
%
   
1.19
%
   
0.81
%
   
1.04
%
   
2.26
%
ALLL / nonaccrual loans
   
73.34
%
   
115.17
%
   
168.88
%
   
127.02
%
   
60.32
%
NPAs / total outstanding loans
   
2.18
%
   
1.84
%
   
1.88
%
   
2.20
%
   
3.65
%
Net charge-offs / total average loans
   
0.44
%
   
0.24
%
   
0.06
%
   
0.07
%
   
0.38
%
Provision / total average loans
   
0.62
%
   
0.33
%
   
0.18
%
   
0.12
%
   
0.28
%
                                         
PER SHARE DATA
                                       
Basic earnings (loss) per share
 
$
(0.01
)
 
$
0.77
   
$
0.73
   
$
0.83
   
$
0.64
 
Diluted earnings (loss) per share
 
$
(0.01
)
 
$
0.77
   
$
0.73
   
$
0.83
   
$
0.64
 
Cash dividends declared
 
$
0.44
   
$
0.40
   
$
0.34
   
$
0.26
   
$
0.22
 
Market value per share
 
$
29.75
   
$
25.00
   
$
17.16
   
$
15.00
   
$
12.82
 
Book value per share
 
$
19.20
   
$
18.94
   
$
18.79
   
$
17.85
   
$
16.29
 
Tangible book value per share
 
$
19.20
   
$
18.94
   
$
18.79
   
$
17.85
   
$
16.29
 
Price to earnings ratio, diluted
   
(2,975.00
)
   
32.47
     
23.51
     
18.07
     
20.03
 
Price to book value ratio
   
1.55
     
1.32
     
0.91
     
0.84
     
0.79
 
Dividend payout ratio
   
(4,400.00
%)
   
51.95
%
   
46.58
%
   
31.33
%
   
34.38
%
Weighted average shares outstanding, basic
   
4,991,060
     
4,959,173
     
4,959,009
     
4,959,009
     
4,959,009
 
Weighted average shares outstanding, diluted
   
4,991,060
     
4,960,934
     
4,959,009
     
4,959,009
     
4,959,009
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion is intended to assist readers in understanding and evaluating the financial condition, changes in financial condition and the results of operations of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Trust. This discussion should be read in conjunction with the Consolidated Financial Statements and other financial information contained elsewhere in this report.

Caution About Forward-Looking Statements
In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include, but are not limited to, statements regarding profitability, including the focus on reducing time deposits; the net interest margin; strategies for managing the net interest margin and the expected impact of such efforts; levels and sources of liquidity; the loan portfolio and expected trends in the quality of the loan portfolio; the allowance and provision for loan losses; the effect of a sustained increase in nonperforming assets; the securities portfolio; monetary policy actions of the Federal Open Market Committee; changes in interest rates; interest rate sensitivity; asset quality; levels of net loan charge-offs and nonperforming assets; sales of OREO properties; levels of interest expense; levels and components of noninterest income and noninterest expense; lease expense; income taxes; expected impact of efforts to restructure the balance sheet; expected yields on the loan and securities portfolios; expected rates on interest-bearing liabilities; expected timing of and effect of the pending acquisition of Citizens National; market risk; future impacts of the Tax Cuts and Jobs Act (the Tax Act) on the Company's operations; business and growth strategies; investment strategy; and financial and other goals. Forward-looking statements often use words such as "believes," "expects," "plans," "may," "will," "should," "projects," "contemplates," "anticipates," "forecasts," "intends" or other words of similar meaning. These statements can also be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to the possibility that: any of the anticipated benefits of the pending acquisition of Citizens National will not be realized or will not be realized within the expected time period; Citizens National may not be integrated into the Company successfully or such integration may be more difficult, time-consuming, or costly than expected; or obtaining required regulatory approvals or completing the acquisition may be more difficult, time-consuming, or costly than expected. Other factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, effects of or changes in interest rates and yields; general economic and general business conditions, including unemployment levels; uncertainty over future federal spending or the budget priorities of the current presidential administration, particularly in connection with the Department of Defense, on the Company's service area; the Tax Act, including, but not limited to, the effect of the lower corporate tax rate, including on the valuation of the Company's tax assets and liabilities; any future refinements to the Company's preliminary analysis of the impact of the Tax Act on the Company; changes in the effect of the Tax Act due to issuance of interpretive regulatory guidance or enactment of corrective or supplemental legislation; the transfer of the securities portfolio from held-to-maturity securities to available-for-sale securities; the quality or composition of the loan or securities portfolios; the volume and mix of interest-earning assets and interest-bearing liabilities; the effects of management's investment strategy and strategy to manage the net interest margin; the adequacy of the Company's credit quality review processes; the level of nonperforming assets and related charge-offs and recoveries; turnover times experienced by the mortgage companies to which the Company has extended warehouse lines of credit; the performance of the Company's re-opened indirect automobile dealer lending program; the federal government's guarantee of repayment of student loans purchased by the Company; the ability of the Company to diversify its sources of noninterest income; new incentive structure for securities brokerage activities; the local real estate market; volatility and disruption in national and international financial markets; government intervention in the U.S. financial system; application of the Basel III capital standards to the Company and its subsidiaries; FDIC premiums and/or assessments; demand for loan and other banking products and financial services in the Company's primary service area; levels of noninterest income and expense; deposit flows; competition; the use of inaccurate assumptions in management's modeling systems; technological risks and developments and cyber-attacks and events; any interruption or breach of security in the Company's information systems or those of the Company's third party vendors or other service providers; reliance on third parties for key services; adequacy of the allowance for loan losses; and changes in accounting principles, policies and guidelines. The Company could also be adversely affected by monetary and fiscal policies of the U.S. Government, as well as any regulations or programs implemented pursuant to the Dodd-Frank Act or other legislation and policies of the Comptroller, U.S. Treasury and the Federal Reserve Board.
 
These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results.

Executive Overview
Description of Operations
Headquartered in Hampton, Virginia, the Company is the parent company of Trust and the Bank. Trust is a wealth management services provider. The Bank offers a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and commercial customers. The Bank is an independent community bank and has 18 branches throughout the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County.
 
Management Initiatives in 2017
Management's two main 2017 initiatives were to grow and diversify the loan portfolio and to expand and increase noninterest revenues. Management believes substantial progress was made with respect to both initiatives. Net loans held for investment increased by $133.5 million when comparing December 31, 2017 to December 31, 2016. This was in large part due to an expansion of the Company's indirect automobile lending program, which began in late 2016. Noninterest income increased $592 thousand in 2017 from 2016 which was driven by the acquisition of Old Point Mortgage completed in the second quarter of 2017. The Company also established Old Point Insurance, LLC in 2017, in partnership with Morgan Marrow Company offering a full array of insurance products.

Primary Financial Data for 2017
In 2017, the Company's net income decreased $3.8 million to a net loss of $29 thousand, as compared to net income of $3.8 million in 2016, or a decrease of 100.76%. The decline was primarily the result of an increased provision for loan losses and three nonrecurring expenses in the fourth quarter. First, the Company completed the previously announced termination and settlement of its defined benefit pension plan which resulted in $2.2 million in after-tax compensation expense. Second, the Company incurred after-tax expenses associated with the planned merger with Citizens National Bank totaling $241 thousand. Third, the changes to the corporate income tax rate resulting from the passage of the Tax Cuts and Jobs Act (the "Tax Act") precipitated $1.2 million in tax expenses related to the reevaluation of the Company's net deferred tax asset.

Assets as of December 31, 2017 were $981.8 million, an increase of $78.9 million or 8.73% compared to assets as of December 31, 2016. During 2017, the Company experienced significant loan growth which was funded by cash flows from the securities portfolio and decreased cash and cash equivalents as well as borrowings from the Federal Home Loan Bank (FHLB). Net loans grew $133.5 million, or 22.41%, over the year, while securities available for sale declined $42.2 million, cash and cash equivalents decreased $11.4 million, and FHLB advances increased $67.5 million.

Critical Accounting Estimates
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles (GAAP) and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. The accounting policy that required management's most difficult, subjective or complex judgments is the Company's allowance for loan losses, which is described below.

Allowance for Loan Losses
The allowance for loan losses is an estimate of probable losses inherent in the loan portfolio. The allowance is based on three basic principles of accounting which require: (i) that losses be accrued when they are probable of occurring and estimable, (ii) that losses be accrued based on the differences between the loan balances and the value of collateral, present value of expected future cash flows (discounted at the loan's effective interest rate) or values that are observable in the secondary market and (iii) that adequate documentation exist to support the allowance for loan losses estimate.

The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. Management's estimate is based on certain observable, historical data and other factors that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; discounted cash flow analysis; loan volumes; geographic, borrower and industry concentrations; the findings of internal credit quality assessments; and results from external bank regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

Authoritative accounting literature requires that the impairment of loans that have been separately identified for evaluation be measured based on the present value of expected future cash flows (discounted at the loan's effective interest rate) or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. Authoritative accounting literature, as amended, also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans.
 
For loans not individually evaluated for impairment, the loan portfolio is segmented into pools, based on the loan classifications as defined by Schedule RC-C of the Federal Financial Institutions Examination Council Consolidated Reports of Condition and Income Form 041 (Call Report) and collectively evaluated for impairment. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan's payments are current (including loans 1-29 days past due), 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of December 31, 2017 and December 31, 2016, the Company had no loans in these categories.

Specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan and the net market value of any underlying collateral.

While management uses the best information available to establish the allowance for loan losses, future adjustment to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

During the third quarter of 2017, the Company changed its method for calculating the allowance for loan and lease losses. This change is discussed in detail in Note 4 of the Notes to the Consolidated Financial Statements included in this annual report on Form 10-K.

Other Than Temporary Impairment of Securities
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on the Company's ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. Management regularly reviews each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, management's best estimate of the present value of cash flows expected to be collected from debt securities, management's intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Other Real Estate Owned (OREO)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and management's ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions.
 
Retirement Plan
The Company maintained a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consisted primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Company's actuary determined plan obligations and annual pension expense using a number of key assumptions including the discount rate, the interest crediting rate, the estimated future return on plan assets and the anticipated rate of future salary increases. This plan was terminated in the fourth quarter of 2017. The termination and settlement of this plan resulted in $2.2 million in after-tax compensation expense in 2017.
 
Income Taxes
The Company recognizes expense for federal income and state bank franchise taxes payable as well as deferred federal income taxes for estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the Consolidated Financial Statements. Income and franchise tax returns are subject to audit by the Internal Revenue Service (IRS) and state taxing authorities. Income and franchise tax expense for current and prior periods is subject to adjustment based on the outcome of such audits. The Company believes it has adequately provided for all taxes payable.
The Tax Act was signed into law on December 22, 2017. This permanently reduced the corporate income tax rate from a maximum of 35% to 21%, effective for tax years including or commencing January 1, 2018. The Company recorded a charge to tax expense in the fourth quarter of 2017 of $1.2 million associated with an initial estimate of the reevaluation of its deferred tax assets and liabilities necessitated by the lower corporate income tax rate.

Earnings Summary
Net loss for 2017 was $29 thousand ($0.01 per diluted share) compared to net income of $3.8 million ($0.77 per diluted share) in 2016. The decrease in net income was due to higher noninterest expense, particularly nonrecurring charges related to the termination of the Company's defined benefit pension plan and the planned merger with Citizens National Bank. Personnel costs also increased due to the acquisition of Old Point Mortgage in the second quarter. Provision expense was also significantly higher in 2017. Partially offsetting the higher noninterest expense were increases in net interest income and noninterest income. Net interest income increased mainly due to significant growth in the loan portfolio, while the Old Point Mortgage acquisition was primarily responsible for the increase in noninterest income.

Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets.

Net interest income, on a fully tax-equivalent basis, was $30.9 million in 2017, an increase of $2.7 million from 2016 and an increase of $3.2 million from 2015. Growth in the loan portfolio was primarily responsible for the increase in 2017 when compared to 2016. The net interest margin was 3.64% in 2017 as compared to 3.66% in 2016 and 3.56% in 2015. The decline in the net interest margin in 2017 relative to 2016 was primarily the result of a higher average rate on interest-bearing liabilities.

When comparing 2017 to 2016, the following changes occurred. Tax equivalent interest income increased $3.1 million, or 10.21%. Average earning assets increased $79.0 million, or 10.27%. Total average loans increased $87.8 million, or 15.00%, and average investment securities decreased $1.0 million, or 0.59%, as continued loan demand allowed the Company to shift its assets from securities to loans.

In 2017, the Company significantly expanded its indirect automobile lending program as part of a strategic initiative to grow and diversify the loan portfolio. This was largely responsible for the strong loan growth which was funded in part by excess liquidity that was previously held in a noninterest-bearing account at a correspondent bank. This contributed to the $21.4 million decline in average cash and due from banks. This also explains the decreases in interest-bearing due from banks and federal funds sold average balances. Interest income was enhanced by the loan growth and the shift in asset composition to loans from lower yielding and non-earnings assets. However, interest income was negatively impacted by continued declines in average loan yields, from 4.52% in 2016 to 4.36% in 2017, as yields on new loan originations were generally lower than on loan maturities and paydowns. Total average earning asset yield was unchanged in 2017 compared to 2016 at 4.00%. Management expects the recent trend in declining loan yields that the Company has experienced to stabilize. The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate three times in 2017, and additional rate increases are forecasted for 2018.
 
Average interest-bearing liabilities increased $40.8 million, or 7.17%, due to increases in both interest-bearing non-maturity deposits and FHLB advances. Additional FHLB advances supplemented modest growth in average deposits and provided funding to support loan growth. Total interest expense increased $438 thousand, or 17.02%, when comparing 2017 to 2016. The increase was driven by increased deposit and borrowing costs. The average rate on interest-bearing liabilities in 2017 was 0.49%, an increase of 4 basis points from 2016.

The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields. Nonaccrual loans are included in loans outstanding.

TABLE I
AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*

Years ended December 31,
 
2017
   
2016
   
2015
 
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Yield/
Rate
 
   
(dollars in thousands)
 
ASSETS
                                                     
Loans *
 
$
673,015
   
$
29,318
     
4.36
%
 
$
585,206
   
$
26,451
     
4.52
%
 
$
563,534
   
$
26,106
     
4.63
%
Investment securities:
                                                                       
Taxable
   
102,644
     
1,964
     
1.91
%
   
104,549
     
1,802
     
1.72
%
   
130,541
     
2,510
     
1.92
%
Tax-exempt *
   
67,403
     
2,426
     
3.60
%
   
66,509
     
2,326
     
3.50
%
   
71,831
     
2,520
     
3.51
%
Total investment securities
   
170,047
     
4,390
     
2.58
%
   
171,058
     
4,128
     
2.41
%
   
202,372
     
5,030
     
2.49
%
Interest-bearing due from banks
   
1,343
     
15
     
1.12
%
   
9,226
     
48
     
0.52
%
   
5,848
     
15
     
0.26
%
Federal funds sold
   
921
     
8
     
0.87
%
   
1,667
     
6
     
0.36
%
   
1,860
     
2
     
0.11
%
Other investments
   
2,348
     
155
     
6.60
%
   
1,562
     
113
     
7.23
%
   
2,373
     
133
     
5.60
%
Total earning assets
   
847,674
     
33,886
     
4.00
%
   
768,719
     
30,746
     
4.00
%
   
775,987
     
31,286
     
4.03
%
Allowance for loan losses
   
(8,950
)
                   
(7,895
)
                   
(7,404
)
               
     
838,724
                     
760,824
                     
768,583
                 
                                                                         
Cash and due from banks
   
20,723
                     
42,111
                     
31,858
                 
Bank premises and equipment, net
   
38,428
                     
40,480
                     
41,988
                 
Other assets
   
41,171
                     
42,643
                     
41,957
                 
                                                                         
Total assets
 
$
939,046
                   
$
886,058
                   
$
884,386
                 
                                                                         
LIABILITIES AND STOCKHOLDERS' EQUITY 
                                             
Time and savings deposits:
                                                                       
Interest-bearing transaction accounts
 
$
27,909
   
$
10
     
0.04
%
 
$
20,045
   
$
9
     
0.04
%
 
$
11,219
   
$
4
     
0.04
%
Money market deposit accounts
   
233,295
     
291
     
0.12
%
   
221,339
     
179
     
0.08
%
   
228,627
     
186
     
0.08
%
Savings accounts
   
82,872
     
41
     
0.05
%
   
78,305
     
39
     
0.05
%
   
74,436
     
37
     
0.05
%
Time deposits
   
208,095
     
2,208
     
1.06
%
   
210,339
     
2,116
     
1.01
%
   
221,087
     
2,144
     
0.97
%
                                                                         
Total time and savings deposits
   
552,171
     
2,550
     
0.46
%
   
530,028
     
2,343
     
0.44
%
   
535,369
     
2,371
     
0.44
%
Federal funds purchased, repurchase
agreements and other borrowings
   
25,743
     
38
     
0.15
%
   
25,348
     
25
     
0.10
%
   
30,777
     
30
     
0.10
%
Federal Home Loan Bank advances
   
32,301
     
424
     
1.31
%
   
14,016
     
206
     
1.47
%
   
27,466
     
1,231
     
4.48
%
                                                                         
Total interest-bearing liabilities
   
610,215
     
3,012
     
0.49
%
   
569,392
     
2,574
     
0.45
%
   
593,612
     
3,632
     
0.61
%
Demand deposits
   
226,951
                     
214,876
                     
194,677
                 
Other liabilities
   
5,359
                     
6,510
                     
5,664
                 
                                                                         
Total liabilities
   
842,525
                     
790,778
                     
793,953
                 
Stockholders' equity
   
96,521
                     
95,280
                     
90,433
                 
                                                                         
Total liabilities and stockholders' equity
 
$
939,046
                   
$
886,058
                   
$
884,386
                 
                                                                         
Net interest margin *
         
$
30,874
     
3.64
%
         
$
28,172
     
3.66
%
         
$
27,654
     
3.56
%

* Computed on a fully tax-equivalent basis using a 34% rate.

The tax-equivalent adjustment of income and yields will change in 2018 as a result of the passage of the Tax Act. The benefit of the tax-exemption for interest income from municipal bonds and loans to municipalities will decline due to the decrease in the corporate income tax rate to 21%.
 
The following table summarizes changes in net interest income attributable to changes in the volume of interest-bearing assets and liabilities and changes in interest rates.

TABLE II
VOLUME AND RATE ANALYSIS*

   
2017 vs. 2016
Increase (Decrease)
Due to Changes in:
   
2016 vs. 2015
Increase (Decrease)
Due to Changes in:
   
2015 vs. 2014
Increase (Decrease)
Due to Changes in:
 
                                                       
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
   
(in thousands)
 
EARNING ASSETS
                                                     
Loans *
 
$
3,969
   
$
(1,102
)
 
$
2,867
   
$
1,004
   
$
(659
)
 
$
345
   
$
2,237
   
$
(1,090
)
 
$
1,147
 
Investment securities:
                                                                       
Taxable
   
(33
)
   
195
     
162
     
(500
)
   
(208
)
   
(708
)
   
(740
)
   
(312
)
   
(1,052
)
Tax-exempt *
   
31
     
69
     
100
     
(187
)
   
(7
)
   
(194
)
   
(79
)
   
19
     
(60
)
Total investment securities
   
(2
)
   
264
     
262
     
(687
)
   
(215
)
   
(902
)
   
(819
)
   
(293
)
   
(1,112
)
                                                                         
Federal funds sold
   
(3
)
   
5
     
2
     
-
     
4
     
4
     
(2
)
   
(1
)
   
(3
)
Other investments
   
(106
)
   
115
     
9
     
46
     
(33
)
   
13
     
(1
)
   
11
     
10
 
Total earning assets
   
3,858
     
(718
)
   
3,140
     
363
     
(903
)
   
(540
)
   
1,415
     
(1,373
)
   
42
 
                                                                         
INTEREST-BEARING LIABILITIES
                                                     
Interest-bearing transaction accounts
   
4
     
(3
)
   
1
     
5
     
-
     
5
     
-
     
(1
)
   
(1
)
Money market deposit accounts
   
10
     
102
     
112
     
(7
)
   
-
     
(7
)
   
12
     
(5
)
   
7
 
Savings accounts
   
2
     
-
     
2
     
2
     
-
     
2
     
1
     
(10
)
   
(9
)
Time deposits
   
(23
)
   
115
     
92
     
(104
)
   
76
     
(28
)
   
(167
)
   
(43
)
   
(210
)
Total time and savings deposits
   
(7
)
   
214
     
207
     
(104
)
   
76
     
(28
)
   
(154
)
   
(59
)
   
(213
)
Federal funds purchased, repurchase
                                                                       
agreements and other borrowings
   
-
     
13
     
13
     
(5
)
   
-
     
(5
)
   
(2
)
   
-
     
(2
)
Federal Home Loan Bank advances
   
269
     
(51
)
   
218
     
(603
)
   
(422
)
   
(1,025
)
   
(45
)
   
43
     
(2
)
Total interest-bearing liabilities
   
262
     
176
     
438
     
(712
)
   
(346
)
   
(1,058
)
   
(201
)
   
(16
)
   
(217
)
                                                                         
Change in net interest income
 
$
3,596
   
$
(894
)
 
$
2,702
   
$
1,075
   
$
(557
)
 
$
518
   
$
1,616
   
$
(1,357
)
 
$
259
 

* Computed on a fully tax-equivalent basis using a 34% rate.

Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact the amount of interest income and expense the Company receives or pays on a significant portion of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short-term until maturity. Management is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk.
 
Three complementary modeling techniques are utilized to measure and monitor the exposure to interest rate risk: static gap analysis, earnings simulation analysis, and economic value of equity (EVE) analysis. Static gap measures the aggregate dollar volume of rate-sensitive assets relative to rate-sensitive liabilities re-pricing over various time horizons. This metric does not effectively capture the re-pricing characteristics or embedded optionality of the Company's assets and liabilities, so it is not relied upon or addressed here. Earnings simulation measures the potential effect of changes in market interest rates on future net interest income. This analysis incorporates management's assumptions for product pricing and pre-payment expectations and is the Company's preferred tool to assess its interest rate sensitivity in the short- to medium-term. The simulation utilizes a "static" balance sheet approach, which assumes that management makes no changes to the composition of the balance sheet to mitigate the impact of interest rate changes. EVE modeling estimates the fair value of assets and liabilities in different interest rate environments using discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. This measure provides an indication of the future earnings capacity of the balance sheet, and the change in EVE over different rate scenarios is a measure of long-term interest rate risk. The Company places less emphasis on EVE results due to the inherent imprecision of cash flow estimations and the limited utility of a static balance sheet assumption over the long-term.

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

When the Company is liability sensitive, net interest income should improve if interest rates fall since liabilities will reprice faster than assets (depending on the optionality or prepayment speeds of the assets). Conversely, if interest rates rise, net interest income should decline. When the Company is asset sensitive, net interest income should improve if interest rates rise and fall if rates fall. The rate change model assumes that these changes will occur gradually over the course of a year.

The table below shows the Company's interest rate sensitivity for the periods and rate scenarios presented (dollars in thousands):

 
TABLE III
CHANGE IN NET INTEREST INCOME
As of December 31,
 
 
2017
   
2016
 
 
%
  $       
 
%
    $  
Change in Interest Rates:
                           
+300 basis points
   
(1.42
)
   
(462
)
   
1.35
     
380
 
+200 basis points
   
(1.02
)
   
(332
)
   
0.88
     
248
 
+100 basis points
   
(0.49
)
   
(160
)
   
0.42
     
117
 
Unchanged
   
-
     
0
     
-
     
-
 
-50 basis points
   
(0.28
)
   
(90
)
   
(0.63
)
   
(177
)
-100 basis points
   
(0.92
)
   
(297
)
   
(1.22
)
   
(343
)

Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company's interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.
 
Provision for Loan Losses
The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the portfolio. This expense is based on management's estimate of probable credit losses inherent in the loan portfolio. Management's evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions, were used in developing estimated loss factors for determining the allowance for loan losses. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate.

The provision for loan losses was $4.2 million for the year ended December 31, 2017 as compared to $1.9 million for 2016. A portion of the increase is due to loan growth during 2017, which required the Company to set aside additional reserves. The provision was also impacted by higher levels of charge offs in 2017 than in 2016. Charged-off loans totaled $3.3 million in 2017, compared to $1.8 million in 2016. Recoveries amounted to $330 thousand in 2017 and $347 thousand in 2016. The Company's net loans charged off to average loans were 0.44% in 2017 as compared to 0.24% in 2016.

Net loan charge-offs for 2017 were higher than in 2016 primarily due to charge-offs in the third and fourth quarters of 2017 on several borrowing relationships whose conditions had deteriorated.

The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real estate values and home sales or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the loan loss provision. If current economic conditions remain stable and net loan charge-offs are consistent with management's forecast, management expects that the loan loss provision will be lower in 2018 than in 2017.
 
Noninterest Income
Unless otherwise noted, all comparisons in this section are between the twelve months ended December 31, 2017 and the twelve months ended December 31, 2016.
 
Noninterest income increased $592 thousand or 4.40% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. Noninterest income in 2017 was elevated in part by a nonrecurring gain recognized on the acquisition of Old Point Mortgage of $550 thousand. Mostly offsetting this was a significant reduction in gains on the sale of available-for-sale securities. There was significant securities sales activity in 2016 as part of a restructuring of the securities portfolio which resulted in considerable net gains. This did not reoccur in 2017.

Aside from the impact of nonrecurring gains, three other categories of noninterest income increased: fiduciary and asset management fees (up $226 thousand or 6.35%), other service charges, commissions and fees (up $242 thousand or 6.14%), and mortgage banking income (up $232 thousand or 56.17%). There was broad growth in the fiduciary and asset management category with significant gains in personal trust income, retirement services income, and investment management income. Other service charges, commissions and fees increased primarily due to growth in merchant processing and debit card fee income. Mortgage banking income increased as a result of the acquisition of Old Point Mortgage.

The increases from these changes were partially offset by declines in deposit service charges in 2017. Both overdraft fee income and service charges on personal and business deposits decreased year over year. Income from bank-owned life insurance was also down modestly, $21 thousand or 2.64%, in 2017 relative to 2016.

The Company continues to focus on diversifying noninterest income through efforts to expand Trust, insurance, and mortgage banking activities, and a continued focus on business checking and other corporate services.
 
Noninterest Expense
Unless otherwise noted, all comparisons in this section are between the twelve months ended December 31, 2017 and the twelve months ended December 31, 2016.
 
The Company's noninterest expense increased $5.1 million or 14.69%. The largest contributing factor of this increase was higher salaries and employee benefits, which included a nonrecurring pre-tax charge associated with the termination and settlement of the defined benefit pension plan of $3.4 million. Salaries and employee benefits also increased due to higher personnel costs resulting from the addition of staff in connection with the Old Point Mortgage acquisition completed in April 2017. The Company also incurred $241 thousand in nonrecurring merger costs associated with the Citizens National acquisition during the fourth quarter of 2017.

Of the remaining categories of noninterest expense, the most significant changes when comparing 2017 to 2016 were in loan related expenses, occupancy and equipment, data processing, FHLB advance prepayment fees, and loss (gain) on other real estate owned.

·
Loan related expenses (increased $424 thousand or 220.83%): The expansion of the Company's indirect automobile lending operations substantially increased costs related to credit reporting and application processing.

·
Occupancy and equipment (increased $289 thousand or 5.18%): Building rental expenses increased with the addition of office space for Old Point Mortgage personnel. Building maintenance and repair expense was also elevated.

·
Data processing fees (increased $163 thousand or 10.06%): The increase was due to higher expenses associated with enhancements to the Company's disaster recovery capabilities and increased debit card expense due to higher transaction volumes. Also, in 2016 the Company was able to use earnings credits from deposits with a correspondent bank to offset some processing related expenses. Due to the decline in cash and due from bank balances, this opportunity was not available in 2017.

·
FHLB advance prepayment penalty (decreased $391 thousand or 100.00%): The Company incurred a prepayment penalty on the early payoff of an advance in the first quarter of 2016 that bore an interest rate considerably above market rates for alternative funding. There were no advance prepayments in 2017.

·
Loss (gain) on other real estate owned (decreased $172 thousand or -111.69%): In 2016 and 2017, the Company worked diligently to sell the properties held in other real estate owned, with the last two sales closing in the second quarter of 2017. Prior to 2017, both properties had already been written down to the anticipated sales price (less costs to sell); the Company recorded a small gain on the final sales in 2017, as compared to a net loss in 2016.

The Company recorded an income tax benefit in 2017 compared to tax expense in 2016 due to lower income. The tax benefit would have been approximately $1.2 million higher had the passage of the Tax Act not required the reevaluation of the Company's net deferred tax asset. The Company's effective tax rate should benefit in the future from the lower statutory corporate income tax rate . Tax expense is positively impacted by the Company's investment in tax-exempt securities, low income housing investments, and BOLI income.

Balance Sheet Review
At December 31, 2017, the Company had total assets of $981.8 million, an increase of $78.9 million or 8.73% compared to assets as of December 31, 2016.

Asset growth in 2017 was driven by strong loan growth, particularly in the consumer automobile loan sector due to a renewed focus on indirect dealer lending. Net loans held for investment increased $133.5 million or 22.41%, from $595.6 million at December 31, 2016 to $729.1 million at December 31, 2017. Increases in consumer automobile loans accounted for $108.8 million of the net loan growth during 2017. This growth was funded in part by declines in cash and cash equivalents and securities available for sale. Cash and cash equivalents decreased $11.4 million or 44.26% from December 31, 2016 to December 31, 2017, and securities available for sale decreased $42.2 million or 21.19% over the same period. Total deposits declined slightly ($908 thousand or 0.12%) in 2017. To compensate for the lack of deposit growth the Company obtained FHLB advances for various terms to provide additional liquidity to fund the loan growth. The Company also utilized its unsecured federal funds lines with correspondents to fulfill some short-term funding needs.
 
The Company's holdings of Alternative A-paper, or "Alt-A", type mortgage loans such as adjustable rate and nontraditional type loans were inconsequential, amounting to less than 1.00% of the Company's loan portfolio as of December 31, 2017.

The Company does not have a formal program for subprime lending. The Company is, however, required by law to comply with the CRA, which imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income borrowers. In order to comply with the CRA and meet the credit needs of its local communities, the Company finds it necessary to make certain loans with subprime characteristics.

For the purposes of this discussion, a "subprime loan" is defined as a loan to a borrower having a credit score of 660 or below. The majority of the Company's subprime loans are to customers in the Company's primary service area.
 
The following table details, as of December 31, 2017 and 2016, the Company's loans with subprime characteristics that were secured by 1-4 family first mortgages, 1-4 family open-end (i.e., equity lines of credit) and 1-4 family junior lien loans (i.e., second mortgages) for which the Company has recorded a credit score in its system.

Loans Secured by 1 - 4 Family First Mortgages,
1 - 4 Family Open-end and 1 - 4 Family Junior Liens
As of December 31,
(dollars in thousands)

   
2017
   
2016
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Subprime
 
$
22,312
     
13.1
%
 
$
21,675
     
13.9
%
Non-subprime
   
147,827
     
86.9
%
   
134,163
     
86.1
%
   
$
170,139
     
100.0
%
 
$
155,838
     
100.0
%
                                 
Total loans
 
$
738,540
           
$
603,882
         
                                 
Percentage of Real Estate-Secured Subprime Loans to Total Loans
           
3.02
%
           
3.59
%

In addition to the subprime loans secured by real estate discussed above, as of December 31, 2017, the Company had an additional $16.3 million in subprime consumer loans that were either unsecured or secured by collateral other than real estate. Together with the subprime loans secured by real estate, the Company's total subprime loans as of December 31, 2017 were $38.6 million, amounting to 5.23% of the Company's total loans at December 31, 2017.

The Company has no investments secured by "Alt-A" type mortgage loans such as adjustable rate and nontraditional type mortgages or subprime loans.

Securities Portfolio
When comparing December 31, 2017 to December 31, 2016, securities available-for-sale decreased $42.2 million, or 21.19%. The vast majority of the decline was due to principal curtailments on mortgage-backed securities and calls and maturities of other securities, principally tax-exempt municipal bonds. The Company also made some strategic sales of securities in the second quarter of 2017 to both realize gains as well as provide additional liquidity.

Restricted securities increased $2.9 million or 296.49% from December 31, 2016 to December 31, 2017 as a result of higher balances in FHLB stock. The Company is required to hold FHLB stock based on its borrowings; since outstanding FHLB advances increased by $67.5 million during 2017, the Company was required to increase its holdings of FHLB stock.

The Company's strategy for the securities portfolio is primarily intended to manage the portfolio's susceptibility to interest rate risk and to provide liquidity to fund loan growth. The securities portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when necessary.
 
The following table sets forth a summary of the securities portfolio:

TABLE IV
SECURITIES PORTFOLIO

As of December 31,
 
2017
   
2016
   
2015
 
   
(in thousands)
 
Available-for-sale securities, at fair value:
                 
U.S. Treasury securities
 
$
-
   
$
20,000
   
$
-
 
Obligations of U.S. Government agencies
   
9,435
     
9,195
     
24,240
 
Obligations of state and political subdivisions
   
64,765
     
77,987
     
78,433
 
Mortgage-backed securities
   
74,296
     
83,694
     
107,396
 
Money market investments
   
1,194
     
647
     
631
 
Corporate bonds
   
7,234
     
7,678
     
3,393
 
Other marketable equity securities
   
197
     
164
     
99
 
   
$
157,121
   
$
199,365
   
$
214,192
 
Restricted securities:
                       
Federal Home Loan Bank stock
 
$
3,677
   
$
801
   
$
1,847
 
Federal Reserve Bank stock
   
169
     
169
     
169
 
   
$
3,846
   
$
970
   
$
2,016
 
                         
Total
 
$
160,967
   
$
200,335
   
$
216,208
 

The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of December 31, 2017:

   
1 year
or less
   
1-5
years
   
5-10
years
   
Over 10
years
   
Total
 
   
(dollars in thousands)
 
Obligations of U.S. Government Agencies
 
$
996
   
$
893
   
$
-
   
$
7,546
   
$
9,435
 
Weighted average yield
   
1.28
%
   
1.37
%
   
-
     
2.00
%
   
1.86
%
                                         
Obligations of state and political subdivisions
 
$
1,117
   
$
12,869
   
$
16,393
   
$
34,386
   
$
64,765
 
Weighted average yield
   
2.88
%
   
2.75
%
   
3.42
%
   
3.80
%
   
3.48
%
                                         
Mortgage-backed securities
 
$
-
   
$
8,971
   
$
16,659
   
$
48,666
   
$
74,296
 
Weighted average yield
   
-
     
1.73
%
   
2.05
%
   
1.80
%
   
1.85
%
                                         
Money market investments
 
$
1,194
   
$
-
   
$
-
   
$
-
   
$
1,194
 
Weighted average yield
   
1.10
%
   
-
     
-
     
-
     
1.10
%
                                         
Corporate bonds
 
$
1,896
   
$
393
   
$
4,945
   
$
-
   
$
7,234
 
Weighted average yield
   
1.48
%
   
2.13
%
   
5.46
%
   
-
     
4.23
%
                                         
Federal Home Loan Bank stock - restricted
 
$
-
   
$
-
   
$
-
   
$
3,677
   
$
3,677
 
Weighted average yield
   
-
     
-
     
-
     
5.01
%
   
5.01
%
                                         
Federal Reserve Bank stock - restricted
 
$
-
   
$
-
   
$
-
   
$
169
   
$
169
 
Weighted average yield
   
-
     
-
     
-
     
6.00
%
   
6.00
%
                                         
Other marketable equity securities
 
$
-
   
$
-
   
$
-
   
$
197
   
$
197
 
Weighted average yield
   
-
     
-
     
-
     
-
     
-
 
                                         
Total securities
 
$
5,203
   
$
23,126
   
$
37,997
   
$
94,641
   
$
160,967
 
Weighted average yield
   
1.66
%
   
2.29
%
   
3.08
%
   
2.67
%
   
2.68
%

The table above is based on maturity. Therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average life of the $74.3 million in mortgage-backed securities as of December 31, 2017 was 4.61 years. Yields are calculated on a fully tax-equivalent basis using a 34% rate.
 
Loan Portfolio
The following table shows a breakdown of total loans by segment at December 31 for years 2013 through 2017:

TABLE V
LOAN PORTFOLIO

As of December 31,
 
2017
   
2016
   
2015
   
2014
   
2013
 
   
(in thousands)
 
Commercial
 
$
60,398
   
$
54,434
   
$
43,197
   
$
37,698
   
$
30,702
 
Real estate-construction
   
27,489
     
23,116
     
19,685
     
9,082
     
14,505
 
Real estate-mortgage (1)
   
465,231
     
448,408
     
437,159
     
435,914
     
416,966
 
Consumer
   
174,225
     
58,907
     
50,427
     
30,493
     
19,791
 
Other
   
11,197
     
19,017
     
18,007
     
22,807
     
18,735
 
                                         
Total
 
$
738,540
   
$
603,882
   
$
568,475
   
$
535,994
   
$
500,699
 

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

Based on the North American Industry Classification System code, there are no categories of loans that exceed 10% of total loans other than the categories disclosed in the preceding table.

As of December 31, 2017, the total loan portfolio increased by $134.7 million or 22.30% from December 31, 2016. Although competition for quality loans remains fierce, the Company accelerated the growth of its loan portfolio in 2017, aided significantly by the focus on its indirect dealer lending division which was re-opened in September 2016. This contributed positively to interest income in 2017 and is expected to do so in the future as well. While there are risks inherent in any new loan program, the Company has hired knowledgeable staff and put in place programs and policies to mitigate those risks. Management is monitoring the allowance for loan losses carefully and will make changes as the portfolio ages.

In addition to the loan growth generated by the re-opening of the dealer department, the Company also experienced appreciable increases in commercial real estate loans, home equity loans, and home equity lines of credit.

The maturity distribution and rate sensitivity of certain categories of the Company's loan portfolio at December 31, 2017 is presented below:

TABLE VI
MATURITY SCHEDULE OF SELECTED LOANS

December 31, 2017
 
Within 1
year
   
1 to 5 years
   
After 5
years
   
Total
 
   
(in thousands)
 
Commercial
 
$
15,969
   
$
20,728
   
$
23,701
   
$
60,398
 
Real estate - construction
   
8,507
     
18,964
     
18
     
27,489
 
Total
 
$
24,476
   
$
39,692
   
$
23,719
   
$
87,887
 
                                 
Loans due after 1 year with:
                               
Fixed interest rate
         
$
36,704
   
$
14,979
   
$
51,683
 
Variable interest rate
           
2,988
     
8,740
     
11,728
 
Total
         
$
39,692
   
$
23,719
   
$
63,411
 
 
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, nonperforming restructured loans, and other real estate owned (OREO). Restructured loans are loans with terms that were modified in a troubled debt restructuring (TDR) for borrowers experiencing financial difficulties. During the year ended December 31, 2017, the Company restructured four loans.

Nonperforming assets increased by $5.0 million or 44.59%, from $11.1 million at December 31, 2016 to $16.1 million at December 31, 2017. The 2017 total consisted of $3.2 million in loans still accruing interest but past due 90 days or more and $12.9 million in nonaccrual loans. Of the $12.9 million in nonaccrual loans, $12.0 million was secured by real estate. All of the nonaccrual loans are classified as impaired. Impaired loans are a component of the allowance for loan losses. When a loan changes from "90 days past due but still accruing interest" to "nonaccrual" status, the loan is normally reviewed for impairment. If impairment is identified, then the Company records a charge-off based on the value of the collateral or the present value of the loan's expected future cash flows, discounted at the loan's effective interest rate. If the Company is waiting on an appraisal to determine the collateral's value, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time.

The recorded investment in impaired loans decreased to $18.5 million as of December 31, 2017 from $20.1 million as of December 31, 2016 as detailed in Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K. The majority of these loans were collateralized.
 
The following table presents information concerning the aggregate amount of nonperforming assets, which includes nonaccrual loans, past due loans, TDRs and OREO:

TABLE VII
NONPERFORMING ASSETS

As of December 31,
 
2017
   
2016
   
2015
   
2014
   
2013
 
   
(in thousands)
 
Nonaccrual loans
                             
Commercial
 
$
836
   
$
231
   
$
276
   
$
-
   
$
149
 
Real estate-construction
   
722
     
-
     
-
     
499
     
2,545
 
Real estate-mortgage (1)
   
11,324
     
6,847
     
4,306
     
5,071
     
8,630
 
Consumer
   
-
     
81
     
-
     
-
     
-
 
Total nonaccrual loans
 
$
12,882
   
$
7,159
   
$
4,582
   
$
5,570
   
$
11,324
 
                                         
Loans past due 90 days or more and accruing interest
                                       
Commercial
 
$
471
   
$
-
   
$
164
   
$
10
   
$
-
 
Real estate-construction
   
-
     
-
     
-
     
-
     
-
 
Real estate-mortgage (1)
   
306
     
276
     
23
     
107
     
527
 
Consumer (2)
   
2,401
     
2,603
     
3,163
     
1,019
     
5
 
Other
   
4
     
5
     
6
     
5
     
14
 
Total loans past due 90 days or more and accruing interest
 
$
3,182
   
$
2,884
   
$
3,356
   
$
1,141
   
$
546
 
                                         
Restructured loans
                                       
Commercial
 
$
98
   
$
144
   
$
-
   
$
-
   
$
-
 
Real estate-construction
   
92
     
96
     
99
     
102
     
-
 
Real estate-mortgage (1)
   
14,781
     
11,616
     
11,077
     
12,203
     
12,076
 
Consumer
   
-
     
-
     
12
     
13
     
15
 
Total restructured loans
 
$
14,971
   
$
11,856
   
$
11,188
   
$
12,318
   
$
12,091
 
Less nonaccrual restructured loans (included above)
   
8,561
     
2,838
     
2,497
     
4,240
     
3,630
 
Less restructured loans in compliance (3)
   
6,410
     
9,018
     
8,691
     
8,078
     
8,461
 
Net nonperforming restructured loans
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
                                         
Other real estate owned
                                       
Construction, land development, and other land
 
$
-
   
$
940
   
$
1,090
   
$
2,138
   
$
2,783
 
1-4 family residential properties
   
-
     
-
     
724
     
884
     
457
 
Multifamily (5 or more) residential properties
   
-
     
-
     
-
     
-
     
-
 
Former branch sites
   
-
     
127
     
-
     
886
     
886
 
Nonfarm nonresidential properties
   
-
     
-
     
927
     
1,198
     
2,289
 
   
$
-
   
$
1,067
   
$
2,741
   
$
5,106
   
$
6,415
 
                                         
Total nonperforming assets
 
$
16,064
   
$
11,110
   
$
10,679
   
$
11,817
   
$
18,285
 
                                         
Interest income that would have been recorded under original loan terms on nonaccrual loans included above
 
$
474
   
$
318
   
$
196
   
$
301
   
$
762
 
                                         
Interest income recorded for the period on nonaccrual loans included above
 
$
281
   
$
269
   
$
141
   
$
265
   
$
251
 
 
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government.  The past due principal portion of these guaranteed loans totaled $4.2 million at December 31, 2017 and $4.8 million at December 31, 2016. For additional information, refer to Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.
(3) Amounts listed represent restructured loans that are in compliance with their modified terms as of the date presented.

As shown in the table above, as of December 31, 2017 compared to December 31, 2016, the nonaccrual loan category increased by $5.7 million or 79.94% and the 90-days past due and still accruing interest category increased by $298 thousand or 10.33%.

The majority of the balance of nonaccrual loans at December 31, 2017 was related to a few large credit relationships. Of the $12.9 million of nonaccrual loans at December 31, 2017, $9.0 million, or approximately 69.73%, was comprised of four credit relationships . All loans in these relationships have been analyzed to determine whether the cash flow of the borrower and the collateral pledged to secure the loans is sufficient to cover outstanding principal balances. The Company has set aside specific allocations for those loans without sufficient cash flow or collateral and charged off any balance that management does not expect to collect . Although increases in nonaccrual loans and loans rated substandard would typically warrant an increase in the allowance, management believes that the collateral and/or cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.
 
The majority of the loans past due 90 days or more and still accruing interest at December 31, 2017 ($2.3 million) were student loans. The federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans; as such, management does not expect even a significant increase in past due student loans to have a material effect on the Company.

OREO decreased by $1.1 million or 100.00% when comparing December 31, 2017 to December 31, 2016, as the Company sold the remaining properties in 2017.

Management believes the Company has an excellent credit quality review process in place to identify problem loans quickly. For a detailed discussion of the Company's nonperforming assets, refer to Note 4 and Note 5 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.

Management is cautiously optimistic about the future and is well aware that if the economy begins to decline, nonperforming assets could increase in future periods. As the Company experienced in 2009, 2010 and 2011, the effect of a sustained increase in nonperforming assets would likely be lower earnings caused by larger contributions to the loan loss provision, which in turn would be driven by larger impairments in the loan portfolio and higher levels of loan charge-offs.

The Allowance for Loan Losses
The allowance for loan losses is based on several components. In evaluating the adequacy of the allowance, each segment of the loan portfolio is divided into several pools of loans:

1.
Specific identification (regardless of risk rating)
 
2.
Pool–substandard
 
3.
Pool–other assets especially mentioned (OAEM) (rated just above substandard)
 
4.
Pool–pass loans (all other rated loans)

The first component of the allowance for loan losses is determined based on specifically identified loans that are impaired. These loans are individually analyzed for impairment and include nonperforming loans and both performing and nonperforming TDRs. This component may also include loans considered impaired for other reasons, such as outdated financial information on the borrower or guarantors or financial problems of the borrower, including operating losses, marginal working capital, inadequate cash flow, or business interruptions. Changes in TDRs and nonperforming loans affect the dollar amount of the allowance. Increases in the impairment allowance for TDRs and nonperforming loans are reflected as an increase in the allowance for loan losses except in situations where the TDR or nonperforming loan does not require a specific allocation (i.e., the discounted present value of expected future cash flows or the collateral value is considered sufficient).

The majority of the Company's TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company has not yet received a current appraisal on loans being reviewed for impairment, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of December 31, 2017 and December 31, 2016, the impaired loan component of the allowance for loan losses amounted to $95 thousand and $800 thousand, respectively. The impaired loan component of the allowance for loan losses is reflected as a valuation allowance related to impaired loans in Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.
 
The second component of the allowance consists of qualitative factors and includes items such as economic conditions, growth trends, loan concentrations, changes in certain loans, changes in underwriting, changes in management and legal and regulatory changes. For the December 31, 2017 calculation, the qualitative factors which had the most significant impact on the allowance were those affected by changes in the economy and past due and nonaccrual loans. Continued incremental improvements in the economy allowed for a reduction in the allowance. At the same time, past due and nonaccrual loans increased in several categories when comparing December 31, 2017 to December 31, 2016.

Historical loss is the final component of the allowance for loan losses. The calculation of the historical loss component is conducted on loans evaluated collectively for impairment and uses migration analysis on pooled segments. These segments are based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the Call Report applicable to the Bank.
 
Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan's payments are current (including loans 1 – 29 days past due), 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets especially mentioned (rated just above substandard), and pass (all other loans). The Company may also assign loans to the risk grades of doubtful or loss, but as of December 31, 2017 and December 31, 2016, the Company had no loans in these categories.

With the December 31, 2016 calculation, the historical loss was based on a four migration periods covering the twelve quarters each. The calculation for December 31, 2017 had one significant change, which are described in detail below. On a combined basis, the historical loss and qualitative factor components amounted to $9.4 million and $7.4 million as of December 31, 2017 and December 31, 2016, respectively. Growth in the loan portfolio is the major reason for the increase in these combined components when comparing the allowance calculation as of December 31, 2017 to the allowance calculation as of December 31, 2016.

Beginning with the September 30, 2017 calculation, management made the following change to its methodology in order to ensure the allowance accurately reflects probable losses inherent in the loan portfolio.

Change in Migration Periods
Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). Multiple migration periods can also be calculated, allowing the Company to assess the migration of loans based on more than one starting point. For example, the Company could run a migration analysis that begins on June 30, 2014 and follows the performance of the loans outstanding on that date through June 30, 2017, assessing changes in risk ratings and the amount of any charge-offs to determine the historical loss rate. The Company could then run a second migration analysis that begins on September 30, 2014 and follows those loans through September 30, 2017 to calculate a second historical loss rate. These two loss rates would then be averaged to determine the overall loss rate applied to the loan portfolio.

The length of a migration period can also be extended. Adding additional quarters to the migration analysis extends the period over which the loan could cease to perform, increasing the number of loans that default and thus also increasing the historical loss rates. While a longer migration period provides a more conservative estimate of expected future losses, extending the migration period too far can provide less accurate estimates if there have been changes in the economy or the Company's loan management processes.

Increasing the number of migration periods, as opposed to lengthening the individual migration periods, provides the Company with an average loss rate that is less affected by unusual balances in the segments of the portfolio. Because migration analysis follows only those loans outstanding at the beginning of the migration period, a significant change in the balance of a loan pool during the migration period can produce results that are not indicative of the performance of the pool.

For example, a migration period of twelve quarters (three years) may apply to a pool of loans that has a balance of $300 thousand at the beginning of the migration period. In a relatively small loan pool such as this, if a loan of $150 thousand is charged off during the migration period, the migration analysis would show a loss rate of 50%, based on the original outstanding balance of $300 thousand and a charge-off of $150 thousand. In this example, the 50% loss rate calculated for the migration period would result from the unique timing and loan balance factors within the period and would not necessarily provide an appropriate reflection of the performance of the loans in the pool. By using multiple migration periods, such unusual situations have less of an impact on the calculated historical loss rate, providing a more accurate representation of the losses expected to be incurred.

As part of the quarterly calculation, management reviews the length of the migration periods and the number of migration periods used. To better reflect the risks inherent in the loan portfolio, in the third quarter of 2017, the Company increased the number of migration periods from four to eight. As with the methodology in prior quarters, each migration period covers twelve quarters, with the most recent migration period ending with the most recent quarter. This same methodology was used in the December 31, 2017 calculation.
 
Overall Change in Allowance
As a result of management's analysis, the Company added, through the provision, $4.2 million to the allowance for loan losses for the year ended December 31, 2017. The allowance for loan losses, as a percentage of year-end loans, was 1.28% in 2017 and 1.37% in 2016. Management believes that the allowance has been appropriately funded for losses on existing loans, based on currently available information. The Company will continue to monitor the loan portfolio and levels of nonperforming assets closely and make changes to the allowance for loan losses when necessary.

See Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K for a discussion of the financial statement impact of this change.
 
The following table shows an analysis of the allowance for loan losses:

TABLE VIII
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

As of December 31,
 
2017
   
2016
   
2015
   
2014
   
2013
 
   
(dollars in thousands)
 
                               
Balance at the beginning of period
 
$
8,245
   
$
7,738
   
$
7,075
   
$
6,831
   
$
7,324
 
                                         
Charge-offs:
                                       
Commercial
   
807
     
915
     
293
     
286
     
200
 
Real estate-construction
   
0
     
0
     
0
     
51
     
501
 
Real estate-mortgage (1)
   
1,934
     
504
     
321
     
563
     
1,548
 
Consumer
   
279
     
204
     
92
     
163
     
141
 
Other
   
267
     
147
     
191
     
175
     
316
 
Total charge-offs
   
3,287
     
1,770
     
897
     
1,238
     
2,706
 
                                         
Recoveries:
                                       
Commercial
   
37
     
79
     
50
     
55
     
76
 
Real estate-construction
   
104
     
3
     
1
     
173
     
6
 
Real estate-mortgage (1)
   
45
     
197
     
393
     
524
     
513
 
Consumer
   
56
     
28
     
39
     
64
     
111
 
Other
   
88
     
40
     
52
     
66
     
207
 
Total recoveries
   
330
     
347
     
535
     
882
     
913
 
                                         
Net charge-offs
   
2,957
     
1,423
     
362
     
356
     
1,793
 
                                         
Provision for loan losses
   
4,160
     
1,930
     
1,025
     
600
     
1,300
 
Balance at end of period
 
$
9,448
   
$
8,245
   
$
7,738
   
$
7,075
   
$
6,831
 
                                         
Selected loan loss statistics
                                       
Loans (net of unearned income):
                                       
End of period balance
 
$
738,540
   
$
603,882
   
$
568,475
   
$
535,994
   
$
500,699
 
Average balance
 
$
673,015
   
$
585,206
   
$
563,534
   
$
517,183
   
$
471,203
 
                                         
Net charge-offs to average total loans
   
0.44
%
   
0.24
%
   
0.06
%
   
0.07
%
   
0.38
%
Provision for loan losses to average total loans
   
0.62
%
   
0.33
%
   
0.18
%
   
0.12
%
   
0.28
%
Provision for loan losses to net charge-offs
   
140.68
%
   
135.63
%
   
283.15
%
   
168.54
%
   
72.50
%
Allowance for loan losses to period end loans
   
1.28
%
   
1.37
%
   
1.36
%
   
1.32
%
   
1.36
%
Earnings to loan loss coverage (2)
   
1.36
     
4.14
     
13.02
     
13.80
     
2.68
 
Allowance for loan losses to nonperforming loans
   
58.81
%
   
82.10
%
   
97.48
%
   
105.42
%
   
57.55
%

(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.
(2) Income before taxes plus provision for loan losses, divided by net charge-offs.
 
The following table shows the amount of the allowance for loan losses allocated to each category at December 31 of the years presented.

TABLE IX
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

As of December 31,
2017
 
2016
 
2015
 
2014
 
2013
 
 
Amount
 
Percent
of
Loans
to
Total
Loans
 
Amount
 
Percent
of
Loans
to
Total
Loans
 
Amount
 
Percent
of
Loans
to
Total
Loans
 
Amount
 
Percent
of
Loans
to
Total
Loans
 
Amount
 
Percent
of
Loans
to
Total
Loans
 
 
(dollars in thousands)
 
                                         
Commercial
 
$
1,889
     
8.18
%
 
$
1,493
     
9.16
%
 
$
633
     
7.60
%
 
$
595
     
7.03
%
 
$
350
     
6.13
%
Real estate-construction
   
541
     
3.72
%
   
846
     
3.83
%
   
985
     
3.46
%
   
703
     
1.69
%
   
662
     
2.90
%
Real estate-mortgage (1)
   
5,217
     
62.99
%
   
5,267
     
74.25
%
   
5,628
     
76.90
%
   
5,347
     
81.33
%
   
5,357
     
83.28
%
Consumer
   
1,644
     
23.59
%
   
455
     
9.61
%
   
279
     
8.87
%
   
219
     
5.69
%
   
294
     
3.95
%
Other
   
157
     
1.52
%
   
184
     
3.15
%
   
213
     
3.17
%
   
211
     
4.26
%
   
168
     
3.74
%
Total
 
$
9,448
     
100.00
%
 
$
8,245
     
100.00
%
 
$
7,738
     
100.00
%
 
$
7,075
     
100.00
%
 
$
6,831
     
100.00
%

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

For the year ended December 31, 2017 as compared to the year ended December 31, 2016, there was an increase in the allowance for loan losses due to growth in the loan portfolio. The change in the allowance was distributed among the loan segments based on the composition of loans in each segment. See Note 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K for further information related to the effect of the change in the calculation method.
 
Although the allowance for loan losses is allocated into these categories, the entire allowance for loan losses is available to cover loan losses in any category. For example, if real estate-construction loans experienced losses of $1.0 million, the allowance for loan losses could absorb these losses even though only $541 thousand is allocated to that category.

Deposits
The following table shows the average balances and average rates paid on deposits for the periods presented.

TABLE X
DEPOSITS

Years ended December 31,
2017
 
2016
 
2015
 
  
Average
Balance
  
Average
Rate
  
Average
Balance
  
Average
Rate
  
Average
Balance
  
Average
Rate
  
 
(dollars in thousands)
 
                         
Interest-bearing transaction accounts
 
$
27,909
     
0.04
%
 
$
20,045
     
0.04
%
 
$
11,219
     
0.04
%
Money market deposit accounts
   
233,295
     
0.12
%
   
221,339
     
0.08
%
   
228,627
     
0.08
%
Savings accounts
   
82,872
     
0.05
%
   
78,305
     
0.05
%
   
74,436
     
0.05
%
Other time deposits
   
208,095
     
1.06
%
   
210,339
     
1.01
%
   
221,087
     
0.97
%
Total interest-bearing deposits
   
552,171
     
0.46
%
   
530,028
     
0.44
%
   
535,369
     
0.44
%
Demand deposits
   
226,951
             
214,876
             
194,677
         
Total deposits
 
$
779,122
           
$
744,904
           
$
730,046
         

The Company's average total deposits were $779.1 million for the year ended December 31, 2017, an increase of $34.2 million or 4.59% from average total deposits for the year ended December 31, 2016. The demand deposit and money market account categories had the largest increases, totaling $12.1 million and $12.0 million, respectively. Average time deposits, which is the Company's most expensive deposit category, decreased by a total of $2.2 million as seen in the table above. The average rate paid on interest-bearing deposits by the Company in 2017 was 0.46% compared to 0.44% in 2016.

As loan growth accelerated in 2017, the Company made strategic increases in the rates on time deposits in certain maturities to fund loan growth and manage its interest-rate risk. Selected money market deposit rates were also raised in 2017 to attract and retain desirable customers relationships as market and competitors' rates increased. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.

The following table shows time deposits in amounts of $100 thousand or more by time remaining until maturity at the dates presented.

TABLE XI
TIME DEPOSITS OF $100,000 OR MORE

As of December 31,
2017
 
2016
 
2015
 
 
(in thousands)
 
Maturing in:
           
Within 3 months
 
$
25,136
   
$
15,074
   
$
23,844
 
3 through 6 months
   
11,192
     
21,183
     
11,474
 
6 through 12 months
   
8,830
     
19,276
     
8,572
 
Greater than 12 months
   
76,418
     
59,501
     
65,207
 
   
$
121,576
   
$
115,034
   
$
109,097
 
 
Return on Equity and Assets
The return on average stockholders' equity and assets, the dividend pay-out ratio, and the average equity to average assets ratio for the past three years are presented below.

As of December 31,
 
2017
   
2016
   
2015
 
Return on average assets
   
0.00
%
   
0.43
%
   
0.41
%
Return on average equity
   
-0.03
%
   
3.99
%
   
4.02
%
Dividend pay-out ratio
   
-7,575.86
%
   
52.23
%
   
46.40
%
Average equity to average assets
   
10.28
%
   
10.75
%
   
10.23
%

Capital Resources
Total stockholders' equity as of December 31, 2017 was $96.4 million, up 2.55% from $94.0 million on December 31, 2016 as the increase in other comprehensive income associated with the termination of the defined benefit pension plan exceeded the net loss for the period, dividends paid, and the mark-to-market adjustment on available-for-sale securities.
 
The Company's capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders' equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses.

In June 2013, the federal bank regulatory agencies adopted the Basel III Final Rules (i) to implement the Basel III capital framework and (ii) for calculating risk-weighted assets. These rules became effective January 1, 2015, subject to limited phase-in periods. For an overview of the Basel III Final Rules, refer to "Regulation and Supervision" included in Item 1, "Business" of this report on Form 10-K.

The following is a summary of the Company's capital ratios for the past three years. As shown below, these ratios were all well above the regulatory minimum levels.

   
2017
Regulatory
Minimums
   
2017
   
2016
   
2015
 
Common Equity Tier 1 Capital
   
4.50
%
   
11.18
%
   
13.39
%
   
13.78
%
Tier 1 Capital
   
6.00
%
   
11.18
%
   
13.39
%
   
13.78
%
Total Capital
   
8.00
%
   
12.28
%
   
14.51
%
   
14.89
%
Tier 1 Leverage
   
4.00
%
   
9.98
%
   
10.68
%
   
10.93
%

Year-end book value per share was $19.20 in 2017, $18.94 in 2016, and $18.79   in 2015. Cash dividends were $2.2 million or $0.44 per share in 2017, $2.0 million or $0.40 per share in 2016, and $1.7 million or $0.34 per share in 2015. The common stock of the Company has not been extensively traded. The table below shows the high and low sales prices and dividends paid for each quarter of 2017 and 2016. The stock is quoted on the NASDAQ Capital Market under the symbol "OPOF" and the prices below are based on trade information as reported by The NASDAQ Stock Market, LLC. There were 1,192 stockholders of record of the Company as of March 13, 2018. This stockholder count does not include stockholders who hold their stock in a nominee registration.

The following is a summary of the quarterly dividends paid and high and low sales prices of Old Point Financial Corporation common stock for the previous two years.

 
2017
 
2016
 
 
Dividend
 
Sales Price
 
Dividend
 
Sales Price
 
 
High
 
Low
 
High
 
Low
 
1st Quarter
 
$
0.11
   
$
30.43
   
$
24.40
   
$
0.10
   
$
20.25
   
$
17.38
 
2nd Quarter
 
$
0.11
   
$
33.88
   
$
28.93
   
$
0.10
   
$
20.50
   
$
18.50
 
3rd Quarter
 
$
0.11
   
$
34.82
   
$
29.61
   
$
0.10
   
$
21.45
   
$
18.30
 
4th Quarter
 
$
0.11
   
$
34.64
   
$
26.03
   
$
0.10
   
$
26.00
   
$
19.34
 

Five Year Stock Performance Graph

The following chart compares the yearly percentage change in the cumulative shareholder return on the Company's common stock during the five years ended December 31, 2017, with (1) the Total Return Index for the NASDAQ Composite, and (2) the Total Return Index for SNL U.S. Bank NASDAQ. This comparison assumes $100 was invested on December 31, 2012 in the Company's common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.
 
 
   
Period Ending
 
Index
 
12/31/2012
   
12/31/2013
   
12/31/2014
   
12/31/2015
   
12/31/2016
   
12/31/2017
 
Old Point Financial Corporation
   
100.00
     
118.04
     
140.51
     
164.22
     
244.07
     
294.78
 
NASDAQ Composite Index
   
100.00
     
140.12
     
160.78
     
171.97
     
187.22
     
242.71
 
SNL U.S. Bank NASDAQ Index
   
100.00
     
143.73
     
148.86
     
160.70
     
222.81
     
234.58
 
Source: S&P Global Market Intelligence
 
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year.

In addition, secondary sources are available through the use of borrowed funds if the need should arise. The Company's sources of funds include a large stable deposit base and secured advances from the Federal Home Loan Bank of Atlanta (FHLB). As of December 31, 2017, the Company had $217.0 million in FHLB borrowing availability. The decrease in availability for FHLB advances is mainly due to the $67.5 million increase in outstanding advances during 2017. The Company also has available short-term unsecured borrowed funds in the form of federal funds with correspondent banks. As of year-end 2017 and 2016, the Company had $45.0 million and $55.0 million available in federal funds lines of credit to address any short-term borrowing needs.

As a result of the Company's management of liquid assets, the availability of borrowed funds and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and to meet its customers' future borrowing needs.

Notwithstanding the foregoing, the Company's ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company's markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company's operations.
 
The following table sets forth information relating to the Company's sources of liquidity and the outstanding commitments for use of liquidity at December 31, 2017 and December 31, 2016. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.

LIQUIDITY SOURCES AND USES

   
December 31, 2017
   
December 31, 2016
 
   
Total
   
In Use
   
Available
   
Total
   
In Use
   
Available
 
   
(dollars in thousands)
 
SOURCES
                                   
Federal funds lines of credit
 
$
55,000
   
$
10,000
   
$
45,000
   
$
55,000
   
$
-
   
$
55,000
 
Federal Home Loan Bank advances
   
284,513
     
67,500
     
217,013
     
270,048
     
-
     
270,048
 
Federal funds sold  & balances at the Federal Reserve
                   
586
                     
3,718
 
Securities, available-for-sale and unpledged at fair value
                   
90,536
                     
126,457
 
Total short-term funding sources
                   
353,135
                     
455,223
 
                                                 
USES
                                               
Unfunded loan commitments and lending lines of credit
                   
68,152
                     
69,389
 
Letters of credit
                   
999
                     
1,079
 
Commitments to purchase assets
                   
-
                     
165
 
Total potential short-term funding uses
                   
69,151
                     
70,633
 
                                                 
Liquidity coverage ratio
                   
510.7
%
                   
644.5
%

The fair value of unpledged available-for-sale securities decreased from December 31, 2016 to December 31, 2017 primarily due to declining balances in the securities portfolio. Unpledged available-for-sale securities also declined due to a $2.0 million increase in customer repurchase agreements. The increase in repurchase agreements from December 31, 2016 to December 31, 2017 was primarily a result of balance fluctuations in the account of a single customer.

Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity or operations. The Company's internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company's primary external source of liquidity is advances from the FHLB.

The Company's operating activities provided $9.4 million of cash during the year ended December 31, 2017, compared to $8.7 million provided during 2016. Even though net income declined significantly, much of this resulted from noncash charges related to the pension termination and increased loan loss provision expense associated with loan growth. The Company's investing activities used $98.4 million of cash during 2017, compared to $23.6 million used during 2016, principally due to additional loan growth. The Company's financing activities provided $77.5 million of cash during 2017 compared to $3.8 million provided of cash during 2016. This change is principally due to increases in FHLB advances.
 
Effects of Inflation
Management believes changes in interest rates affect the financial condition of the Company, and other financial institutions, to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.

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

Off-Balance Sheet Lending Related Commitments
The Company had $144.1 million in consumer and commercial commitments at December 31, 2017. As of the same date, the Company also had $3.3 million in letters of credit that the Company will fund if certain future events occur. It is expected that only a portion of these commitments will ever actually be funded.
 
Management believes that the Company has the liquidity and capital resources to handle these commitments in the normal course of business. See Note 15 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this report on Form 10-K.

Contractual Obligations
In the normal course of business, there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table provides the Company's contractual obligations as of December 31, 2017:

Payments due by period
 
 
 
 
Total
 
 
 
Less Than
1 Year
   
1-3 Years
   
3-5 Years
 
 
 
More Than
5 Years
 
 
(in thousands)
 
Contractual Obligations
                   
Short-Term Debt Obligations
 
$
78,193
   
$
78,193
   
$
-
   
$
-
   
$
-
 
Long-Term Debt Obligations
   
20,000
     
-
     
20,000
     
-
     
-
 
Operating Lease Obligations
   
413
     
178
     
235
     
-
     
-
 
Total contractual cash obligations excluding deposits
   
98,606
     
78,371
     
20,235
     
-
     
-
 
Deposits
   
783,594
     
650,967
     
89,121
     
43,506
     
-
 
Total
 
$
882,200
   
$
729,338
   
$
109,356
   
$
43,506
   
$
-
 

Short-term debt obligatio ns include federal funds purchased, overnight repurchase agreements and Federal Home Loan Bank advances maturing within a year of origination. Long-term debt obligations consist of Federal Home Loan Bank advances with original maturities greater than one year.

Short-Term Borrowings
Certain short-term borrowings at December 31, 2017, 2016 and 2015 are presented below. Information is presented only on those categories whose average balance at December 31   exceeded 30 percent of total stockholders' equity at the same date.

TABLE XII
SHORT-TERM BORROWINGS

   
2017
   
2016
   
2015
 
   
Balance
   
Rate
   
Balance
   
Rate
   
Balance
   
Rate
 
   
(dollars in thousands)
 
Balance at December 31,
                                   
Federal funds purchased
 
$
10,000
     
1.62
%
 
$
-
     
0.00
%
 
$
-
     
-
 
Repurchase agreements
   
20,693
     
0.10
%
   
18,704
     
0.10
%
   
25,950
     
0.09
%
Federal Home Loan Bank advances
   
47,500
     
1.51
%
   
-
     
0.00
%
   
-
     
-
 
                                                 
Average daily balance for the year ended December 31,
                                               
Federal funds purchased
 
$
854
     
1.52
%
 
$
204
     
0.75
%
 
$
-
     
-
 
Repurchase agreements
   
24,889
     
0.10
%
   
25,144
     
0.10
%
   
30,654
     
0.10
%
Federal Home Loan Bank advances
   
27,589
     
1.24
%
   
12,115
     
0.54
%
   
-
     
-
 
                                                 
Maximum month-end outstanding balance:
                                               
Federal funds purchased
 
$
10,000
           
$
-
           
$
-
         
Repurchase agreements
   
36,809
             
34,519
             
44,614
         
Federal Home Loan Bank advances
   
47,500
             
20,000
             
-
         
 
Quarterly Data
The table below contains a comparison of the Company's quarterly income and expenses for the periods indicated:

   
Years Ended December 31,
 
   
2017
   
2016
 
   
Fourth
   
Third
   
Second
   
First
   
Fourth
   
Third
   
Second
   
First
 
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Quarter
 
   
(in thousands, except per share data)
 
Interest and dividend income
 
$
8,580
   
$
8,568
   
$
8,061
   
$
7,725
   
$
7,590
   
$
7,436
   
$
7,435
   
$
7,365
 
Interest expense
   
(914
)
   
(837
)
   
(673
)
   
(588
)
   
(640
)
   
(633
)
   
(582
)
   
(719
)
                                                                 
Net interest income
   
7,666
     
7,731
     
7,388
     
7,137
     
6,950
     
6,803
     
6,853
     
6,646
 
Provision for loan losses
   
(1,235
)
   
(1,275
)
   
(1,000
)
   
(650
)
   
(630
)
   
100
     
(1,250
)
   
(150
)
Net interest income, after provision for loan losses
   
6,431
     
6,456
     
6,388
     
6,487
     
6,320
     
6,903
     
5,603
     
6,496
 
                                                                 
Noninterest income
   
3,443
     
3,361
     
4,091
     
3,163
     
3,188
     
3,327
     
3,286
     
3,665
 
Noninterest expenses
   
(12,854
)
   
(9,116
)
   
(9,270
)
   
(8,706
)
   
(8,566
)
   
(8,689
)
   
(8,485
)
   
(9,091
)
                                                                 
Income before income taxes
   
(2,980
)
   
701
     
1,209
     
944
     
942
     
1,541
     
404
     
1,070
 
Provision for income taxes
   
91
     
56
     
(48
)
   
(2
)
   
(47
)
   
(212
)
   
148
     
(49
)
Net income
 
$
(2,889
)
 
$
757
   
$
1,161
   
$
942
   
$
895
   
$
1,329
   
$
552
   
$
1,021
 
                                                                 
Earnings per common share:
                                                               
Basic
 
$
(0.58
)
 
$
0.15
   
$
0.23
   
$
0.19
   
$
0.18
   
$
0.27
   
$
0.11
   
$
0.21
 
Diluted
 
$
(0.58
)
 
$
0.15
   
$
0.23
   
$
0.19
   
$
0.18
   
$
0.27
   
$
0.11
   
$
0.21
 

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

This information is incorporated herein by reference from Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", on pages 20 through 44 of this report on Form 10-K.

Item 8.
Financial Statements and Supplementary Data

The Consolidated Financial Statements and related footnotes of the Company are presented below followed by the financial statements of the Parent.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Old Point Financial Corporation
Hampton, Virginia

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Old Point Financial Corporation. and Subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operation, comprehensive income, changes in stockholders’ equity and cash flows for the three years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company’s auditor since 2004.

Winchester, Virginia
March 15, 2018

58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Old Point Financial Corporation
Hampton, Virginia

Opinion on the Internal Control over Financial Reporting
We have audited Old Point Financial Corporation and Subsidiaries' (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of operation, comprehensive income, changes in stockholders’ equity and cash flows for the three years then ended of the Company and our report dated March 15, 2018 expressed an unqualified opinion.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report of Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia
March 15, 2018
Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets

   
December
31, 2017
   
December
31, 2016
 
   
(dollars in thousands,
except per share data)
 
Assets
           
             
Cash and due from banks
 
$
13,420
   
$
21,885
 
Interest-bearing due from banks
   
908
     
1,667
 
Federal funds sold
   
84
     
2,302
 
Cash and cash equivalents
   
14,412
     
25,854
 
Securities available-for-sale, at fair value
   
157,121
     
199,365
 
Restricted stock, at cost
   
3,846
     
970
 
Loans held for sale
   
779
     
-
 
Loans, net
   
729,092
     
595,637
 
Premises and equipment, net
   
37,197
     
39,324
 
Bank-owned life insurance
   
25,981
     
25,206
 
Other real estate owned, net of valuation allowance
   
-
     
1,067
 
Goodwill
   
621
     
-
 
Other assets
   
12,777
     
15,543
 
Total assets
 
$
981,826
   
$
902,966
 
                 
Liabilities & Stockholders' Equity
               
                 
Deposits:
               
Noninterest-bearing deposits
 
$
225,716
   
$
228,641
 
Savings deposits
   
345,053
     
344,452
 
Time deposits
   
212,825
     
211,409
 
Total deposits
   
783,594
     
784,502
 
Federal funds purchased
   
10,000
     
-
 
Overnight repurchase agreements
   
20,693
     
18,704
 
Federal Home Loan Bank advances
   
67,500
     
-
 
Accrued expenses and other liabilities
   
3,651
     
5,770
 
Total liabilities
   
885,438
     
808,976
 
                 
Commitments and contingencies (Note 15)
               
                 
Stockholders' equity:
               
Common stock, $5 par value, 10,000,000 shares authorized; 5,019,703 and 4,961,258 shares outstanding (includes 2,245 and 0 unvested restricted shares, respectively)
   
25,087
     
24,806
 
Additional paid-in capital
   
17,270
     
16,427
 
Retained earnings
   
54,738
     
56,965
 
Accumulated other comprehensive loss, net
   
(707
)
   
(4,208
)
Total stockholders' equity
   
96,388
     
93,990
 
Total liabilities and stockholders' equity
 
$
981,826
   
$
902,966
 
 
See Notes to Consolidated Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Operations

   
Years Ended
December 31,
 
 
2017
   
2016
   
2015
 
   
(dollars in thousands, except per share data)
 
Interest and Dividend Income:
                 
Interest and fees on loans
 
$
29,191
   
$
26,322
   
$
25,972
 
Interest on due from banks
   
15
     
48
     
15
 
Interest on federal funds sold
   
8
     
6
     
2
 
Interest on securities:
                       
Taxable
   
1,964
     
1,802
     
2,510
 
Tax-exempt
   
1,601
     
1,535
     
1,663
 
Dividends and interest on all other securities
   
155
     
113
     
133
 
Total interest and dividend income
   
32,934
     
29,826
     
30,295
 
                         
Interest Expense:
                       
Interest on savings deposits
   
342
     
227
     
227
 
Interest on time deposits
   
2,208
     
2,116
     
2,144
 
Interest on federal funds purchased, securities sold under agreements to repurchase and other borrowings
   
38
     
25
     
30
 
Interest on Federal Home Loan Bank advances
   
424
     
206
     
1,231
 
Total interest expense
   
3,012
     
2,574
     
3,632
 
Net interest income
   
29,922
     
27,252
     
26,663
 
Provision for loan losses
   
4,160
     
1,930
     
1,025
 
Net interest income, after provision for loan losses
   
25,762
     
25,322
     
25,638
 
                         
Noninterest Income:
                       
Fiduciary and asset management fees
   
3,786
     
3,560
     
3,617
 
Service charges on deposit accounts
   
3,874
     
4,052
     
4,021
 
Other service charges, commissions and fees
   
4,182
     
3,940
     
4,084
 
Bank-owned life insurance income
   
774
     
795
     
885
 
Mortgage banking income
   
645
     
413
     
259
 
Gain on sale of available-for-sale securities, net
   
96
     
522
     
76
 
Gain on acquisition of Old Point Mortgage
   
550
     
-
     
-
 
Other operating income
   
151
     
184
     
194
 
Total noninterest income
   
14,058
     
13,466
     
13,136
 
                         
Noninterest Expense:
                       
Salaries and employee benefits
   
20,863
     
19,878
     
20,747
 
Pension termination settlement
   
3,350
     
-
     
-
 
Occupancy and equipment
   
5,864
     
5,575
     
5,330
 
Data processing
   
1,783
     
1,620
     
1,625
 
FDIC insurance
   
478
     
483
     
586
 
Customer development
   
575
     
612
     
584
 
Professional services
   
2,069
     
2,122
     
1,413
 
Employee professional development
   
794
     
659
     
591
 
Loan related expenses
   
616
     
192
     
146
 
Other taxes
   
563
     
505
     
439
 
Prepayment fee on Federal Home Loan Bank advance
   
-
     
391
     
-
 
Loss (gain) on other real estate owned
   
(18
)
   
154
     
957
 
Merger expenses
   
241
     
-
     
-
 
Other operating expenses
   
2,768
     
2,640
     
2,668
 
Total noninterest expense
   
39,946
     
34,831
     
35,086
 
Income (loss) before income taxes
   
(126
)
   
3,957
     
3,688
 
Income tax expense (benefit)
   
(97
)
   
160
     
54
 
Net income (loss)
 
$
(29
)
 
$
3,797
   
$
3,634
 
                         
Basic earnings (loss) per share:
                       
Weighted average shares outstanding
   
4,991,060
     
4,959,173
     
4,959,009
 
Net income (loss) per share of common stock
 
$
(0.01
)
 
$
0.77
   
$
0.73
 
                         
Diluted earnings (loss) per share:
                       
Weighted average shares outstanding
   
4,991,060
     
4,960,934
     
4,959,009
 
Net income (loss) per share of common stock
 
$
(0.01
)
 
$
0.77
   
$
0.73
 
 
See Notes to Consolidated Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income

   
Years Ended
December 31,
 
   
2017
   
2016
   
2015
 
   
(dollars in thousands)
 
                   
Net income (loss)
 
$
(29
)
 
$
3,797
   
$
3,634
 
Other comprehensive income (loss), net of tax
                       
Net unrealized gain (loss) on available-for-sale securities
   
1,032
     
(1,163
)
   
(498
)
Amortization of unrealized losses on securities transferred to held-to-maturity
   
-
     
-
     
3,386
 
Changes in defined benefit plan assets and benefit obligations
   
2,469
     
117
     
(157
)
Other comprehensive income (loss), net of tax
   
3,501
     
(1,046
)
   
2,731
 
Comprehensive income
 
$
3,472
   
$
2,751
   
$
6,365
 

See Notes to Consolidated Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity

   
Shares of
Common
Stock
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
   
Total
 
   
(dollars in thousands, except per share data)
 
                                     
Balance at  December 31, 2014
   
4,959,009
   
$
24,795
   
$
16,392
   
$
53,203
   
$
(5,893
)
 
$
88,497
 
                                                 
Net income
   
-
     
-
     
-
     
3,634
     
-
     
3,634
 
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
2,731
     
2,731
 
Cash dividends ($0.40 per share)
   
-
     
-
     
-
     
(1,686
)
   
-
     
(1,686
)
Balance at  December 31, 2015
   
4,959,009
   
$
24,795
   
$
16,392
   
$
55,151
   
$
(3,162
)
 
$
93,176
 
                                                 
Net income
   
-
     
-
     
-
     
3,797
     
-
     
3,797
 
Other comprehensive loss, net of tax
   
-
     
-
     
-
     
-
     
(1,046
)
   
(1,046
)
Exercise of stock options
   
1,250
     
6
     
19
     
-
     
-
     
25
 
Employee Stock Purchase Plan share issuance
   
999
     
5
     
16
     
-
     
-
     
21
 
Cash dividends ($0.44 per share)
   
-
     
-
     
-
     
(1,983
)
   
-
     
(1,983
)
                                                 
Balance at  December 31, 2016
   
4,961,258
   
$
24,806
   
$
16,427
   
$
56,965
   
$
(4,208
)
 
$
93,990
 
   
Net loss
   
-
     
-
     
-
     
(29
)
   
-
     
(29
)
Other comprehensive income, net of tax
   
-
     
-
     
-
     
-
     
3,501
     
3,501
 
Exercise of stock options
   
58,105
     
290
     
875
     
-
     
-
     
1,165
 
Employee Stock Purchase Plan share issuance
   
3,548
     
18
     
81
     
-
     
-
     
99
 
Repurchase of common stock related to stock option exercises
   
(5,453
)
   
(27
)
   
(130
)
   
-
     
-
     
(157
)
Stock-based compensation expense
   
-
     
-
     
17
     
-
     
-
     
17
 
Cash dividends ($0.44 per share)
   
-
     
-
     
-
     
(2,198
)
   
-
     
(2,198
)
                                                 
Balance at  December 31, 2017
   
5,017,458
   
$
25,087
   
$
17,270
   
$
54,738
   
$
(707
)
 
$
96,388
 

See Notes to Consolidated Financial Statements.
 
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows

Years Ended December 31,
 
2017
   
2016
   
2015
 
   
(dollars in thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income
 
$
(29
)
 
$
3,797
   
$
3,634
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
   
2,742
     
2,725
     
2,543
 
Provision for loan losses
   
4,160
     
1,930
     
1,025
 
Net gain on sale of available-for-sale securities
   
(96
)
   
(522
)
   
(76
)
Net amortization of securities
   
2,247
     
2,196
     
2,188
 
Increase in loans held for sale
   
(779
)
   
-
     
-
 
Net (gain) loss on disposal of premises and equipment
   
4
     
(3
)
   
6
 
Net (gain) loss on write-down/sale of other real estate owned
   
(18
)
   
154
     
957
 
Income from bank owned life insurance
   
(774
)
   
(795
)
   
(885
)
Stock compensation expense
   
17
     
-
     
-
 
Deferred tax benefit
   
(117
)
   
(19
)
   
(227
)
Decrease (increase) in other assets
   
458
     
(567
)
   
(3,969
)
Decrease (Increase) in other liabilities
   
3,177
     
(243
)
   
3,637
 
Pension plan contribution
   
(1,554
)
   
-
     
(1,000
)
Net cash provided by operating activities
   
9,438
     
8,653
     
7,833
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchases of available-for-sale securities
   
(23,095
)
   
(151,204
)
   
(104,103
)
Proceeds from redemption of restricted securities, net
   
(2,876
)
   
1,046
     
277
 
Proceeds from maturities and calls of available-for-sale securities
   
50,290
     
43,660
     
80,790
 
Proceeds from maturities and calls of held-to-maturity securities
   
-
     
-
     
300
 
Proceeds from sales of available-for-sale securities
   
4,480
     
107,647
     
23,005
 
Paydowns on available-for-sale securities
   
9,981
     
11,288
     
9,353
 
Paydowns on held-to-maturity securities
   
-
     
-
     
8,161
 
(Purchases) paydowns of consumer installment loans, net
   
(6,944
)
   
(2,281
)
   
(6,797
)
Net increase in all other loans (including repayments on student loans)
   
(130,671
)
   
(34,549
)
   
(26,599
)
Proceeds from sales of other real estate owned
   
1,084
     
1,699
     
1,956
 
Payments for improvements to other real estate owned
   
-
     
(52
)
   
-
 
Purchases of premises and equipment
   
(619
)
   
(891
)
   
(1,756
)
Net cash used in investing activities
   
(98,370
)
   
(23,637
)
   
(15,413
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
(Increase) decrease in noninterest-bearing deposits
   
(2,925
)
   
13,551
     
28,810
 
Decrease in savings deposits
   
601
     
23,082
     
14,292
 
Decrease (increase) in time deposits
   
1,416
     
1,398
     
(13,285
)
Decrease (increase) in federal funds purchased and repurchase agreements, net
   
11,989
     
(7,246
)
   
(11,866
)
Increase in Federal Home Loan Bank advances
   
167,500
     
55,000
     
20,000
 
Repayment of Federal Home Loan Bank advances
   
(100,000
)
   
(80,000
)
   
(25,000
)
Proceeds from exercise of stock options and ESPP issuance
   
1,264
     
46
     
-
 
Repurchase and retirement of common stock
   
(157
)
   
-
     
-
 
Cash dividends paid on common stock
   
(2,198
)
   
(1,983
)
   
(1,686
)
Net cash provided by financing activities
   
77,490
     
3,848
     
11,265
 
                         
Net (increase) decrease in cash and cash equivalents
   
(11,442
)
   
(11,136
)
   
3,685
 
Cash and cash equivalents at beginning of period
   
25,854
     
36,990
     
33,305
 
Cash and cash equivalents at end of period
 
$
14,412
   
$
25,854
   
$
36,990
 
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                       
Cash payments for:
                       
Interest
 
$
2,880
   
$
2,587
   
$
3,646
 
Income tax
   
600
     
-
     
200
 
                         
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
                       
Unrealized gain (loss) on securities available-for-sale
 
$
1,563
   
$
(1,762
)
 
$
(755
)
Loans transferred to other real estate owned
   
-
     
-
     
553
 
Former bank property transferred from fixed assets to foreclosed properties
   
-
     
127
     
-
 
(Increase) decrease in pension liability
   
3,741
     
177
     
(237
)
Securities transferred from held-to-maturity to available-for-sale
   
-
     
-
     
85,555
 
Unamortized losses on transfer date on securities transferred from available-for-sale to held-to-maturity, eliminated upon transfer back to available-for-sale
   
-
     
-
     
4,197
 
Amortization of unrealized loss on securities transferred to held-to-maturity
   
-
     
-
     
934
 

See Notes to Consolidated Financial Statements.
 
NOTE 1, Significant Accounting Policies
 
THE COMPANY
Headquartered in Hampton, Virginia, Old Point Financial Corporation is a holding company that conducts substantially all of its operations through two subsidiaries, The Old Point National Bank of Phoebus and Old Point Trust & Financial Services, N.A. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of December 31, 2017, the Bank had 18 branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through its Old Point Mortgage division. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Trust offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Old Point Financial Corporation (the Company) and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). All significant intercompany balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES
In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities, and the valuation allowance on other real estate owned.

VARIABLE INTEREST ENTITIES
Current accounting guidance states that if a business enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate the entity. It also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. At this time, the Company has no VIEs that are consolidated.

ACQUISITIONS
The Bank had a joint venture agreement with Tidewater Mortgage Services, Inc. (TMSI) to provide mortgage origination services through Old Point Mortgage, LLC (OPM), a joint venture between the Bank and TMSI. Per the terms of the joint venture agreement, TMSI and the Bank owned 51% and 49%, respectively, of OPM, and TMSI was the managing member.

On April 20, 2017, the Bank completed its purchase of TMSI's interest in OPM, which terminated the joint venture agreement between TMSI and the Bank and made OPM a wholly-owned subsidiary of the Bank as of that date. OPM's fair value was based on an independent valuation performed as of March 31, 2017. Since OPNB had a 49% interest in OPM prior to acquisition of the remaining interest and obtains a controlling interest with the buy-out, this will transaction was accounted for as a business combination achieved in stages or a step acquisition. OPNB has through the aforementioned valuation estimated the fair value of its previously held equity interest in the target resulting in a gain for the excess of the acquisition-date fair value of its previously held equity interest in the target over its carrying value of $550 thousand which is included as a gain on acquisition of Old Point Mortgage in the Consolidated Statements of Income.
 
The table below summarizes the transaction and goodwill recognition (000's):

Consideration transferred
 
$
1,534
 
Acquisition-date fair value of previously-held equity interest
   
2,002
 
Total
   
3,536
 
Net assets acquired
   
2,915
 
Goodwill
 
$
621
 

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's activities are with customers located within the Hampton Roads region. The types of securities that the Company invests in are included in Note 3. The types of lending that the Company engages in are included in Note 4. The Company has significant concentrations in the following industries: construction, lessors of real estate, activities related to real estate, ambulatory health care and religious organizations. The Company does not have any significant concentrations to any one customer.
At December 31, 2017 and 2016, there were $317.2 million and $308.5 million, or 42.95% and 51.09%, respectively, of total loans concentrated in commercial real estate. Commercial real estate for purposes of this note includes all construction loans, loans secured by multifamily residential properties, loans secured by farmland and loans secured by nonfarm, nonresidential properties.

CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash and balances due from banks and federal funds sold, all of which mature within 90 days.

INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks mature within one year and are carried at cost.

SECURITIES
Certain debt securities that management has the positive intent and ability to hold until maturity are classified as "held-to-maturity" and recorded at amortized cost. Securities not classified as held-to-maturity, including equity securities with readily determinable fair values, are classified as "available-for-sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments. In the event that the cost of an investment exceeds its fair value, the Company evaluates, among other factors, the magnitude and duration of the decline in fair value; the expected cash flows of the securities; the financial health of and business outlook for the issuer; the performance of the underlying assets for interests in securitized assets; and the Company's intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in investment income and a new cost basis in the investment is established.

RESTRICTED STOCK, AT COST
The Company, as a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank of Atlanta (FHLB), is required to maintain an investment in the capital stock of both the FRB and the FHLB. Based on the redemption provisions of these investments, the stocks have no quoted market value, are carried at cost and are listed as a restricted securities. The Company reviews its holdings for impairment based on the ultimate recoverability of the cost basis in the FRB and FHLB stock.
 
LOANS HELD FOR SALE
The Company records loans held for sale using the lower of cost or market value. In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be closed, thus limiting interest rate risk. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The change in fair value of loans held for sale is recorded as a component of "Mortgage banking income, net" within the Company's Consolidated Statements of Operations.

LOANS
The Company extends loans to individual consumers and commercial customers for various purposes. Most of the Company's loans are secured by real estate, including real estate construction loans and real estate mortgage loans (i.e., residential 1-4 family mortgages, commercial real estate loans, second mortgages and equity lines of credit).  Other loans are secured by collateral that is not real estate, which may include inventory, accounts receivable, equipment or other personal property. A substantial portion of the loan portfolio is represented by real estate mortgage loans throughout Hampton Roads. The ability of the Company's debtors to honor their contracts is dependent in part upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses and any unamortized deferred fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

NONACCRUALS, PAST DUES AND CHARGE-OFFS
The accrual of interest on commercial loans (including construction loans and commercial loans secured and not secured by real estate) is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Consumer loans not secured by real estate and consumer real estate secured loans (i.e., residential 1-4 family mortgages, second mortgages and equity lines of credit) are generally placed on nonaccrual status when payments are 120 days past due. Past due status is based on the contractual terms of the loan, and loans are considered past due when a payment of principal and/or interest is due but not paid. Regular payments not received within the payment cycle are considered to be 30, 60, or 90 or more days past due accordingly. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status or charged off. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.

Loans are generally fully charged off or partially charged down to the fair value of collateral securing the asset when:

·
Management determines the asset to be uncollectible;

·
Repayment is deemed to be protracted beyond reasonable time frames;

·
The asset has been classified as a loss by either the internal loan review process or external examiners;

·
The borrower has filed for bankruptcy protection and the loss becomes evident due to a lack of borrower assets; or

The loan is 120 days or more past due unless the loan is both well secured and in the process of collection.

ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired, such as a loan that is considered a TDR (discussed in detail below). These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment. All loans, including consumer loans, whose terms have been modified in a TDR are also individually analyzed for estimated impairment. Impairment is measured on a loan-by-loan basis for construction loans and commercial loans (i.e., commercial mortgage loans on real estate and commercial loans not secured by real estate) by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. For those loans that are classified as impaired, an allowance is established when the discounted value of expected future cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

The general component covers loans that are not classified as impaired. Loans collectively evaluated for impairment are pooled, with a historical loss rate, based on migration analysis, applied to each pool, segmented by risk grade or days past due, depending on the type of loan.  Based on credit risk assessments and management's analysis of qualitative factors, additional loss factors are applied to loan balances. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and consumer loans secured by real estate (i.e., residential 1-4 family mortgages, second mortgages and equity lines of credit) for impairment disclosures, unless the terms of such loans have been modified in a TDR due to financial difficulties of the borrower.

Each portfolio segment has risk characteristics as follows:
 
·
Commercial: Commercial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

·
Real estate-construction: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

·
Real estate-mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts.
 
·
Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

·
Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets.

Each segment of the portfolio is pooled by risk grade or by days past due.  Loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades.  A historical loss percentage is then calculated by migration analysis and applied to each pool.  The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment.  At December 31, 2017 management used four twelve-quarter migration periods, and at December 31, 2016, m anagement used one twelve-quarter migration period.

TROUBLED DEBT RESTRUCTURINGS
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management grants a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty before their loans reach nonaccrual status and works with them to grant appropriate concessions, if necessary, and modify their loans to more affordable terms. These modified terms could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.

TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company (i.e., put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership); (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

OTHER REAL ESTATE OWNED (OREO)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance (direct write-downs) are included in loss (gain) on other real estate owned.

BANK-OWNED LIFE INSURANCE
The Company owns insurance on the lives of a certain group of key employees. The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and the increase in cash surrender value is recorded as noninterest income on the consolidated statements of operations. In the event of the death of an insured individual under these policies, the Company would receive a death benefit payment. Any excess in the amount received over the recorded cash surrender value would be recorded as other operating income on the consolidated statements of operations.

PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets. Buildings and equipment are depreciated over their estimated useful lives ranging from 3 to 39 years; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Software is amortized over its estimated useful life ranging from 3 to 5 years.
 
OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial letters of credit and lines of credit. Such financial instruments are recorded when they are funded.

PENSION PLAN
The Company has a non-contributory defined benefit pension plan, which was frozen by the Company in 2006 and terminated in 2017. This plan was terminated in the fourth quarter of 2017. Details regarding the impact of this can be found in Note 14.

STOCK COMPENSATION PLANS
Stock compensation accounting guidance (FASB ASC 718, "Compensation -- Stock Compensation") requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees' service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black Scholes model is used to estimate the fair value of the stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.

INCOME TAXES
The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, "Income Taxes"). The Company adopted the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability or balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the difference between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

No uncertain tax positions were recorded in 2017 or 2016.
 
The results for the year ended December 31, 2017 include the effect of the Tax Cuts and Jobs Act (the Tax Act), which was signed into law on December 22, 2017. Among other things, the Tax Act permanently lowers the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%, effective January 1, 2018. As a result of the federal corporate income tax rate, U.S. GAAP requires companies to re-measure their deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income (loss), as of the date of the Tax Act's enactment and record the corresponding effects in income tax expense in the fourth quarter of 2017. As a result of the permanent reduction in the corporate income tax rate, the Company recognized a $1.2 million reduction in the value of its net deferred tax asset and recorded a corresponding incremental income tax expense in the Company's consolidated statement of income for 2017. The Company's evaluation of the effect of the Tax Act is considered a preliminary estimate and is subject to refinement in 2018. No material adjustment is anticipated.

EARNINGS PER COMMON SHARE
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and shares to be issued as part of the employee stock purchase plan and are determined using the treasury stock method.

TRUST ASSETS AND INCOME
Securities and other property held by Trust in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying Consolidated Financial Statements.

ADVERTISING EXPENSES
Advertising expenses are expensed as incurred. Advertising expense for the years ended 2017,  2016 and 2015 was $249 thousand, $273 thousand, and $217 thousand, respectively.

COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income, net of tax. Other comprehensive income (loss), net of tax includes unrealized gains and losses on securities available-for-sale, unrealized losses on securities transferred from available-for-sale to held-to-maturity, and unrealized losses related to changes in the funded status of the pension plan which are also recognized as separate components of equity.

FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606." This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The Company plans to adopt this guidance on the effective date, January 1, 2018 via the modified retrospective approach. The Company has completed its assessment of the adoption of this ASU, noting the standard will result in expanded disclosures related to non-interest income and enhance the qualitative disclosures on the revenues within the scope of the new guidance. The Company has concluded the adoption of ASU 2014-09 will not have a material impact on its consolidated financial statements.
 
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU requires an entity to, among other things: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific credit risk. The Company has completed its assessment of ASU No. 2016-01 and upon adoption there will be enhancements to the current financial instrument disclosures.

During February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements. As the Company owns the majority of its buildings, management does not anticipate that the ASU will have a material impact.

During June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements and has formed a committee to oversee the adoption of the new standard. The ALLL model currently in use by the Company already provides it with the ability to archive prior period information and contains loan balance and charge-off information beginning with September 30, 2011. The committee has reviewed the data included in each monthly archive file and has added fields to enhance its data analysis capabilities under the new standard.

During August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
 
During January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements. The Company's pending merger with Citizens National Bank will be accounted for under the acquisition accounting guidance.

During January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company has concluded the adoption of ASU 2017-07 will not have a material impact on its consolidated financial statements.

During March 2017, the FASB issued ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017 ‐ 08 will have on its consolidated financial statements.
 
During May 2017, the FASB issued ASU 2017 ‐ 09, "Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company has concluded that ASU 2017 ‐ 08 will not have a material impact on its consolidated financial statements.

During August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."  The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes.  Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update.   The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018.  Early adoption is permitted, including adoption in any interim period.  The Company has concluded that the adoption of ASU 2017-12 will not have a material impact on its consolidated financial statements.

During February 2018, the FASB issued ASU 2018-02, "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded.  The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.  The Company has elected to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act in the consolidated financial statements for the period ending December 31, 2018.
 
NOTE 2, Restrictions on Cash and Amounts Due from Banks

The Company is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2017 and 2016, the Company had no balance requirements on any of its accounts. The Company had approximately $0.5 million and $9.9 million in deposits in financial institutions in excess of amounts insured by the FDIC at December 31, 2017 and December 31, 2016, respectively.

NOTE 3, Securities Portfolio

The amortized cost and fair value, with gross unrealized gains and losses, of securities available-for-sale were:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(in thousands)
 
December 31, 2017
                       
Obligations of U.S. Government agencies
 
$
9,530
   
$
27
   
$
(122
)
 
$
9,435
 
Obligations of state and political subdivisions
   
64,413
     
489
     
(137
)
   
64,765
 
Mortgage-backed securities
   
75,906
     
-
     
(1,610
)
   
74,296
 
Money market investments
   
1,194
     
-
     
-
     
1,194
 
Corporate bonds and other securities
   
7,049
     
195
     
(10
)
   
7,234
 
Other marketable equity securities
   
100
     
97
     
-
     
197
 
Total
 
$
158,192
   
$
808
   
$
(1,879
)
 
$
157,121
 
                                 
December 31, 2016
                               
U.S. Treasury securities
 
$
20,000
   
$
-
   
$
-
   
$
20,000
 
Obligations of  U.S. Government agencies
   
9,361
     
-
     
(166
)
   
9,195
 
Obligations of state and political subdivisions
   
78,645
     
358
     
(1,016
)
   
77,987
 
Mortgage-backed securities
   
85,649
     
18
     
(1,973
)
   
83,694
 
Money market investments
   
647
     
-
     
-
     
647
 
Corporate bonds and other securities
   
7,598
     
92
     
(12
)
   
7,678
 
Other marketable equity securities
   
100
     
64
     
-
     
164
 
Total
 
$
202,000
   
$
532
   
$
(3,167
)
 
$
199,365
 
 
Securities with a fair value of $66.6 million and $72.9 million at December 31, 2017 and 2016, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, FHLB advances and for other purposes required or permitted by law.

At December 31, 2017, the Company held no securities of any single issuer (excluding U.S. Government agencies) with a book value that exceeded 10 percent of stockholders' equity.

The amortized cost and fair value of securities by contractual maturity are shown below.

 
 
December 31, 2017
Available-for-Sale
 
 
 
Amortized
Cost
 
 
Fair
Value
 
 
(in thousands)
 
         
Due in one year or less
 
$
4,015
   
$
4,009
 
Due after one year through five years
   
23,293
     
23,126
 
Due after five years through ten years
   
38,197
     
37,997
 
Due after ten years
   
91,393
     
90,598
 
Total debt securities
   
156,898
     
155,730
 
Other securities without stated maturities
   
1,294
     
1,391
 
                 
Total securities
 
$
158,192
   
$
157,121
 

The following table provides information about securities sold in the years ended December 31:

 
2017
 
 
2016
 
 
2015
 
 
(in thousands)
     
             
Proceeds from sales
 
$
4,480
   
$
107,647
   
$
23,005
 
                         
Gross realized gains
 
$
96
   
$
578
   
$
76
 
                         
Gross realized losses
 
$
-
   
$
56
   
$
-
 

OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES
Management assesses whether the Company intends to sell or it is more-likely-than-not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and the present value of expected future cash flows is due to factors that are not credit related and is recognized in other comprehensive income.
 
The present value of expected future cash flows is determined using the best-estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best-estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including subordination and guarantees.

The Company has a process in place to identify debt securities that could potentially have a credit or interest-rate related impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, and cash flow projections as indicators of credit issues. On a quarterly basis, management reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. Management considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (a) the extent and length of time the fair value has been below cost; (b) the reasons for the decline in value; (c) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (d) for fixed maturity securities, the Company's intent to sell a security or whether it is more-likely-than-not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the Company's ability and intent to hold the security for a period of time that allows for the recovery in value.

The Company has not recorded impairment charges on securities for the years ended December 31, 2017 and 2016.

The following table shows the number of securities with unrealized losses, the gross unrealized losses and fair value of the Company's investments with unrealized losses that are deemed to be temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated:

 
December 31, 2017
 
 
 
Less Than Twelve
Months
 
 
More Than Twelve
Months
        
Total
 
 
 
 
Gross
Unrealized
Losses
 
 
 
Fair
Value
 
 
 
Gross
Unrealized
Losses
 
 
 
Fair
Value
 
 
 
Gross
Unrealized
Losses
 
 
 
Fair
Value
 
 
 
Number
of
Securities
 
 
(dollars in thousands)
 
Securities Available-for-Sale
                           
Obligations of U.S. Government agencies
 
$
11
   
$
3,189
   
$
111
   
$
3,089
   
$
122
   
$
6,278
     
13
 
Obligations of state and political subdivisions
   
32
     
11,141
     
105
     
10,999
     
137
     
22,140
     
29
 
Mortgage-backed securities
   
67
     
9,742
     
1,543
     
64,554
     
1,610
     
74,296
     
24
 
Corporate bonds and other securities
   
2
     
1,098
     
8
     
792
     
10
     
1,890
     
11
 
Total securities available-for-sale
 
$
112
   
$
25,170
   
$
1,767
   
$
79,434
   
$
1,879
   
$
104,604
     
77
 
 
 
December 31, 2016
 
 
 
 
Less Than Twelve
Months
 
 
More Than Twelve
Months
 
Total
 
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
 
Number
of
Securities
 
(dollars in thousands)
 
Securities Available-for-Sale
                           
Obligations of U. S. Government agencies
 
$
166
   
$
9,195
   
$
-
   
$
-
   
$
166
   
$
9,195
     
6
 
Obligations of state and political subdivisions
   
1,016
     
38,020
     
-
     
-
     
1,016
     
38,020
     
56
 
Mortgage-backed securities
   
1,973
     
80,680
     
-
     
-
     
1,973
     
80,680
     
23
 
Corporate bonds and other securities
   
11
     
1,787
     
1
     
100
     
12
     
1,887
     
13
 
Total securities available-for-sale
 
$
3,166
   
$
129,682
   
$
1
   
$
100
   
$
3,167
   
$
129,782
     
98
 

Certain investments within the Company's portfolio had unrealized losses at December 31, 2017 and December 31, 2016, as shown in the tables above. The unrealized losses were caused by increases in market interest rates. The Company purchases only highly-rated securities, including U.S. government agencies and mortgage-backed securities guaranteed by government-sponsored entities. The municipal and corporate securities portfolios are reviewed regularly to ensure that ratings of individual securities have not deteriorated below the threshold established by the Company's policy.

Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at December 31, 2017 or December 31, 2016.

Restricted Stock
The restricted stock category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB and Federal Reserve Bank stock is carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered.

NOTE 4, Loans and Allowance for Loan Losses

The following is a summary of the balances in each class of the Company's loan portfolio as of the dates indicated:

   
December
31,
2017
   
December
31,
2016
 
   
(in thousands)
 
Mortgage loans on real estate:
           
Residential 1-4 family
 
$
101,021
   
$
94,827
 
Commercial
   
289,682
     
285,429
 
Construction
   
27,489
     
23,116
 
Second mortgages
   
17,918
     
17,128
 
Equity lines of credit
   
56,610
     
51,024
 
Total mortgage loans on real estate
   
492,720
     
471,524
 
Commercial and industrial loans
   
60,398
     
54,434
 
Consumer automobile loans
   
119,251
     
10,407
 
Other consumer loans
   
54,974
     
48,500
 
Other (1)
   
11,197
     
19,017
 
Total loans
   
738,540
     
603,882
 
Less: Allowance for loan losses
   
(9,448
)
   
(8,245
)
Loans, net of allowance and deferred fees (2)
 
$
729,092
   
$
595,637
 
 
(1) Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $594 thousand and $536 thousand at December 31, 2017 and December 31, 2016, respectively.
(2) Net deferred loan costs totaled $916 thousand and $522 thousand at December 31, 2017 and December 31, 2016, respectively.

CREDIT QUALITY INFORMATION
The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company's internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company's internally assigned risk grades are as follows:
 
·
Pass: Loans are of acceptable risk.

·
Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management's close attention.

·
Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.

·
Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.

·
Loss: Loans have been charged off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:

   
Credit Quality Information
As of December 31, 2017
 
   
Pass
   
OAEM
   
Substandard
   
Total
 
               
(in thousands)
 
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
98,656
   
$
-
   
$
2,365
   
$
101,021
 
Commercial
   
264,275
     
10,526
     
14,881
     
289,682
 
Construction
   
26,694
     
74
     
721
     
27,489
 
Second mortgages
   
17,211
     
431
     
276
     
17,918
 
Equity lines of credit
   
56,318
     
-
     
292
     
56,610
 
Total mortgage loans on real estate
   
463,154
     
11,031
     
18,535
     
492,720
 
Commercial and industrial loans
   
58,091
     
1,469
     
838
     
60,398
 
Consumer automobile loans
   
119,211
     
-
     
40
     
119,251
 
Other consumer loans
   
54,926
     
-
     
48
     
54,974
 
Other
   
11,197
     
-
     
-
     
11,197
 
Total
 
$
706,579
   
$
12,500
   
$
19,461
   
$
738,540
 
 
   
Credit Quality Information
As of December 31, 2016
 
   
Pass
   
OAEM
   
Substandard
   
Total
 
               
(in thousands)
 
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
92,458
   
$
1,138
   
$
1,231
   
$
94,827
 
Commercial
   
260,948
     
10,014
     
14,467
     
285,429
 
Construction
   
22,219
     
162
     
735
     
23,116
 
Second mortgages
   
16,445
     
475
     
208
     
17,128
 
Equity lines of credit
   
50,387
     
500
     
137
     
51,024
 
Total mortgage loans on real estate
   
442,457
     
12,289
     
16,778
     
471,524
 
Commercial and industrial loans
   
49,979
     
2,278
     
2,177
     
54,434
 
Consumer automobile loans
   
10,407
     
-
     
-
     
10,407
 
Other consumer loans
   
48,334
     
-
     
166
     
48,500
 
Other
   
19,017
     
-
     
-
     
19,017
 
Total
 
$
570,194
   
$
14,567
   
$
19,121
   
$
603,882
 

As of December 31, 2017 and 2016 the Company did not have any loans internally classified as Loss or Doubtful.

AGE ANALYSIS OF PAST DUE LOANS BY CLASS
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. Loans in nonaccrual status that are also past due are included in the aging categories in the table below.

Age Analysis of Past Due Loans as of December 31, 2017
 
   
30 - 59
Days Past
Due
   
60 - 89
Days Past
Due
   
90 or
More
Days Past
Due
   
Total Past
Due
   
Total
Current
Loans (1)
   
Total
Loans
   
Recorded
Investment
> 90 Days
Past Due
and
Accruing
 
   
(in thousands)
 
Mortgage loans on real estate:
                                         
Residential 1-4 family
 
$
229
   
$
153
   
$
1,278
   
$
1,660
   
$
99,361
   
$
101,021
   
$
261
 
Commercial
   
194
     
771
     
1,753
     
2,718
     
286,964
     
289,682
     
-
 
Construction
   
-
     
-
     
721
     
721
     
26,768
     
27,489
     
-
 
Second mortgages
   
15
     
-
     
163
     
178
     
17,740
     
17,918
     
45
 
Equity lines of credit
   
75
     
19
     
53
     
147
     
56,463
     
56,610
     
-
 
Total mortgage loans on real estate
   
513
     
943
     
3,968
     
5,424
     
487,296
     
492,720
     
306
 
Commercial and industrial loans
   
709
     
-
     
1,060
     
1,769
     
58,629
     
60,398
     
471
 
Consumer automobile loans
   
517
     
122
     
41
     
680
     
118,571
     
119,251
     
41
 
Other consumer loans
   
2,222
     
544
     
2,360
     
5,126
     
49,848
     
54,974
     
2,360
 
Other
   
84
     
9
     
4
     
97
     
11,100
     
11,197
     
4
 
Total
 
$
4,045
   
$
1,618
   
$
7,433
   
$
13,096
   
$
725,444
   
$
738,540
   
$
3,182
 

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

In the table above, the other consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.2 million at December 31, 2017.
 
Age Analysis of Past Due Loans as of December 31, 2016
 
   
30 - 59
Days Past
Due
   
60 - 89
Days Past
Due
   
90 or
More
Days Past
Due
   
Total Past
Due
   
Total
Current
Loans (1)
   
Total
Loans
   
Recorded
Investment
> 90 Days
Past Due
and
Accruing
 
   
(in thousands)
 
Mortgage loans on real estate:
                                         
Residential 1-4 family
 
$
564
   
$
-
   
$
496
   
$
1,060
   
$
93,767
   
$
94,827
   
$
218
 
Commercial
   
2,280
     
1,625
     
227
     
4,132
     
281,297
     
285,429
     
-
 
Construction
   
162
     
-
     
-
     
162
     
22,954
     
23,116
     
-
 
Second mortgages
   
-
     
200
     
188
     
388
     
16,740
     
17,128
     
58
 
Equity lines of credit
   
394
     
9
     
86
     
489
     
50,535
     
51,024
     
-
 
Total mortgage loans on real estate
   
3,400
     
1,834
     
997
     
6,231
     
465,293
     
471,524
     
276
 
Commercial and industrial loans
   
5
     
-
     
86
     
91
     
54,343
     
54,434
     
-
 
Consumer automobile loans
   
-
     
11
     
-
     
11
     
10,396
     
10,407
     
-
 
Other consumer loans
   
1,876
     
702
     
2,684
     
5,262
     
43,238
     
48,500
     
2,603
 
Other
   
41
     
12
     
5
     
58
     
18,959
     
19,017
     
5
 
Total
 
$
5,322
   
$
2,559
   
$
3,772
   
$
11,653
   
$
592,229
   
$
603,882
   
$
2,884
 

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

In the table above, the consumer category includes student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The past due principal portion of these guaranteed loans totaled $4.8 million at December 31, 2016.

NONACCRUAL LOANS
The Company generally places commercial loans (including construction loans and commercial loans secured and not secured by real estate) in nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection.

Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and consumer loans secured by real estate (including residential 1 - 4 family mortgages, second mortgages, and equity lines of credit) are not required to be placed in nonaccrual status. Although consumer loans and consumer loans secured by real estate are not required to be placed in nonaccrual status, the Company may elect to place these loans in nonaccrual status, if necessary to avoid a material overstatement of interest income. Generally, consumer loans secured by real estate are placed in nonaccrual status only when payments are 120 days past due.

Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. If a charge-off has not occurred sooner for other reasons, a consumer loan not secured by real estate will generally be placed in nonaccrual status when payments are 120 days past due. These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, when classified as a "loss," when repayment is unreasonably protracted, when bankruptcy has been initiated, or when the loan is 120 days or more past due unless the credit is well-secured and in the process of collection.
 
When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the cash basis or cost recovery method, until it qualifies for return to accrual status or is charged off. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or when the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments for at least six months.

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

Nonaccrual Loans by Class

   
December
31, 2017
   
December
31, 2016
 
   
(in thousands)
 
Mortgage loans on real estate:
           
Residential 1-4 family
 
$
1,447
   
$
598
 
Commercial
   
9,468
     
6,033
 
Construction
   
721
     
-
 
Second mortgages
   
118
     
129
 
Equity lines of credit
   
292
     
87
 
Total mortgage loans on real estate
   
12,046
     
6,847
 
Commercial and industrial loans
   
836
     
231
 
Consumer loans
   
-
     
81
 
Total
 
$
12,882
   
$
7,159
 

The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

 
Years Ended December 31,
 
 
2017
   
2016
   
2015
 
 
(in thousands)
 
Interest income that would have been recorded under original loan terms
 
$
474
   
$
318
   
$
196
 
Actual interest income recorded for the period
   
281
     
269
     
141
 
Reduction in interest income on nonaccrual loans
 
$
193
   
$
49
   
$
55
 

TROUBLED DEBT RESTRUCTURINGS
The Company's loan portfolio includes certain loans classified as TDRs, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.
When the Company modifies a loan, management evaluates any possible impairment as discussed further under Impaired Loans below.

The following table presents TDRs during the period indicated, by class of loan:

Troubled Debt Restructurings by Class
For the Year Ended December 31, 2017

 
Number of
Modifications
 
 
Recorded
Investment
Prior to
Modification
 
 
Recorded
Investment
After
Modification
 
 
Current
Investment
on
December
31, 2017
 
 
(dollars in thousands)
 
Mortgage loans on real estate:
               
Residential 1-4 family
   
1
   
$
142
   
$
142
   
$
140
 
Commercial
   
3
     
5,132
     
5,132
     
5,132
 
Total
   
4
   
$
5,274
   
$
5,274
   
$
5,272
 
 
Troubled Debt Restructurings by Class
For the Year Ended December 31, 2016

   
Number of
Modifications
   
Recorded
Investment
Prior to
Modification
   
Recorded
Investment
After
Modification
   
Current
Investment
on
December
31, 2016
 
   
(dollars in thousands)
 
Mortgage loans on real estate:
                       
Residential 1-4 family
   
6
   
$
1,061
   
$
1,061
   
$
992
 
Commercial
   
1
     
150
     
150
     
-
 
Second mortgages
   
1
     
53
     
53
     
53
 
Equity lines of credit
   
1
     
93
     
93
     
86
 
Total mortgage loans on real estate
   
9
     
1,357
     
1,357
     
1,131
 
Commercial and industrial loans
   
1
     
152
     
152
     
144
 
Consumer loans
   
2
     
8
     
8
     
-
 
Total
   
12
   
$
1,517
   
$
1,517
   
$
1,275
 

Of the loans restructured in 2017  two were given a below-market rate for debt with similar risk characteristics and two were granted terms that the Company would not otherwise extend to borrowers with similar risk charateristics. All of the loans restructured in 2016 were given below-market rates for debt with similar risk characteristics.

At December 31, 2017 and 2016, the Company had no outstanding commitments to disburse additional funds on any TDR. Also at December 31, 2017 and 2016 , the Company had $77 thousand and $10 thousand, respectively, in loans secured by residential 1 - 4 family real estate that were in the process of foreclosure.

In the years ended December 31, 2017 and 2016 there were no defaulting TDRs where the default occurred within twelve months of restructuring. The Company considers a TDR in default when any of the following occurs: the loan, as restructured, becomes 90 days or more past due; the loan is moved to nonaccrual status following the restructure; the loan is restructured again under terms that would qualify it as a TDR if it were not already so classified; or any portion of the loan is charged off.

All TDRs are factored into the determination of the allowance for loan losses and included in the impaired loan analysis, as discussed below.

IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include nonperforming loans and loans modified in a TDR. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash basis method.
 
The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.

Impaired Loans by Class
 
   
As of December 31, 2017 
 
 
For the Year Ended
December 31, 2017
 
     
Recorded Investment
             
 
 
Unpaid
Principal
Balance
 
 
Without
Valuation
Allowance
 
 
With
Valuation
Allowance
 
 
Associated
Allowance
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
(in thousands)
 
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
2,873
   
$
2,499
   
$
316
   
$
52
   
$
2,525
   
$
90
 
Commercial
   
15,262
     
11,622
     
1,644
     
1
     
13,541
     
579
 
Construction
   
814
     
721
     
92
     
18
     
406
     
23
 
Second mortgages
   
473
     
318
     
135
     
14
     
464
     
20
 
Equity lines of credit
   
293
     
53
     
239
     
10
     
261
     
-
 
Total mortgage loans on real estate
 
$
19,715
   
$
15,213
   
$
2,426
   
$
95
   
$
17,197
   
$
712
 
Commercial and industrial loans
   
1,115
     
836
     
-
     
-
     
1,388
     
30
 
Consumer loans
   
-
     
-
     
-
     
-
     
41
     
-
 
Total
 
$
20,830
   
$
16,049
   
$
2,426
   
$
95
   
$
18,626
   
$
742
 

Impaired Loans by Class
 
 
As of December 31, 2016
 
 
For the Year Ended
December 31, 2016
 
     
Recorded Investment
             
 
 
Unpaid
Principal
Balance
 
Without
Valuation
Allowance
 
 
With
Valuation
Allowance
 
 
Associated
Allowance
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
(in thousands)
 
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
2,496
   
$
1,835
   
$
622
   
$
75
   
$
2,741
   
$
119
 
Commercial
   
16,193
     
11,095
     
4,274
     
415
     
11,885
     
727
 
Construction
   
619
     
528
     
96
     
22
     
496
     
43
 
Second mortgages
   
526
     
309
     
141
     
17
     
511
     
25
 
Equity lines of credit
   
87
     
86
     
-
     
-
     
46
     
3
 
Total mortgage loans on real estate
 
$
19,921
   
$
13,853
   
$
5,133
   
$
529
   
$
15,679
   
$
917
 
Commercial and industrial loans
   
1,077
     
-
     
989
     
271
     
827
     
74
 
Consumer loans
   
81
     
81
     
-
     
-
     
68
     
1
 
Total
 
$
21,079
   
$
13,934
   
$
6,122
   
$
800
   
$
$ 16,574
   
$
992
 

ALLOWANCE FOR LOAN LOSSES
Loans are either individually evaluated for impairment or pooled with like loans and collectively evaluated for impairment. Also, various qualitative factors are applied to each segment of the loan portfolio. The allowance for loan losses is the accumulation of these components. Management's estimate is based on certain observable, historical data and other factors that management believes are most reflective of the underlying credit losses being estimated.
 
Management provides an allocated component of the allowance for loans that are individually evaluated for impairment. An allocated allowance is established when the discounted value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower than the carrying value of that loan. This allocation represents the sum of management's estimated losses on each loan.

Loans collectively evaluated for impairment are pooled, with a historical loss rate, based on migration analysis, applied to each pool, segmented by risk grade or days past due, depending on the type of loan. Based on credit risk assessments and management's analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions, trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

ALLOWANCE FOR LOAN LOSSES BY SEGMENT
The following table presents, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
(in thousands)

For the Year Ended December 31, 2017
 
Commercial
 
 
Real Estate -
Construction
 
 
Real
Estate -
Mortgage
 
Consumer
 
Other
 
Total
 
Allowance for Loan Losses:
                       
Balance at the beginning of period
 
$
1,493
   
$
846
   
$
5,267
   
$
455
   
$
184
   
$
8,245
 
Charge-offs
   
(807
)
   
-
     
(1,934
)
   
(279
)
   
(267
)
   
(3,287
)
Recoveries
   
37
     
104
     
45
     
56
     
88
     
330
 
Provision for loan losses
   
1,166
     
(409
)
   
1,839
     
1,412
     
152
     
4,160
 
Ending balance
   
1,889
     
541
     
5,217
     
1,644
     
157
     
9,448
 
Ending balance individually evaluated for impairment
   
-
     
18
     
77
     
-
     
-
     
95
 
Ending balance collectively evaluated for impairment
   
1,889
     
523
     
5,140
     
1,644
     
157
     
9,353
 
Ending balance
   
1,889
     
541
     
5,217
     
1,644
     
157
     
9,448
 
Loan Balances:
                                               
Ending balance individually evaluated for impairment
   
836
     
813
     
16,826
     
-
     
-
     
18,475
 
Ending balance collectively evaluated for impairment
   
59,562
     
26,676
     
448,405
     
174,225
     
11,197
     
720,065
 
Ending balance
 
$
60,398
   
$
27,489
   
$
465,231
   
$
174,225
   
$
11,197
   
$
738,540
 
 
For the Year Ended December 31, 2016
Commercial
 
 
Real Estate -
Construction
 
 
Real
Estate -
Mortgage
 
 
Consumer
 
 
Other
 
 
Total
 
Allowance for Loan Losses:
                                               
Balance at the beginning of period
 
$
633
   
$
985
   
$
5,628
   
$
279
   
$
213
   
$
7,738
 
Charge-offs
   
(915
)
   
-
     
(504
)
   
(204
)
   
(147
)
   
(1,770
)
Recoveries
   
79
     
3
     
197
     
28
     
40
     
347
 
Provision for loan losses
   
1,696
     
(142
)
   
(54
)
   
352
     
78
     
1,930
 
Ending balance
   
1,493
     
846
     
5,267
     
455
     
184
     
8,245
 
Ending balance individually evaluated for impairment
   
271
     
22
     
507
     
-
     
-
     
800
 
Ending balance collectively evaluated for impairment
   
1,222
     
824
     
4,760
     
455
     
184
     
7,445
 
Ending balance
   
1,493
     
846
     
5,267
     
455
     
184
     
8,245
 
Loan Balances:
                                               
Ending balance individually evaluated for impairment
   
989
     
624
     
18,362
     
81
     
-
     
20,056
 
Ending balance collectively evaluated for impairment
   
53,445
     
22,492
     
430,046
     
58,826
     
19,017
     
583,826
 
Ending balance
 
$
54,434
   
$
23,116
   
$
448,408
   
$
58,907
   
$
19,017
   
$
603,882
 
 
CHANGES IN ACCOUNTING METHODOLOGY
Historical loss rates calculated by migration analysis are determined by the performance of a loan over a period of time (the migration period). This migration period can be lengthened or shortened based on management's assessment of the most appropriate length of time over which to analyze losses in the loan portfolio. The Company can also calculate multiple migration periods, allowing management to assess the migration of loans based on more than one starting point.

In the third quarter of 2017, management changed its migration approach for calculating the allowance to better match the length of the current credit cycle. The number of migration periods was changed from four to eight. Each migration period remains at twelve quarters, the length of the migration period used by the Company in prior periods. This change had the result of reducing the calculated provision by $1.2 million for the twelve months ended December 31, 2017. The prior methodology was resulting in distortion between required allocations by segment and the underlying credit metrics for those segments. By increasing the number of migration periods from four to eight, the migration is better able to capture the performance of the portfolio segment over a greater portion of the credit cycle.

The following table represents the effect on the loan loss provision as a result of these changes in methodology. It compares the methodology actually used for the year ended December 31, 2017 to that used in prior periods.

   
Calculated
Provision
Based on
Current
Methodology
   
Calculated
Provision
Based on
Prior
Methodology
   
Difference
 
   
(in thousands)
 
Portfolio Segment:
                 
Commercial
 
$
1,166
   
$
1,653
   
$
(487
)
Real estate - construction
   
(409
)
   
(791
)
   
382
 
Real estate - mortgage
   
1,839
     
2,397
     
(558
)
Consumer loans
   
1,412
     
1,698
     
(286
)
Other
   
152
     
361
     
(209
)
Total
 
$
4,160
   
$
5,318
   
$
(1,158
)
 
NOTE 5, Other Real Estate Owned (OREO)

The Company holds certain parcels of real estate due to completed foreclosure proceedings on defaulted loans or the closing of former branches. An analysis of the balance in OREO is as follows:

   
Years Ended December 31,
 
   
2017
   
2016
 
   
(in thousands)
 
Balance at beginning of year
 
$
2,093
   
$
5,290
 
Transfers to OREO due to foreclosure
   
-
     
-
 
Other additions to foreclosed properties
   
-
     
52
 
Closed branch locations transferred to OREO
   
-
     
127
 
Properties sold
   
(2,093
)
   
(3,376
)
Balance at end of year
 
$
-
   
$
2,093
 

Other additions to foreclosed properties in the table above are for capital improvements on existing properties.

OREOs are presented net of a valuation allowance for losses. As the fair values of OREOs change, adjustments are made to the recorded investment in the properties through the valuation allowance to ensure that all properties are recorded at the lower of cost or fair value.  Properties written down in previous periods can be written back up if a current property valuation warrants the change, though never above the original cost of the property. An analysis of the valuation allowance on OREOs is as follows:

   
Years Ended December 31,
 
   
2017
    2016  
   
(in thousands)
 
Balance at beginning of year
 
$
1,026
   
$
2,549
 
Additions and write-downs
   
-
     
60
 
Reductions due to sales or increases in value
   
(1,026
)
   
(1,583
)
Balance at end of year
 
$
-
   
$
1,026
 
 
Expenses applicable to OREOs include the following:

   
Years Ended December 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
       
Net loss (gain) on sales of real estate
 
$
(18
)
 
$
94
   
$
-54
 
Provision for losses (net write-downs)
   
-
     
60
     
1,011
 
Operating expenses, net of income (1)
   
10
     
160
     
219
 
Total Expenses
 
$
(8
)
 
$
314
   
$
1,176
 
 
(1) Included in other operating income and other operating expense on the Consolidated Statements of Operations.

NOTE 6, Premises and Equipment

Premises and equipment consisted of the following at December 31:

   
2017
   
2016
 
   
(in thousands)
 
Land
 
$
7,663
   
$
7,663
 
Buildings
   
37,944
     
37,890
 
Construction in process
   
137
     
43
 
Leasehold improvements
   
861
     
852
 
Furniture, fixtures and equipment
   
19,675
     
19,220
 
     
66,280
     
65,668
 
Less accumulated depreciation and amortization
   
29,083
     
26,344
 
   
$
37,197
   
$
39,324
 
 
Depreciation expense for the years ended December 31, 2017, 2016, and 2015 amounted to $2.7 million, $2.7 million, and $2.5 million, respectively.

The Company has noncancellable leases on premises and equipment expiring at various dates, not including extensions, to the year 2020. Certain leases provide for increased annual payments based on increases in real estate taxes and the Consumer Price Index.

The total approximate minimum rental commitment at December 31, 2017 under noncancellable leases is $413 thousand which is due as follows (in thousands):

2018
 
$
178
 
2019
   
156
 
2020
   
79
 
Total
 
$
413
 

The aggregate rental expense of premises and equipment was $345 thousand,$239 thousand, and $270 thousand for December 31, 2017, 2016, and 2015, respectively.

NOTE 7, Low-Income Housing Tax Credits

The Company was invested in four separate housing equity funds at both December 31, 2017 and December 31, 2016. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and preserve and protect project assets.

The investments in these funds were recorded as other assets on the consolidated balance sheets and were $3.5 million and $3.9 million at December 31, 2017 and December 31, 2016, respectively. The expected terms of these investments and the related tax benefits run through 2033. Additional committed capital calls expected for the funds totaled $1.1 million and $2.5 million at December 31, 2017 and December 31, 2016, respectively, and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheets. During the years ended December 31, 2017, 2016, and 2015, the Company recognized amortization expense of $340 thousand, $300 thousand, and $219 thousand, respectively, which was included within noninterest expense on the consolidated statements of operations.

The table below summarizes the tax credits and other tax benefits recognized by the Company and related to these investments, as of the periods indicated:

 
Years Ended December 31,
 
 
2017
   
2016
   
2015
 
 
(in thousands)
 
Tax credits received
 
$
412
   
$
384
   
$
(291
)
Tax benefit from losses
   
116
     
102
     
74
 
Total tax benefit
 
$
528
   
$
486
   
$
365
 

NOTE 8, Deposits

The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2017 and 2016 was $39.9 million and $38.1 million, respectively. As of December 31, 2017, no single customer relationship exceeded 5 percent of total deposits.
 
At December 31, 2017 the scheduled maturities of time deposits (in thousands) are as follows:

2018
 
$
80,198
 
2019
   
36,737
 
2020
   
52,384
 
2021
   
24,485
 
2022
   
19,021
 
Total
 
$
212,825
 

NOTE 9, Short Term and Long Term Borrowings

Short-Term 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 December 31, 2017 and December 31, 2016 the remaining credit available from these lines totaled $45.0 million and $55.0 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $217.0 million and $270.0 million as of December 31, 2017 and December 31, 2016, respectively.

The following table presents total short-term borrowings as of the dates indicated (dollars in thousands):

   
December
31, 2017
   
December
31, 2016
 
Federal funds purchased
 
$
10,000
   
$
-
 
Overnight repurchase agreements
   
20,693
     
18,704
 
Federal Home Loan Bank Advances
   
47,500
     
-
 
Total short-term borrowings
 
$
78,193
   
$
18,704
 
                 
Maximum month-end outstanding balance
 
$
79,819
   
$
68,864
 
Average outstanding balance during the period
 
$
53,165
   
$
39,364
 
Average interest rate during the period
   
0.72
%
   
0.59
%
Average interest rate at end of period
   
1.27
%
   
0.10
%

Long-Term Borrowings
At December 31, 2017, the Company had the following long-term FHLB advances outstanding (dollars in thousands).

Long-term Type
 
Interest
Rate
 
Maturity Date
 
Advance
Amount
 
Fixed Rate Hybrid
   
1.54
%
2/28/2019
 
$
10,000
 
Fixed Rate Hybrid
   
1.90
%
11/15/2019
   
10,000
 
             
$
20,000
 
There were no long-term borrowings at December 31, 2016.
 
NOTE 10, Share-Based Compensation

The Company has adopted an employee stock purchase plan and offers share-based compensation through its equity compensation plan. Share-based compensation arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights. Accounting standards require all share-based payments to employees to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.

The Company's 1998 Stock Option Plan, pursuant to which stock options could be granted to key employees and non-employee directors, expired on March 9, 2008.  Stock options that were outstanding on March 9, 2008 remained outstanding in accordance with their terms, but no new awards could be granted under the plan after March 9, 2008. At December 31, 2017, no options to purchase shares of common stock granted under the stock option plan remain outstanding.

Stock option activity for the year ended December 31, 2017 is summarized below:

   
Shares
   
Weighted
Average
Exercise
Price
 
 
Weighted
Average
Remaining
Contractual
Life
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
 
Options outstanding, January 1, 2017
   
60,605
   
$
20.05
         
Granted
   
-
     
-
         
Exercised
   
(58,105
)
   
20.05
         
Canceled or expired
   
(2,500
)
   
20.05
         
Options outstanding, December 31, 2017
   
-
   
$
-
     
-
   
$
-
 
Options exercisable, December 31, 2017
   
-
   
$
-
     
-
   
$
-
 

During 2017 and 2016, the Company received $1.3 million and $25 thousand, respectively, from the exercise of stock options.

No options were granted during the years ended December 31, 2017 or December 31, 2016. As of December 31, 2017 and December 31, 2016, all outstanding stock options were fully vested and there was no unrecognized stock-based compensation expense.

The 2016 Incentive Stock Plan (the Incentive Stock Plan) permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. The Company did not award any equity compensation under the Incentive Stock Plan during 2016.

Restricted stock activity for the year ended December 31, 2017 is summarized below.

   
Shares
   
Weighted
Average
Grant
Date Fair
Value
 
Nonvested, January 1, 2017
   
-
   
$
-
 
Issued
   
2,245
     
33.60
 
Vested
   
-
     
-
 
Forfeited
   
-
     
-
 
Nonvested, December 31, 2017
   
2,245
   
$
33.60
 

The weighted average period over which nonvested awards are expected to be recognized in compensation expense is two years.
 
The fair value of restricted stock granted during the year ended December 31, 2017 was $75 thousand.

The remaining unrecognized compensation expense for the shares granted during the year ended December 31, 2017 totaled $58 thousand as of December 31, 2017.

Stock-based compensation expense was $17 thousand for the year ended December 31, 2017. There was no stock compensation expense in 2016.

Under the Company's Employee Stock Purchase Plan (ESPP), substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company's common stock. Shares of stock are issued quarterly at a discount to the market price of the Company's stock on the day of purchase, which can range from 0-15% and for 2017 and 2016 was set at 5%.

Total stock purchases under the ESPP amounted to 3,548 shares during 2017 and 999 shares during 2016. At December 31, 2017, the Company had 245,453 remaining shares reserved for issuance under this plan.

NOTE 11, Stockholders' Equity and Earnings per Common Share

STOCKHOLDERS' EQUITY--OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents information on amounts reclassified out of accumulated other comprehensive Income (loss), by category, during the periods indicated:

   
Years Ended
December 31,
 
Affected Line Item on
Consolidated Statement of Income
   
2017
 
2016
   
2015
 
   
(in thousands)
          
Available-for-sale securities
                 
Realized gains (losses) on sales of securities
 
$
96
   
$
522
   
$
76
 
Gain (loss) on sale of available-for-sale securities, net
Tax effect
   
33
     
177
     
26
 
Income tax expense (benefit)
   
$
63
   
$
345
   
$
50
   
Defined-benefit pension plan
                         
Amortization of actuarial loss (1)
 
$
(490
)
 
$
(504
)
 
$
(390
)
Salaries and employee benefits
Tax effect
   
(167
)
   
(171
)
   
(133
)
Income tax expense (benefit)
   
$
(323
)
 
$
(333
)
 
$
(257
)
 
                            
Total reclassifications for the period
 
$
(260
)
 
$
12
   
$
(207
)
 

(1) This accumulated other comprehensive loss component is included in the computation of net periodic pension cost (see Note 14. Pension Plan and 401(k) Plan for additional details).
 
The following table presents the changes in accumulated other comprehensive Income (loss), by category, net of tax, for the periods indicated:

   
Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities
   
Unrealized
Losses on
Securities
Transferred
from
Available-
for-Sale to
Held-to-
Maturity
(1)
   
Defined
Benefit
Pension
Plans (2)
   
Accumulated
Other
Comprehensive
Income (Loss)
 
   
(in thousands)
 
                         
Balance at December 31, 2014
 
$
(78
)
 
$
(3,386
)
 
$
(2,429
)
 
$
(5,893
)
Net change for the year ended December 31, 2015
   
(498
)
   
3,386
     
(157
)
   
2,731
 
Balance at December 31, 2015
   
(576
)
   
-
     
(2,586
)
   
(3,162
)
                                 
Net change for the year ended December 31, 2016
   
(1,163
)
   
-
     
117
     
(1,046
)
Balance at December 31, 2016
 
$
(1,739
)
 
$
-
   
$
(2,469
)
 
$
(4,208
)
   
Net change for the year ended December 31, 2017
   
1,032
     
-
     
2,469
     
3,501
 
Balance at December 31, 2017
 
$
(707
)
 
$
-
   
$
-
   
$
(707
)

(1) Net change for the year ended December 31, 2015 represents reclassification due to the transfer of securities held-to-maturity to available-for-sale.
(2) Net change reflects termination and settlement of the pension plan during year ended December 31, 2017.

The following table presents the change in each component of other comprehensive income, net of tax on a pre-tax and after-tax basis for the periods indicated.

   
Year Ended December 31, 2017
 
   
Pretax
   
Tax Effect
   
Net-of-Tax
 
   
(in thousands)
 
Unrealized gains on available-for-sale securities:
                 
Unrealized holding gains arising during the period
 
$
1,659
   
$
564
   
$
1,095
 
Reclassification adjustment for gains recognized in income
   
(96
)
   
(33
)
   
(63
)
Net unrealized gains on securities
   
1,563
     
531
     
1,032
 
                         
Defined benefit pension plans:
                       
Plan termination, settlement and net amortization
   
3,741
     
1,272
     
2,469
 
                         
Total change in accumulated other comprehensive income
 
$
5,304
   
$
1,803
   
$
3,501
 

   
Year Ended December 31, 2016
 
   
Pretax
   
Tax Effect
   
Net-of-Tax
 
   
(in thousands)
 
Unrealized losses on available-for-sale securities:
                 
Unrealized holding losses arising during the period
 
$
(1,240
)
 
$
(422
)
 
$
(818
)
Reclassification adjustment for gains recognized in income
   
(522
)
   
(177
)
   
(345
)
Net change
   
(1,762
)
   
(599
)
   
(1,163
)
                         
Defined benefit pension plans:
                       
Net actuarial loss for the period
   
(327
)
   
(111
)
   
(216
)
Amortization of actuarial loss from prior period
   
504
     
171
     
333
 
Net change
   
177
     
60
     
117
 
                         
Total change in accumulated other comprehensive loss
 
$
(1,585
)
 
$
(539
)
 
$
(1,046
)
 
   
Year Ended December 31, 2015
 
   
Pretax
   
Tax Effect
   
Net-of-Tax
 
   
(in thousands)
 
Unrealized losses on available-for-sale securities:
                 
Unrealized holding losses arising during the period
 
$
(679
)
 
$
(231
)
 
$
(448
)
Reclassification adjustment for gains recognized in income
   
(76
)
   
(26
)
   
(50
)
Net change
   
(755
)
   
(257
)
   
(498
)
                         
Unrealized losses on securities transferred from available-for-sale to held-to-maturity:
                       
Elimination upon transfer back to available-for-sale
   
4,197
     
1,427
     
2,770
 
Amortization
   
934
     
318
     
616
 
Net change
   
5,131
     
1,745
     
3,386
 
                         
Defined benefit pension plans:
                       
Net actuarial loss for the period
   
(627
)
   
(213
)
   
(414
)
Amortization of actuarial loss from prior period
   
390
     
133
     
257
 
Net change
   
(237
)
   
(80
)
   
(157
)
                         
Total change in accumulated other comprehensive loss
 
$
4,139
   
$
1,408
   
$
2,731
 

EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares attributable to outstanding stock options.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the years ended December 31, 2017, 2016, and 2015:

   
Net Income
Available to
Common
Shareholders
(Numerator)
   
Weighted
Average
Common
Shares
(Denominator)
   
Per
Share
Amount
 
   
(in thousands except per share data)
 
Year Ended December 31, 2017
                 
Net income, basic
 
$
(29
)
   
4,991
   
$
(0.01
)
Potentially dilutive common shares - stock options
   
-
     
-
     
-
 
Potentially dilutive common shares - employee stock purchase program
   
-
     
-
     
-
 
Diluted
 
$
(29
)
   
4,991
   
$
(0.01
)
                         
Year Ended December 31, 2016
                       
Net income, basic
 
$
3,797
     
4,959
   
$
0.77
 
Potentially dilutive common shares - stock options
   
-
     
2
     
-
 
Potentially dilutive common shares - employee stock purchase program
   
-
     
-
     
-
 
Diluted
 
$
3,797
     
4,961
   
$
0.77
 
                         
Year Ended December 31, 2015
                       
Net income, basic
 
$
3,634
     
4,959
   
$
0.73
 
Potentially dilutive common shares - stock options
   
-
     
-
     
-
 
Potentially dilutive common shares - employee stock purchase program
   
-
     
-
     
-
 
Diluted
 
$
3,634
     
4,959
   
$
0.73
 
 
The Company had no antidilutive shares in 2017. The Company did not include an average of 52 thousand and 76 thousand potential common shares attributable to outstanding stock options in the diluted earnings per share calculation for 2016 and 2015, respectively, because they were antidilutive. Non-vested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.
 
NOTE 12, Related Party Transactions

In the ordinary course of business, the Company has granted loans to principal stockholders, executive officers and directors and their affiliates. These loans were made on substantially the same terms and conditions, including interest rates, collateral and repayment terms, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management and the Company's board of directors, do not involve more than normal risk or present other unfavorable features. None of the principal stockholders, executive officers or directors had direct or indirect loans exceeding 10 percent of stockholders' equity at December 31, 2017.

Annual activity consisted of the following:

   
2017
   
2016
 
   
(in thousands)
 
Balance, beginning of year
 
$
4,354
   
$
4,429
 
Additions
   
351
     
110
 
Reductions
   
(418
)
   
(185
)
Balance, end of year
 
$
4,287
   
$
4,354
 

Deposits from related parties held by the Company at December 31, 2017 and 2016 amounted to $12.5 million and $13.8 million, respectively.

NOTE 13, Income Taxes

On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act permanently reduced the corporate tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, companies are required to revalue their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the fourth quarter of 2017. The Company continues to evaluate the impact on its 2017 tax expense of the revaluation required by the lower corporate tax rate implemented by the Tax Act.  During the fourth quarter of 2017, the Company recorded $1.2 million in additional tax expense based on the Company's preliminary analysis of the impact of the Tax Act. The Company's preliminary estimate of the impact of the Tax Act is based on currently available information and interpretation of its provisions. The actual results may differ from the current estimate due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies and/or changes in interpretations and assumptions that the Company has preliminarily made. The Company's evaluation of the impact of the Tax Act is subject to refinement for up to one year after enactment per the guidance under ASC 740, Accounting for Uncertainty in Income Taxes, and the Securities and Exchange Commission's Staff Accounting Bulletin 118.

The components of income tax expense for the current and prior year-ends are as follows:

   
2017
   
2016
   
2015
 
   
(in thousands)
 
Current income tax expense
 
$
20
   
$
179
   
$
281
 
Deferred income tax benefit
   
(117
)
   
(19
)
   
(227
)
Reported income tax expense (benefit)
 
$
(97
)
 
$
160
   
$
54
 
 
A reconciliation of the expected federal income tax expense on income before income taxes with the reported income tax expense for the same periods follows:

   
Years Ended December 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
Expected tax expense (34%)
 
$
(43
)
 
$
1,345
   
$
1,254
 
Interest expense on tax-exempt assets
   
23
     
15
     
22
 
Low-income housing tax credits
   
(412
)
   
(384
)
   
(274
)
Tax-exempt interest
   
(628
)
   
(608
)
   
(654
)
Bank-owned life insurance
   
(263
)
   
(270
)
   
(301
)
Impact of Tax Act
   
1,221
     
-
     
-
 
Other, net
   
5
     
62
     
7
 
Reported income tax expense
 
$
(97
)
 
$
160
   
$
54
 

The effective tax rates for 2017, 2016, and 2015 were -77.0%, 4.0%, and 1.5%, respectively.

The components of the net deferred tax asset, included in other assets, are as follows:

   
December 31,
 
   
2017
   
2016
 
   
(in thousands)
 
Deferred tax assets:
           
Allowance for loan losses
 
$
1,984
   
$
2,803
 
Interest on nonaccrual loans
   
82
     
71
 
Other real estate owned
   
-
     
349
 
Pension - other comprehensive income
   
-
     
1,272
 
Bank owned life insurance benefit
   
55
     
94
 
Charitable contributions carried forward
   
2
     
1
 
Net unrealized loss on securities available-for-sale
   
225
     
896
 
Unexercised nonqualified options
   
-
     
36
 
Alternative minimum tax
   
1,344
     
1,019
 
Deferred benefits and compensation
   
139
     
256
 
Other
   
179
     
89
 
   
$
4,010
   
$
6,886
 
                 
Deferred tax liabilities:
               
Depreciation
 
$
(404
)
 
$
(822
)
Accretion of discounts on securities
   
-
     
(1
)
Deferred loan fees and costs
   
(295
)
   
(325
)
Pension
   
-
     
(740
)
     
(699
)
   
(1,888
)
Net deferred tax assets
 
$
3,311
   
$
4,998
 

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2014.

NOTE 14, Pension Plan and 401(k) Plan

PENSION PLAN
The Company previously provided pension benefits for eligible participants through a non-contributory defined-benefit pension plan. The plan was frozen effective September 30, 2006; therefore no additional participants have been or will be added to the plan since such date.

On November 23, 2016 the Company's Board of Directors voted to terminate the pension plan, effective January 31, 2017. The Company completed the transfer of all liabilities and administrative responsibilities under the Plan in the fourth quarter of 2017 which resulted in a nonrecurring pretax termination charge of $3.4 million in 2017.
 
Information pertaining to the activity in the plan, using a measurement date of December 31, is as follows:

   
Years ended December 31,
 
   
2017
   
2016
 
   
(in thousands)
 
Change in benefit obligation
           
Benefit obligation at beginning of year
 
$
7,062
   
$
7,039
 
Service cost
   
-
     
-
 
Interest cost
   
268
     
279
 
Benefits paid
   
(6,977
)
   
(461
)
Actuarial (gain) loss
   
(353
)
   
205
 
Benefit obligation at end of year
 
$
-
   
$
7,062
 
                 
Change in plan assets
               
Fair value of plan assets at beginning of year
 
$
5,499
   
$
5,691
 
Actual return on plan assets
   
(76
)
   
269
 
Employer contribution
   
1,554
     
-
 
Benefits paid
   
(6,977
)
   
(461
)
Fair value of plan assets at end of year
 
$
-
   
$
5,499
 
                 
Funded Status at end of year
 
$
-
   
$
(1,563
)

   
December 31,
 
   
2017
   
2016
 
   
(in thousands)
 
Amounts recognized in the consolidated balance sheets
           
Accrued pension liability
 
$
-
   
$
(1,563
)
                 
Amounts recognized in accumulated other comprehensive (income) loss
               
Loss
 
$
-
   
$
3,741
 
Deferred taxes
   
-
     
(1,272
)
Net loss
 
$
-
   
$
2,469
 
                 
Accumulated benefit obligation
 
$
-
   
$
7,062
 

Assumptions used to determine the benefit obligations at December 31,
 
2017
   
2016
 
Discount rate
   
0.00
%
   
3.86
%
 
   
During the years ending December 31,
 
Weighted-average assumptions used to determine net periodic pension cost
 
2017
   
2016
 
Discount rate
   
3.86
%
   
4.03
%
Expected long-term rate of return on plan assets
   
7.00
%
   
7.00
%
 
   
Years ended December 31,
 
   
2017
   
2016
   
2015
 
Components of net periodic pension cost
 
(in thousands)
       
Interest cost
 
$
268
   
$
279
   
$
260
 
Expected return on plan assets
   
(376
)
   
(391
)
   
(376
)
Amortization of unrecognized loss
   
490
     
504
     
390
 
Preliminary net periodic pension cost
   
382
     
392
     
274
 
Settlement/curtailment expense
   
3,350
     
-
     
-
 
Net periodic pension cost
 
$
3,732
   
$
392
   
$
274
 
                         
Components of other amounts recognized in other comprehensive income (loss)
                       
Net actuarial (gain) loss
 
$
99
   
$
327
   
$
627
 
Settlement loss
   
(3,350
)
   
-
         
Amortization of actuarial loss
   
(490
)
   
(504
)
   
(390
)
Total recognized in other comprehensive income (loss)
 
$
(3,741
)
 
$
(177
)
 
$
237
 
                         
Total recognized in net periodic benefit cost and other comprehensive income (loss)
 
$
(9
)
 
$
215
   
$
511
 

Fair value is discussed in detail in Note 16. Upon termination of the Company's pension plan in the fourth quarter of 2017 all assets under the plan were liquidated. The fair value of the pension plan assets by asset category were as follows at December 31, 2016:

Assets at Fair Value as of December 31, 2016
 
Asset Category
 
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(in thousands)
 
Money market funds
 
$
2,839
   
$
-
   
$
-
   
$
2,839
 
Mutual funds
   
-
     
-
     
-
     
-
 
Common stock
   
1,129
     
-
     
-
     
1,129
 
Corporate bonds
   
-
     
1,472
     
-
     
1,472
 
Partnerships
   
-
     
59
     
-
     
59
 
Total assets at fair value
 
$
3,968
   
$
1,531
   
$
-
   
$
5,499
 

The Company made no contributions to the pension plan in 2016 or in 2017, until the plan was terminated.

401(K) PLAN
The Company has a 401(k) Plan in which substantially all employees are eligible to participate. Employees may contribute to the plan subject to certain limits based on federal tax laws. The Company makes matching contributions equal to 100 percent of the first 4 percent of an employee's compensation contributed to the plan. Matching contributions vest to the employee immediately. The Company may make profit sharing contributions to the plan as determined by the Board of Directors. Profit sharing contributions vest to the employee over a six-year period. For the years ended December 31, 2017, 2016, and 2015, expense attributable to the plan amounted to $536 thousand, $523 thousand, and $519 thousand, respectively.

NOTE 15, Commitments and Contingencies

CREDIT-RELATED FINANCIAL INSTRUMENTS
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making such commitments as it does for on-balance-sheet instruments.

The following financial instruments whose contract amounts represent credit risk were outstanding at December 31:

   
2017
   
2016
 
   
(in thousands)
 
Commitments to extend credit:
           
Home equity lines of credit
 
$
56,486
   
$
47,243
 
Commercial real estate, construction and development loans committed but not funded
   
19,526
     
15,948
 
Other lines of credit (principally commercial)
   
68,101
     
81,966
 
Total
 
$
144,113
   
$
145,157
 
                 
Letters of credit
 
$
3,331
   
$
3,597
 
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extensions of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are not collateralized and usually do not contain a specified maturity date, and ultimately may or may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year, with the exception of one letter of credit which expires in 2020. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various collateral supporting those commitments for which collateral is deemed necessary.

LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will not have a material effect on the Company's Consolidated Financial Statements.

NOTE 16, Fair Value Measurements

DETERMINATION OF FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the "Fair Value Measurements and Disclosures" topics of FASB ASU 2010-06 and FASB ASU 2011-04, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.

In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model, used by the Company's bond accounting service provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. For assets other than securities and for all liabilities, fair value is determined using the Company's asset/liability modeling software. The software uses current yields, anticipated yield changes, and estimated duration of assets and liabilities to calculate fair value.
 
In accordance with ASC 820, "Fair Value Measurements and Disclosures," the Company groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 –
Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 –
Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 –
Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

An instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Debt and equity securities with readily determinable fair values that are classified as "available-for-sale" are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company's available-for-sale securities are considered to be Level 2 securities.
 
The following table presents the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:

         
Fair Value Measurements at
December 31, 2017 Using
 
Description  
Balance
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Available-for-sale securities
                       
Obligations of  U.S. Government agencies
 
$
9,435
   
$
-
   
$
9,435
   
$
-
 
Obligations of state and political subdivisions
   
64,765
     
-
     
64,765
     
-
 
Mortgage-backed securities
   
74,296
     
-
     
74,296
     
-
 
Money market investments
   
1,194
     
-
     
1,194
     
-
 
Corporate bonds
   
7,234
     
-
     
7,234
     
-
 
Other marketable equity securities
   
197
     
-
     
197
     
-
 
Total available-for-sale securities
 
$
157,121
   
$
-
   
$
157,121
   
$
-
 

         
Fair Value Measurements at
December 31, 2016 Using
 
Description  
Balance
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Available-for-sale securities
                       
U.S. Treasury securities
 
$
20,000
   
$
-
   
$
20,000
   
$
-
 
Obligations of  U.S. Government agencies
   
9,195
     
-
     
9,195
     
-
 
Obligations of state and political subdivisions
   
77,987
     
-
     
77,987
     
-
 
Mortgage-backed securities
   
83,694
     
-
     
83,694
     
-
 
Money market investments
   
647
     
-
     
647
     
-
 
Corporate bonds
   
7,678
     
-
     
7,678
     
-
 
Other marketable equity securities
   
164
     
-
     
164
     
-
 
Total available-for-sale securities
 
$
199,365
   
$
-
   
$
199,365
   
$
-
 

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS
Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

Impaired loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of fair value and loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of the loan's expected future cash flows, discounted at the loan's effective interest rate. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable, with the vast majority of the collateral in real estate.
 
The value of real estate collateral is determined utilizing an income, market, or cost valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company. In the case of loans with lower balances, the Company may obtain a real estate evaluation instead of an appraisal. Evaluations utilize many of the same techniques as appraisals, and are typically performed by independent appraisers. Once received, appraisals and evaluations are reviewed by trained staff independent of the lending function to verify consistency and reasonability. Appraisals and evaluations are based on significant unobservable inputs, including but not limited to: adjustments made to comparable properties, judgments about the condition of the subject property, the availability and suitability of comparable properties, capitalization rates, projected income of the subject or comparable properties, vacancy rates, projected depreciation rates, and the state of the local and regional economy. The Company may also elect to make additional reductions in the collateral value based on management's best judgment, which represents another source of unobservable inputs. Because of the subjective nature of collateral valuation, impaired loans are considered Level 3.

Impaired loans may be secured by collateral other than real estate. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business' financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). If a loan is not collateral-dependent, its impairment may be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate. Because the loan is discounted at its effective rate of interest, rather than at a market rate, the loan is not considered to be held at fair value and is not included in the tables below. Collateral-dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as part of the provision for loan losses on the Consolidated Statements of Operations.

Other Real Estate Owned (OREO)
Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of loss associated with OREOs is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management reasonably believes the transaction will be consummated in accordance with the terms of the contract, fair value is based on the sale price in that contract (Level 1). If management has recent information about the sale of identical properties, such as when selling multiple condominium units on the same property, the remaining units would be valued based on the observed market data (Level 2). Lacking either a contract or such recent data, management would obtain an appraisal or evaluation of the value of the collateral as discussed above under Impaired Loans (Level 3). After the asset has been booked, a new appraisal or evaluation is obtained when management has reason to believe the fair value of the property may have changed and no later than two years after the last appraisal or evaluation was received. Any fair value adjustments to OREOs below the original book value are recorded in the period incurred and expensed against current earnings.

Loans Held For Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item on the Company's Consolidated Statements of Income.

The following table presents the assets carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded. Assets are shown by class of loan and by level in the fair value hierarchy, as of the dates indicated. Certain impaired loans are valued by the present value of the loan's expected future cash flows, discounted at the loan's effective interest rate. These loans are not carried on the consolidated balance sheets at fair value and, as such, are not included in the table below. Former branch sites are carried at the lower of cost or market. Those carried at cost are not included in the table below.

       
Carrying Value at December 31, 2017
Using
 
Description
 
Fair Value
 
 
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Impaired loans
                     
Mortgage loans on real estate:
                     
Residential 1-4 family
 
$
264
   
$
-
   
$
-
   
$
264
 
Construction
   
74
     
-
     
-
     
74
 
Equity lines of credit
   
229
     
-
     
-
     
229
 
Total
 
$
567
   
$
-
   
$
-
   
$
567
 
                                 
Loans held for sale
 
$
779
   
$
-
   
$
779
   
$
-
 
 
         
Carrying Value at December 31, 2016
Using
 
Description
 
Fair Value
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Impaired loans
                       
Mortgage loans on real estate:
                       
Residential 1-4 family
 
$
400
   
$
-
   
$
-
   
$
400
 
Commercial
   
1,483
     
-
     
-
     
1,483
 
Construction
   
74
     
-
     
-
     
74
 
Total mortgage loans on real estate
   
1,957
     
-
     
-
     
1,957
 
Commercial loans
   
718
     
-
     
-
     
718
 
Total
 
$
2,675
   
$
-
   
$
-
   
$
1,957
 
                                 
Other real estate owned
                               
Construction
 
$
940
   
$
-
   
$
-
   
$
940
 
Total
 
$
940
   
$
-
   
$
-
   
$
940
 

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

Quantitative Information About Level 3 Fair Value Measurements
 
Description
 
Fair Value
at
December
31, 2017
(dollars in
thousands)
 
Valuation Techniques
Unobservable Input
 
Range
(Average)
 
Impaired loans
               
Residential 1-4 family real estate
 
$
264
 
Market comparables
Selling costs
   
7.25
%
           
Liquidation discount
   
0.00% - 4.00% (2.91
%)
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
%
 
Quantitative Information About Level 3 Fair Value Measurements
 
Description
 
Fair Value
at
December
31, 2016
(dollars in
thousands)
 
Valuation Techniques
Unobservable Input
 
Range
(Average)
 
Impaired loans
               
Residential 1-4 family real estate
 
$
400
 
Market comparables
Selling costs
   
7.25
%
           
Liquidation discount
   
4.00
%
Commercial real estate
   
1,483
 
Market comparables
Selling costs
   
7.25
%
           
Liquidation discount
   
4.00
%
Construction
   
74
 
Market comparables
Selling costs
   
7.25
%
           
Liquidation discount
   
4.00
%
Commercial loans
   
718
 
Market comparables
Selling costs
   
0.00
%
           
Liquidation discount
   
0.00% - 38.58% (32.40
%)
                     
Other real estate owned
                   
Construction
   
940
 
Market comparables
Selling costs
   
7.25
%
           
Liquidation discount
   
0.00
%

FASB ASC 825, "Financial Instruments," requires disclosure about fair value of financial instruments and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company's assets.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments not discussed above:

CASH AND CASH EQUIVALENTS
The carrying amounts of cash and short-term instruments, including interest-bearing due from banks, approximate fair values.

RESTRICTED SECURITIES
The restricted security category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and they lack a market. When the FHLB or Federal Reserve Bank repurchases stock, they repurchase at the stock's book value. Therefore, the carrying amounts of restricted securities approximate fair value.

LOANS RECEIVABLE
The fair value of a loan is based on its interest rate in relation to its risk profile, in comparison to what an investor could earn on a different investment with a similar risk profile. Variations in risk tolerance between lenders, and thus in risk pricing, can result in the same loan being priced differently at different institutions. A bank's experience with the type of lending (such as commercial real estate) can also impact its assessment of the riskiness of a loan. A comprehensive picture of competitors' rates in relation to borrower risk profiles is not available. Since the rate and risk profile are the primary factors in determining the fair value of a loan, both of which are unobservable in the market, the Company classifies loans as Level 3 in the fair value hierarchy. The Company uses a model which estimates market value based on the loan's interest rate (regardless of its risk level) and rates for debt of similar maturities where market data is available. Fair values for non-performing loans are estimated as described above.
 
BANK-OWNED LIFE INSURANCE
Bank-owned life insurance represents insurance policies on certain current and former officers of the Company. The cash value of the policies is estimated using information provided by the insurance carrier. The insurance carrier uses actuarial data to estimate the value of each policy, based on the age and health of the insured relative to other individuals about whom the carrier has information. Health information can be broken down into quantitative, observable inputs, such as smoking habits, blood pressure, and weight, which, along with the insured's age, can be compared to observable data the insurance carrier has available. The carrier can then estimate the cash value of each policy. Since the cash value represents the amount of cash the Company would receive when the policies are paid, the cash value closely approximates the fair value of the policies. Accordingly, bank-owned life insurance is classified as Level 2.

DEPOSIT LIABILITIES
The fair value of demand deposits, savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Information about the rates paid by other institutions for deposits of similar terms is readily available, and rates are mainly influenced by the term of the deposit itself. As a result, fair value calculations are based on observable inputs, and are classified as Level 2.

SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased, overnight repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Since the contractual terms of these borrowings provide all information necessary to calculate the amounts that will be due at maturity, these liabilities are classified as Level 2.

LONG-TERM BORROWINGS
The fair values of the Company's long-term borrowings are estimated based on the current cost to repay the debt in full, discounted to current values and including any prepayment penalties that may apply. As the contractual terms of the borrowing provide all the necessary inputs for this calculation, long-term borrowings are classified as Level 2.

ACCRUED INTEREST
The calculation of accrued interest is based on readily observable information, such as the rate and term of the underlying asset or liability. Since these amounts are expected to be realized quickly (generally within 30 to 90 days), the carrying value approximates fair value and is classified as Level 2.

COMMITMENTS TO EXTEND CREDIT AND IRREVOCABLE LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2017 and December 31, 2016, the fair value of fees charged for loan commitments and irrevocable letters of credit was immaterial.
 
The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments as of the dates indicated are as follows:

         
Fair Value Measurements at
December 31, 2017 Using
 
Description
 
Carrying
Value
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Assets
                       
Cash and cash equivalents
 
$
14,412
   
$
14,412
   
$
-
   
$
-
 
Securities available-for-sale
   
157,121
     
-
     
157,121
     
-
 
Restricted securities
   
3,846
     
-
     
3,846
     
-
 
Loans held for sale
   
779
     
-
     
779
     
-
 
Loans, net of allowances for loan losses
   
729,092
     
-
     
-
     
722,464
 
Bank owned life insurance
   
25,981
     
-
     
25,981
     
-
 
Accrued interest receivable
   
3,254
     
-
     
3,254
     
-
 
                                 
Liabilities
                               
Deposits
 
$
783,594
   
$
-
   
$
782,539
   
$
-
 
Federal funds purchased
   
10,000
     
-
     
10,000
     
-
 
Overnight repurchase agreements
   
20,693
     
-
     
20,693
     
-
 
Federal Home Loan Bank advances
   
67,500
     
-
     
67,329
     
-
 
Accrued interest payable
   
360
     
-
     
360
     
-
 

         
Fair Value Measurements at December 31, 2016 Using
 
Description
 
Carrying
Value
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
Assets
                       
Cash and cash equivalents
 
$
25,854
   
$
25,854
   
$
-
   
$
-
 
Securities available-for-sale
   
199,365
     
-
     
199,365
     
-
 
Restricted securities
   
970
     
-
     
970
     
-
 
Loans, net of allowances for loan losses
   
595,637
     
-
     
-
     
594,190
 
Bank owned life insurance
   
25,206
     
-
     
25,206
     
-
 
Accrued interest receivable
   
3,189
     
-
     
3,189
     
-
 
                                 
Liabilities
                               
Deposits
 
$
784,502
   
$
-
   
$
783,450
   
$
-
 
Overnight repurchase agreements
   
18,704
     
-
     
18,704
     
-
 
Accrued interest payable
   
228
     
-
     
228
     
-
 

NOTE 17, Regulatory Matters

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and possibly additional discretionary actions to be initiated by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The terms Tier 1 and common equity tier 1 capital, risk-weighted assets and average assets, as used in this note, are as defined in the applicable regulations. Management believes, as of December 31, 2017 and 2016, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Bank to comply with the following minimum capital ratios: (i) a new common equity Tier 1 capital (CET1) ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). The Basel III Final Rules establish a capital conservation buffer of 2.5%, which is added to the 4.5% CET1 to risk-weighted assets to increase the ratio to at least 7%. The Basel III Final Rules also establish risk weighting that applied to many classes of assets held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans. The Basel III Final Rules became effective January 1, 2015 and the Basel III Final Rules capital conservation buffer will be phased in from 2015 to 2019.

When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 captial to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total captial ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

As of December 31, 2017, the most recent notification from the Comptroller categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, common equity tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios as of December 31, 2017 and 2016 are also presented in the table.
 
   
Capital
   
Minimum
Capital
Requirement
   
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(dollars in thousands)
 
December 31, 2017:
                                   
Total Capital to Risk Weighted Assets:
                               
Consolidated
 
$
106,029
     
12.28
%
 
$
69,055
     
8.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
97,194
     
11.30
%
   
68,803
     
8.00
%
 
$
86,004
     
10.00
%
                                                 
Tier 1 Capital to Risk Weighted Assets:
                                               
Consolidated
   
96,474
     
11.18
%
   
51,791
     
6.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
87,639
     
10.19
%
   
51,602
     
6.00
%
   
68,803
     
8.00
%
                                                 
Common Equity Tier 1 Capital to Risk Weighted Assets:
                                               
Consolidated
   
96,474
     
11.18
%
   
38,843
     
4.50
%
   
N/A
     
N/A
 
Old Point National Bank
   
87,639
     
10.19
%
   
38,702
     
4.50
%
   
55,902
     
6.50
%
                                                 
Tier 1 Capital to Average Assets:
                                               
Consolidated
   
96,474
     
9.98
%
   
38,686
     
4.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
87,639
     
9.09
%
   
38,575
     
4.00
%
   
48,218
     
5.00
%
                                                 
December 31, 2016:
                                               
Total Capital to Risk Weighted Assets:
                                               
Consolidated
 
$
106,443
     
14.51
%
 
$
58,678
     
8.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
98,237
     
13.47
%
   
58,350
     
8.00
%
 
$
72,938
     
10.00
%
                                                 
Tier 1 Capital to Risk Weighted Assets:
                                               
Consolidated
   
98,198
     
13.39
%
   
44,009
     
6.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
89,992
     
12.34
%
   
43,763
     
6.00
%
   
58,350
     
8.00
%
                                                 
Common Equity Tier 1 Capital to Risk Weighted Assets:
                                               
Consolidated
   
98,198
     
13.39
%
   
33,007
     
4.50
%
   
N/A
     
N/A
 
Old Point National Bank
   
89,992
     
12.34
%
   
32,822
     
4.50
%
   
47,410
     
6.50
%
                                                 
Tier 1 Capital to Average Assets:
                                               
Consolidated
   
98,198
     
10.68
%
   
36,768
     
4.00
%
   
N/A
     
N/A
 
Old Point National Bank
   
89,992
     
9.85
%
   
36,549
     
4.00
%
   
45,686
     
5.00
%

The approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank and Trust can distribute as dividends to the Company in 2018, without approval of the Comptroller, $388 thousand (Trust only) plus an additional amount equal to the Bank's and Trust's retained net profits for 2018 up to the date of any dividend declaration.

NOTE 18, Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: the Bank, the Trust, and the Parent. Revenues from the Bank's operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust's operating revenues consist principally of income from fiduciary and asset management fees. The Parent company's revenues are mainly interest and dividends received from the Bank and Trust companies.
The Company has no other segments.
 
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.
 
Information about reportable segments, and reconciliation of such information to the Consolidated Financial Statements as of and for the years ended December 31 follows:

2017
 
Bank
   
Trust
   
Unconsolidated
Parent
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Revenues
                             
Interest and dividend income
 
$
32,861
   
$
71
   
$
667
   
$
(665
)
 
$
32,934
 
Fiduciary and asset management fees
   
-
     
3,786
     
-
     
-
     
3,786
 
Other income
   
9,389
     
944
     
200
     
(261
)
   
10,272
 
Total operating income
   
42,250
     
4,801
     
867
     
(926
)
   
46,992
 
                                         
Expenses
                                       
Interest expense
   
3,010
     
-
     
-
     
2
     
3,012
 
Provision for loan losses
   
4,160
     
-
     
-
     
-
     
4,160
 
Salaries and employee benefits
   
20,968
     
2,800
     
445
     
-
     
24,213
 
Other expenses
   
14,109
     
1,075
     
811
     
(262
)
   
15,733
 
Total operating expenses
   
42,247
     
3,875
     
1,256
     
(260
)
   
47,118
 
                                         
Income (loss) before taxes
   
3
     
926
     
(389
)
   
(666
)
   
(126
)
                                         
Income tax expense (benefit)
   
(65
)
   
328
     
(360
)
   
-
     
(97
)
                                         
Net income (loss)
 
$
68
   
$
598
   
$
(29
)
 
$
(666
)
 
$
(29
)
                                         
Capital expenditures
 
$
613
   
$
6
   
$
-
   
$
-
   
$
619
 
                                         
Total assets
 
$
975,991
   
$
6,126
   
$
96,406
   
$
(96,697
)
 
$
981,826
 

2016
 
Bank
   
Trust
   
Unconsolidated
Parent
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Revenues
                             
Interest and dividend income
 
$
29,765
   
$
61
   
$
4,590
   
$
(4,590
)
 
$
29,826
 
Fiduciary and asset management fees
   
-
     
3,560
     
-
     
-
     
3,560
 
Other income
   
9,058
     
910
     
200
     
(262
)
   
9,906
 
Total operating income
   
38,823
     
4,531
     
4,790
     
(4,852
)
   
43,292
 
                                         
Expenses
                                       
Interest expense
   
2,574
     
-
     
-
     
-
     
2,574
 
Provision for loan losses
   
1,930
     
-
     
-
     
-
     
1,930
 
Salaries and employee benefits
   
16,801
     
2,671
     
406
     
-
     
19,878
 
Other expenses
   
13,179
     
1,041
     
995
     
(262
)
   
14,953
 
Total operating expenses
   
34,484
     
3,712
     
1,401
     
(262
)
   
39,335
 
                                         
Income (loss) before taxes
   
4,339
     
819
     
3,389
     
(4,590
)
   
3,957
 
                                         
Income tax expense (benefit)
   
288
     
280
     
(408
)
   
-
     
160
 
                                         
Net income (loss)
 
$
4,051
   
$
539
   
$
3,797
   
$
(4,590
)
 
$
3,797
 
                                         
Capital expenditures
 
$
887
   
$
4
   
$
-
   
$
-
   
$
891
 
                                         
Total assets
 
$
897,966
   
$
5,761
   
$
93,998
   
$
(94,759
)
 
$
902,966
 
 
2015
 
Bank
   
Trust
   
Unconsolidated
Parent
   
Eliminations
   
Consolidated
 
   
(in thousands)
 
Revenues
                             
Interest and dividend income
 
$
30,242
   
$
54
   
$
4,009
   
$
(4,010
)
 
$
30,295
 
Fiduciary and asset management fees
   
-
     
3,617
     
-
     
-
     
3,617
 
Other income
   
8,548
     
1,032
     
200
     
(261
)
   
9,519
 
Total operating income
   
38,790
     
4,703
     
4,209
     
(4,271
)
   
43,431
 
                                         
Expenses
                                       
Interest expense
   
3,633
     
-
     
-
     
(1
)
   
3,632
 
Provision for loan losses
   
1,025
     
-
     
-
     
-
     
1,025
 
Salaries and employee benefits
   
17,630
     
2,685
     
432
     
-
     
20,747
 
Other expenses
   
13,254
     
1,010
     
336
     
(261
)
   
14,339
 
Total operating expenses
   
35,542
     
3,695
     
768
     
(262
)
   
39,743
 
                                         
Income (loss) before taxes
   
3,248
     
1,008
     
3,441
     
(4,009
)
   
3,688
 
                                         
Income tax expense (benefit)
   
(96
)
   
343
     
(193
)
   
-
     
54
 
                                         
Net income (loss)
 
$
3,344
   
$
665
   
$
3,634
   
$
(4,009
)
 
$
3,634
 
                                         
Capital expenditures
 
$
1,682
   
$
74
   
$
-
   
$
-
   
$
1,756
 
                                         
Total assets
 
$
891,877
   
$
5,694
   
$
93,191
   
$
(93,975
)
 
$
896,787
 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains or losses.

Both the Parent and the Trust companies maintain deposit accounts with the Bank, on terms substantially similar to those available to other customers. These transactions are eliminated to reach consolidated totals.

The Company operates in one geographical area and does not have a single external customer from which it derives 10 percent or more of its revenues.

NOTE 19, Condensed Financial Statements of Parent Company

Financial information pertaining to Old Point Financial Corporation (parent company only) is as follows:

   
December 31,
 
Balance Sheets
 
2017
   
2016
 
   
(in thousands)
 
Assets
           
Cash and cash equivalents
 
$
2,622
   
$
2,366
 
Securities available-for-sale
   
197
     
164
 
Investment in common stock of subsidiaries
   
93,533
     
91,437
 
Other assets
   
54
     
31
 
Total assets
 
$
96,406
   
$
93,998
 
                 
Liabilities and Stockholders' Equity
               
Note payable - subsidiary
 
$
18
   
$
8
 
Common stock
   
25,087
     
24,806
 
Additional paid-in capital
   
17,270
     
16,427
 
Retained earnings
   
54,738
     
56,965
 
Accumulated other comprehensive loss
   
(707
)
   
(4,208
)
Total liabilities and stockholders' equity
 
$
96,406
   
$
93,998
 
 
   
Years Ended December 31,
 
Statements of Income
 
2017
   
2016
   
2015
 
   
(in thousands)
 
Income:
                 
Dividends from subsidiaries
 
$
2,050
   
$
2,900
   
$
2,900
 
Other income
   
200
     
200
     
200
 
Total income
   
2,250
     
3,100
     
3,100
 
                         
Expenses:
                       
Salaries and benefits
   
445
     
406
     
432
 
Legal expenses
   
285
     
774
     
180
 
Service fees
   
210
     
166
     
137
 
Other operating expenses
   
316
     
55
     
19
 
Total expenses
   
1,256
     
1,401
     
768
 
Income before income taxes and equity in undistributed net income (loss) of subsidiaries
   
994
     
1,699
     
2,332
 
Income tax benefit
   
(360
)
   
(408
)
   
(193
)
     
1,354
     
2,107
     
2,525
 
Equity in undistributed net income (loss) of subsidiaries
   
(1,383
)
   
1,690
     
1,109
 
Net income (loss)
 
$
(29
)
 
$
3,797
   
$
3,634
 

   
Years Ended December 31,
 
Statements of Cash Flows
 
2017
   
2016
   
2015
 
   
(in thousands)
       
Cash flows from operating activities:
                 
Net income (loss)
 
$
(29
)
 
$
3,797
   
$
3,634
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Equity in undistributed net income (loss) of subsidiaries
   
1,383
     
(1,690
)
   
(1,109
)
Stock compensation expense
   
17
     
-
     
-
 
(Increase) decrease in other assets
   
(34
)
   
5
     
(5
)
Increase (decrease) in other liabilities
   
10
     
(7
)
   
15
 
Net cash provided by operating activities
   
1,347
     
2,105
     
2,535
 
                         
Cash flows from investing activities:
   
-
     
-
     
-
 
                         
Cash flows from financing activities:
                       
Proceeds from sale of stock
   
1,107
     
46
     
-
 
Cash dividends paid on common stock
   
(2,198
)
   
(1,983
)
   
(1,686
)
Net cash used in financing activities
   
(1,091
)
   
(1,937
)
   
(1,686
)
                         
Net increase in cash and cash equivalents
   
256
     
168
     
849
 
Cash and cash equivalents at beginning of year
   
2,366
     
2,198
     
1,349
 
Cash and cash equivalents at end of year
 
$
2,622
   
$
2,366
   
$
2,198
 
                         
Supplemental schedule of noncash transactions:
                       
Unrealized gain (loss) on securities available-for-sale
 
$
33
   
$
64
     
(1
)

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.
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.

Management's Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act.

Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in 2013. Based on this evaluation, using those criteria, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by Yount, Hyde & Barbour, PC, the independent registered public accounting firm which also audited the Company's consolidated financial statements included in this Annual Report on Form 10-K. Yount, Hyde & Barbour's attestation report on the Company's internal control over financial reporting is included in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.

Changes in Internal Control over Financial Reporting. There was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
Item 9B.
Other Information
 
None.

Part III

Except as otherwise indicated, information called for by the following items under Part III is contained in the Proxy Statement for the Company's 2018 Annual Meeting of Stockholders (the 2018 Proxy Statement) to be held on May 22, 2018.

Item 10.
Directors, Executive Officers and Corporate Governance

The information with respect to the directors of the Company is set forth under the caption "Election of Directors" in the 2018 Proxy Statement and is incorporated herein by reference.

The information regarding the Section 16(a) reporting requirements of the directors and executive officers is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2018 Proxy Statement and is incorporated herein by reference.

The information concerning the executive officers of the Company required by this item is included in Part I of this report on Form 10-K under the caption "Executive Officers of the Registrant."

The information regarding the Company's Audit Committee and its Audit Committee Financial Expert is set forth under the caption "Board Committees and Attendance" in the 2018 Proxy Statement and is incorporated herein by reference.

The Company has a Code of Ethics which details principles and responsibilities governing ethical conduct for all Company directors, officers, employees and principal stockholders.

A copy of the Code of Ethics will be provided free of charge, upon written request made to the Company's secretary at 1 West Mellen Street, Hampton, Virginia 23663 or by calling (757) 728-1200. The Code of Ethics is also posted on the Company's website at www.oldpoint.com in the "Community" section, under "Investor Relations" and then "Governance Documents." The Company intends to satisfy the disclosure requirements of Form 8-K with respect to waivers of or amendments to the Code of Ethics with respect to certain officers of the Company by posting such disclosures on its website under "Waivers of or amendments to the Code of Ethics." The Company may, however, elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to or in lieu of the website disclosure.

Item 11.
Executive Compensation

The information set forth under the captions "Compensation and Benefits Committee Interlocks and Insider Participation" and "Executive Compensation" in the 2018 Proxy Statement is incorporated herein by reference.
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" in the 2018 Proxy Statement is incorporated herein by reference.

The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 2018 Proxy Statement is incorporated herein by reference.

Item 13.
Certain Relationships and Related Transactions, and Director Independence

The information set forth under the caption "Interest of Management in Certain Transactions" in the 2018 Proxy Statement is incorporated herein by reference.

The information regarding director independence set forth under the caption "Board Committees and Attendance" in the 2018 Proxy Statement is incorporated herein by reference.

Item 14.
Principal Accountant Fees and Services

The information set forth under the captions "Principal Accountant Fees" and "Audit Committee Pre-Approval Policy" in the 2018 Proxy Statement is incorporated herein by reference.
 
Part IV
 
Item 15.
Exhibits, Financial Statement Schedules

(a)(1)
Consolidated Financial Statements

The following Consolidated Financial Statements and reports are included in Part II, Item 8, of this report on Form 10-K.

Report of Independent Registered Public Accounting Firm (Yount, Hyde & Barbour, P.C.)
Consolidated Balance Sheets – December 31, 2017 and 2016
Consolidated Statements of Operations – Years Ended December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity – Years Ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows – Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements

(a)(2)
Consolidated Financial Statement Schedules
 
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the Consolidated Financial Statements or notes thereto.

(a)(3)
Exhibits
 
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
 
Exhibit No.
Description
 
Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)
 
 
 
 
Articles of Incorporation of Old Point Financial Corporation, as amended June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed on March 12, 2009)
 
 
 
 
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016)
 
 
 
 
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016)
 
 
 
 
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with The Northwestern Mutual Life Insurance Company entered into with each of Robert F. Shuford, Sr., Laurie D. Grabow and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.4 to Form 10-K filed March 30, 2005)
 
 
 
 
Directors' Compensation
 
 
 
 
Base Salaries of Executive Officers of the Registrant
 
 
 
 
Summary of Old Point Financial Corporation Incentive Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 30, 2015)
 
 
 
 
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with Ohio National Life Assurance Corporation entered into with each of Laurie D. Grabow and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.8 to Form 10-K filed March 14, 2008)
 
 
Memorandum of Understanding between The Old Point National Bank of Phoebus and Tidewater Mortgage Services, Inc., dated September 10, 2007 (incorporated by reference to Exhibit 10.8 to Form 10-Q filed November 9, 2007)
 
 
 
 
Form of 162 Insurance Plan (incorporated by reference to Exhibit 10.10 to Form 10-K filed March 12, 2009)
 
 
 
 
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with Ohio National Life Assurance Corporation entered into with Joseph R. Witt (incorporated by reference to Exhibit 10.11 to Form 10-K filed March 12, 2010)
 
 
 
 
Form of Life Insurance Endorsement Method Split Dollar Plan Agreement with New York Life Insurance and Annuity Corporation entered into with Eugene M. Jordan, II, Robert F. Shuford, Jr., and Joseph R. Witt (incorporated by reference to Exhibit 10.12 to Form 10-K filed March 30, 2012)
 
 
 
 
Settlement Agreement dated March 16, 2016 among Old Point Financial Corporation, Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., PL Capital, LLC, PL Capital Advisors, LLC, Goodbody/PL Capital, L.P., Goodbody/PL Capital, LLC, Mr. John W. Palmer and Mr. Richard J. Lashley, as Managing Members of PL Capital, LLC, PL Capital Advisors, LLC and Goodbody/PL Capital, LLC and Mr. William F. Keefe (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 17, 2016)
 
 
 
 
Old Point Financial Corporation 2016 Incentive Stock Plan (incorporated by reference to Exhibit 10.15 to Form 8-K filed May 31, 2016)
 
 
 
 
Membership Interest Purchase Agreement dated January 13, 2017 between Tidewater Mortgage Services, Inc. and The Old Point National Bank of Phoebus (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 20, 2017)
 
 
 
 
Retirement Agreement, Waiver and General Release by and among Laurie D. Grabow and Old Point Financial Corporation, The Old Point National Bank of Phoebus and Old Point Trust & Financial Services, N.A., dated March 10, 2017 (incorporated by reference to Exhibit 10.17 to Form 10-K filed March 15, 2017)
 
 
 
 
Additional Employment Arrangement by and among Laurie D. Grabow and Old Point Financial Corporation and The Old Point National Bank of Phoebus dated as of May 23, 2017 (incorporated by reference to Exhibit 10.18 to Form 8-K filed May 23, 2017)
 
 
 
 
Time-Based Restricted Stock Agreement, dated July 11, 2017, between Old Point Financial Corporation and Jeffrey W. Farrar (incorporated by reference to Exhibit 10.19 to Form 8-K filed July 13, 2017)
 
 
 
 
Form of Support and Non-Competition Agreement, by and among Old Point Financial Corporation and certain shareholders of Citizens National Bank (incorporated by reference to Annex A to Appendix A to the proxy statement/prospectus included in Amendment No. 1 to Form S-4 filed January 26, 2018)
 
 
 
 
Form of Warrant Cancellation Agreement, by and among Old Point Financial Corporation, Citizens National Bank and holders of warrants to acquire shares of common stock of Citizens National Bank (incorporated by reference to Annex B to Appendix A to the proxy statement/prospectus included in Amendment No. 1 to Form S-4 filed January 26, 2018)
 
 
 
 
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Robert F. Shuford, Jr. (incorporated by reference to Exhibit 10.22 to Form 8-K filed February 28, 2018)
 
 
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Jeffrey W. Farrar (incorporated by reference to Exhibit 10.23 to Form 8-K filed February 28, 2018)
 
 
 
 
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and The Old Point National Bank of Phoebus and Joseph R. Witt (incorporated by reference to Exhibit 10.24 to Form 8-K filed February 28, 2018)
 
 
 
 
Employment Agreement, dated as of February 22, 2018, by and between Old Point Financial Corporation and Old Point Trust & Financial Services, N.A. and Eugene M. Jordan, II (incorporated by reference to Exhibit 10.25 to Form 8-K filed February 28, 2018)
 
 
 
 
Change of Control Severance Agreement, dated as of February 22, 2018, by and between The Old Point National Bank of Phoebus and Donald S. Buckless
 
 
 
 
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to Form 10-K filed March 30, 2005)
 
 
 
 
Consent of Yount, Hyde & Barbour, P.C.
 
 
 
 
Powers of Attorney
 
 
 
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
101
The following materials from Old Point Financial Corporation's annual report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
 
* Denotes management contract.

Item 16.
Form 10-K Summary

Not applicable.
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
OLD POINT FINANCIAL CORPORATION
     
   
/s/Robert F. Shuford, Sr.
   
Robert F. Shuford, Sr.,
   
Chairman, President & Chief Executive Officer
     
   
Date: March 15, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/Robert F. Shuford, Sr.
 
Chairman, President & Chief Executive Officer and Director
Robert F. Shuford, Sr.
 
Principal Executive Officer
     
Date: March 15, 2018
   
     
/s/Jeffrey W. Farrar
 
Chief Financial Officer & Senior Vice President/Finance
Jeffrey W. Farrar
 
Principal Financial & Accounting Officer
     
Date: March 15, 2018
   
     
/s/Stephen C. Adams*
 
Director
Stephen C. Adams
   
     
/s/James Reade Chisman*
 
Director
James Reade Chisman
   
     
/s/Russell S. Evans, Jr.*
 
Director
Russell S. Evans, Jr.
   
     
/s/Michael A. Glasser*
 
Director
Michael A. Glasser
   
     
/s/Dr. Arthur D. Greene*
 
Director
Dr. Arthur D. Greene
   
     
/s/John Cabot Ishon*
 
Director
John Cabot Ishon
   
     
/s/William F. Keefe*
 
Director
William F. Keefe
   
     
/s/Tom B. Langley*
 
Director
Tom B. Langley
   
     
/s/Dr. H. Robert Schappert*
 
Director
Dr. H. Robert Schappert
   
     
/s/Robert F. Shuford, Jr.*
 
Director
Robert F. Shuford, Jr.
   
     
/s/Ellen Clark Thacker*
 
Director
Ellen Clark Thacker
   
     
/s/Joseph R. Witt*
 
Director
Joseph R. Witt
   

*By Robert F. Shuford, Sr., as Attorney in Fact

Date: March 15, 2018
 
 
116
EXHIBIT 10.5

Directors' Compensation

All non-employee directors of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N.A. (the Trust Company) receive $600 and $350, respectively, for each board meeting they attend. The non-employee directors of the Bank and Trust Company receive $200 for each committee meeting they attend except for the Bank's Investment Committee and Nominating and Corporate Governance Committee and the Trust Company's Marketing Committee meetings, for which members receive $150 for attendance, and the Bank's Directors Loan Committee, Compensation and Benefits Committee and Audit Committee meetings, for which members receive $200 for attendance.

In addition, non-employee directors of the Bank and Trust Company receive an annual retainer fee of $12,000 and $4,000, respectively.  In addition, the chairman of the Audit Committee receives an additional $3,000 annual retainer, the chairman of the Trust Company Board receive an additional $2,000 annual retainer, the Lead Director of the Bank Board receives an additional $10,000 annual retainer, and the chairman of the Directors Loan Committee receives an additional $1,000 annual retainer.

All directors of Old Point Financial Corporation (the Company) have been elected as directors of the Bank, but there is no assurance that this practice will continue. However, not all Company directors serve as directors of the Trust Company. There are no additional fees paid for being a Company director.

The Company reimburses travel, lodging and meal expense for all directors living outside of Virginia to attend board and committee meetings. The Company also pays for all directors and their spouses to attend regular director seminars.
 
Non-employee directors are eligible to receive equity compensation awards under the Company’s 2016 Incentive Stock Plan.
 
 
Exhibit 10.6

Base Salaries of Executive Officers of the Registrant

As of April 1, 2018, the following are the base salaries (on an annual basis) of the executive officers of Old Point Financial Corporation:

Robert F. Shuford, Sr.
 
$
300,000
 
Chairman, President & Chief Executive Officer
Old Point Financial Corporation
       
         
Robert F. Shuford, Jr.
 
$
330,000
 
Executive Vice President/Bank
Old Point Financial Corporation
       
         
Joseph R. Witt
 
$
297,030
 
Chief Business Development Officer & Senior Vice President
Old Point Financial Corporation
       
         
Jeffrey W. Farrar
 
$
285,000
 
Chief Financial Officer & Senior Vice President/Finance
Old Point Financial Corporation
       
         
Eugene M. Jordan, II
 
$
190,000
 
Secretary to the Board & Executive Vice President/Trust
Old Point Financial Corporation
       
         
Donald S. Buckless (53)
 
$
187,200
 
Chief Lending Officer & Senior Vice President
Old Point Financial Corporation
       
 
 
EXHIBIT 10.17

RETIREMENT AGREEMENT, WAIVER AND GENERAL RELEASE

This Retirement Agreement (the " Agreemen t") dated March 10, 2017 confirms the following understandings and agreements with Old Point Financial Corporation, its officers, directors, employees, agents, successors, assigns, affiliates, and subsidiaries, including but not limited to, The Old Point National Bank of Phoebus and Old Point Trust & Financial Services, N.A., along with their affiliates, successors, assigns, officers, directors, employees, and agents (hereinafter collectively called the "Company", "Old Point") and Laurie Grabow ("Employee", "you" or "your", "her or herself") with respect to Employee's retirement from the Company.

NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein, and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto stipulate and agree as follows:
 
 
1.
Employee hereby makes a voluntary election to retire.

2.
Employee acknowledges that she will be retiring from employment with the Company effective May 31, 2017 (the " Retirement Date ") or earlier date by mutual agreement by the Company and Employee.  During the remainder of Employee's employment, Employee will have those duties and responsibilities as the Chief Financial Officer of Old Point. Employee further acknowledges that officials of the Company have explained to Employee that Employee will receive payment of her regular base salary to the Retirement Date and accrued vacation, whether or not Employee signs this Agreement.  On the Retirement Date, Employee also shall be deemed to have resigned from all officer, director and other positions with the Company, and to the extent that Employee is a trustee, or is a member of any committee of the Company or its benefits plans, as of the Retirement Date, Employee shall be deemed to have resigned from such capacities and agrees to execute any additional, more specific resignation documents the Company may request.

3.
In consideration of this AGREEMENT, and upon receipt of a validly executed copy of this AGREEMENT, the expiration of the 7-day revocation period referenced in paragraph 14 below, and following the Retirement Date, Old Point agrees to provide Employee with the following additional compensation and benefits:

  A.
Retirement Benefit.   Provided that Employee signs this Agreement, does not revoke the Agreement and abides by its terms, and in return for Employee's promises in this Agreement, the Company agrees to pay Employee 39 weeks of base salary at the rate in effect on the Retirement Date as severance pay (the "Severance Period") following the Retirement Date.  All salary payments shall be made at a time and in accord with the regular payroll practices of the Company with respect to its executive officers. All such amounts shall be subject to and reduced by any applicable federal and state withholding taxes or other deductions authorized by Employee. Employee agrees and acknowledges that Retirement Benefit is above and beyond anything to which Employee is otherwise entitled to and is payable to Employee only in exchange for execution of this Agreement and that the Retirement Benefit represents full and complete consideration for the release Employee is giving the Company in this Agreement.
 
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B.
Health/Dental Plan Continuation .  If Employee is enrolled in an Old Point sponsored health and/or Dental insurance plan on the Retirement Date, notwithstanding anything in the plan to the contrary, Employee will be eligible to continued health and/or dental insurance coverage under the Old Point sponsored insurance plan for herself and her covered spouse.  Employee, however, shall not be entitled to guaranteed or continued coverage under any specific policy or plan and Old Point reserves the right to make changes in any policy or policies of insurance it offers. In the event Old Point ceases to offer the policy or plan in which Employee participates, Employee shall be entitled to participate in the nearest equivalent policy or plan replacing such terminated policy or plan in accordance with the terms of such plan.  In the event Old Point ceases to offer any group plan coverage to its employees, Employee's right to continued plan coverage will cease.

C.
Health and Dental Insurance Premium Benefit . If Employee is eligible for Health Plan and Dental plan Continuation under paragraph 3.B. above, the Company shall reimburse the Employee for the insurance premiums resulting from continuing coverage under the Company insurance plan pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA") for 39 weeks.

D.
401(k) and Health Savings Account .  Employee may not defer any portion of the Retirement Benefit to any retirement plan sponsored by Old Point, including Old Point's 401(k), or any health-savings accounts sponsored by Old Point, including Employee's HSA.  However, Employee may still be deemed an eligible individual for purposes of making post-tax contributions to his or her HSA, if applicable, and should consult with appropriate tax advisors or attorneys to determine the same.

4.
Employee acknowledges that the above delineated payment and benefits represent additional monies and benefits to which he or she is not otherwise entitled.  Employee and Old Point acknowledge that this Agreement does not modify the benefits to which he or she is already entitled as a terminating employee.

5.
In exchange for the payment and benefits described in paragraph 3 above, Employee, for herself and her heirs, legal representatives, beneficiaries, assigns and successors in interest, hereby releases and forever discharges Old Point, its successors, assigns, officers, directors, employees, agents, representatives and subsidiaries, whether in their individual or official capacities (hereinafter collectively referred to as the "RELEASED PARTIES") of and from any and all actions or causes of action, suits, debts, claims, complaints, contracts, controversies, agreements, promises, damages, claims for attorney's fees, punitive damages and reinstatement, judgments, and demands whatsoever, in law or in equity, that her or she has or ever had from the beginning of the world to the date of this AGREEMENT, including, but without limiting the generality of the foregoing, any claim arising out of or in any way connected with her employment relationship with Old Point or any claim alleging discrimination, harassment, retaliation or violation of Title VII of the Civil Rights Act of 1964, as amended, and as amended by the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Americans with Disabilities Act, as amended, the Virginia Human Rights Act, Virginia Code §2.1-714 through §2.1-725, violation of any other local, state or federal law, regulation or ordinance, or any other claim arising under any common law theory of tort or contract, including, but not limited to, wrongful discharge, libel, slander, defamation or intentional infliction of emotional distress.  The parties recognize, however, that nothing contained in this AGREEMENT shall prohibit either party from instituting legal action to enforce any provisions of this AGREEMENT.
 
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EMPLOYEE UNDERSTANDS AND AGREES THAT, OTHER THAN CLAIMS THAT CANNOT BE WAIVED BY LAW, HE OR SHE IS WAIVING AND RELEASING ANY AND ALL CLAIMS AGAINST OLD POINT TO THE DATE ON WHICH HE OR SHE SIGNS THIS AGREEMENT IN EXCHANGE FOR CONSIDERATION TO WHICH HE OR SHE IS NOT OTHERWISE ENTITLED.

6.
Employee acknowledges that she is over the age of forty (40) years and that, as such, she is covered by the Age Discrimination in Employment Act, 29 U.S.C. § 621 ("ADEA").  Employee further acknowledges that this AGREEMENT constitutes a release in accord with the provisions of the ADEA.

7.
Acknowledgements and Affirmations .

a.
Employee represents and affirms that Employee has not filed any claim or charge against Old Point.
b.
Employee also represents and affirms that Employee has reported all hours worked as of the date she signs this release and has been paid and/or has received all compensation, wages, bonuses, commissions, and/or benefits to which she may be entitled.  Employee represents and affirms that she has been granted any leave to which she was entitled under the Family and Medical Leave Act or related state or local leave or disability accommodation laws.
c.
Employee further represents and affirms that she has no known workplace injuries or occupational diseases.
d.
Employee also represents and affirms that she has not divulged any proprietary or confidential information of Old Point and will continue to maintain the confidentiality of such information consistent with Old Point's policies and/or common law.
e.
Employee further represents and affirms that she has not been retaliated against for reporting any allegations of wrongdoing by Old Point, including any allegations of corporate fraud.  Both Parties acknowledge that this Agreement does not limit either party's right, where applicable, to file or participate in an investigative proceeding of any federal, state or local governmental agency.
f.
Employee represents and affirms that all of Old Point's decisions regarding calculation of Employee's pay and benefits earned through the date of Employee's separation from employment were not discriminatorily based on age, disability, race, color, sex, religion, national origin or any other classification protected by law.
 
8.
In consideration of the benefits provided to Employee pursuant to this Agreement, Employee agrees to keep the terms and conditions of this Agreement confidential and private and not to divulge the terms, conditions, or benefits of this Early Retirement Agreement to the general public, media, or press. This provision shall not be interpreted to prevent Employee from disclosing information concerning this Agreement to Employee's spouse, pursuant to a valid court order or legal requirement, or to Employee's financial, tax, or legal advisor. Should Employee violate this paragraph 8, Old Point's obligation to provide the benefits provided in this Agreement shall immediately cease.

9.
This AGREEMENT may not be modified, altered or changed except upon the express prior written consent of the parties.
 
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10.
This AGREEMENT contains all the terms and conditions agreed upon by the parties hereto with reference to the subject matters hereof.  No other agreements, oral or otherwise, shall be deemed to exist or to bind either of the parties hereto.  No representative of either party hereto had or has any authority to make any representation or promise not contained in this AGREEMENT, and each of the parties hereto acknowledges that each has not executed this AGREEMENT in reliance upon any such representation or promise.

11.
This AGREEMENT may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.

12.
This AGREEMENT shall in all respects be interpreted, enforced, governed and construed by and under the laws of the Commonwealth of Virginia.

13.
The invalidity, illegality or unenforceability of any provision hereof or any particular application thereof shall not be deemed to affect or impair in any manner the validity, legality or enforceability of any other provision of this AGREEMENT, and this AGREEMENT shall continue in full force and effect and shall be interpreted so as to implement as nearly as possible the intention of the parties in the absence of such provision or application.

14.
Employee acknowledges that Old Point has advised her that she has a right to consult with an attorney prior to signing this AGREEMENT; and, after such consultation or declining to seek such consultation, Employee freely and voluntarily enters into this AGREEMENT.  Employee further acknowledges that Old Point has given her a period of forty-five (45) days from the date of receipt of this AGREEMENT, in which to consider the terms and binding effect of this AGREEMENT and decide whether she wishes to sign it.  Employee further understands that if she signs this AGREEMENT, she will have seven (7) days thereafter in which she can change her mind and revoke it.  Employee agrees that if she decides to revoke this AGREEMENT within the seven (7) day revocation period, she will provide such revocation notice in writing to Rachel Blankenship, Senior Vice President, Human Resources, Old Point National Bank, 101 East Queen Street, Hampton, Virginia 23669.  Employee understands and agrees that this AGREEMENT is not effective or enforceable until the expiration of the seven (7) day revocation period.

[SIGNATURE PAGE FOLLOWS]
 
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on the date first above written.

 
OLD POINT FINANCIAL CORPORATION
 
By:
/s/ Robert F. Shuford, Sr.
 
Name:
Robert F. Shuford, Sr.
 
Its:
Chairman, President & Chief Executive Officer
 
 
 
THE OLD POINT NATIONAL BANK OF PHOEBUS
 
By:
/s/ Robert F. Shuford, Jr.
 
Name:
Robert F. Shuford, Jr.
 
Its:
President & Chief Executive Officer
 
 
 
OLD POINT TRUST & FINANCIAL SERVICES, N.A.
 
By:
/s/ Eugene M. Jordan, II
 
Name:
Eugene M. Jordan, II
 
Its:
President and Chief Executive Officer
 
 
March 10, 2017
 
/s/ Laurie D. Grabow
 
Date
 
Employee
 
 
 
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Exhibit 10.26
 
CHANGE OF CONTROL SEVERANCE AGREEMENT

THIS CHANGE OF CONTROL SEVERANCE AGREEMENT (the “Agreement”), effective this 22nd day of February, 2018, by and between The Old Point National Bank of Phoebus (the “Bank”) and Donald S. Buckless (“Employee”).

W I T N E S S E T H:

WHEREAS, Employee is a valuable employee of the Bank;

WHEREAS , the Bank wishes to encourage Employee to continue Employee’s career and services with the Bank and to remain with the Bank during any potential change of control of the Bank; and

WHEREAS , the Bank and Employee have agreed to enter into this Agreement to set forth the terms on which Employee may be entitled to severance pay from the Bank following a Change of Control (as defined below).

NOW, THEREFORE, it is hereby agreed by and between the parties hereto as follows:

1.             Definitions .

(a)           “Cause” shall mean:

(i)            Employee’s misconduct in connection with the performance of Employee’s duties;

(ii)            Employee’s misappropriation or embezzlement of funds or property of the Bank or any affiliate;

(iii)           Employee’s fraud or dishonesty with respect to the Bank or any affiliate;

(iv)           Employee’s conviction of, indictment for (or the procedural equivalent), or entering of a guilty plea or plea of no contest with respect to any felony or any misdemeanor involving moral turpitude; or

(v)            Employee’s breach of a material term of this Agreement, failure to perform the material duties and responsibilities of Employee's position or violation in any material respect of any policy, code or standard of behavior generally applicable to officers or employees of the Bank, after being advised in writing of such breach or violation and being given a reasonable opportunity and period (as determined by the Bank) to remedy such breach or violation (if such breach or violation is deemed by the Bank to be capable of being remedied) which period shall be not less than thirty (30) days;

(vi)           Employee’s material breach of any fiduciary duty owed to the Bank; or
 

(vii)          Employee’s engaging in conduct that, if it became known by any regulatory or governmental agency or the public, would be or is reasonably likely to result, in the good faith judgment of the Bank, in injury to the Bank, monetarily or otherwise.

(b)           “Change of Control” shall mean the date any one of the following events occurs after the effective date of this Agreement:

(i)            any one person, or more than one person acting as a group, acquires ownership of stock of Old Point Financial Corporation (“Old Point”) that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of Old Point. However, if any one person or group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of Old Point, the acquisition of additional stock by the same person or group is not considered to cause a Change of Control. An increase in the percentage of stock owned by any one person or group, as a result of a transaction in which Old Point acquires its stock in exchange for property will be treated as an acquisition of stock. This applies only when there is a transfer of stock of Old Point (or issuance of stock of Old Point) and stock in Old Point remains outstanding after the transaction.

(ii)           any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or group) ownership of stock of Old Point possessing thirty percent (30%) or more of the total voting power of the stock of Old Point.

(iii)          a majority of members of Old Point’s Board of Directors is replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the members of Old Point’s Board of Directors prior to the date of the appointment or election.

(iv)          any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or group) assets from Old Point that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of Old Point immediately prior to such acquisition or acquisitions. For this purpose, “gross fair market value” shall mean the value of the assets of Old Point, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. A transfer of assets by Old Point shall not be treated as a Change of Control if the assets are transferred to: (A) a shareholder of Old Point (immediately before the asset transfer) in exchange for or with respect to its stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by Old Point; (C) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of Old Point; or (D) a n entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 1(b)(iv)(C) above . A person’s status is determined immediately after the transfer of the assets. For example, a transfer to a corporation in which Old Point has no ownership interest before the transaction, but which is a majority-owned subsidiary of Old Point after the transaction is not treated as a Change of Control.
 
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For purposes of Section 1(b)(ii) and (iii) above, if any one person or more than one person acting as a group is considered to effectively control Old Point (within the meaning of Section 1(b)(ii) or (iii) above), the acquisition of additional control of Old Point by the same person or group is not considered to cause a Change of Control. For purposes of this Section 1, "more than one person acting as a group" shall include the owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or assets, or similar business transaction with Old Point. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or assets, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation. Persons will not be considered to be acting as a group solely because they (I) purchase or own stock of the same corporation at the same time, or as a result of the same public offering, or (II) purchase assets of the same corporation at the same time.

(c)           “Good Reason” shall mean within twenty-four (24) months after a Change of Control:

(i)            a material diminution in Employee’s authority, duties or responsibilities; or

(ii)            the relocation of Employee to any other primary place of employment more than fifty (50) miles from the Bank headquarters in Hampton, Virginia, without Employee’s express written consent to such relocation; or

(iii)           a material breach of this Agreement by the Bank involving Employee’s base salary.

Employee is required to provide notice to the Bank of the existence of a condition described in Section 1(c) above within a sixty (60) day period of the initial existence of the condition, and the Bank shall have thirty (30) days after notice to remedy the condition without liability. If not remedied by the Bank, Employee shall have thirty (30) days after the end of such remedy period to terminate employment for Good Reason.

(d)           “Incapacity” shall mean Employee is suffering a physical or mental impairment that renders the Executive unable to perform the essential functions of the Position, and such impairment exists for six months within any twelve-month period, as determined by the Bank and in compliance with the requirements of the Americans with Disabilities Act.
 
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2.             Severance Payments and Other Matters Related to Termination within Two (2) Years After a Change of Control .

(a)            Without Cause or for Good Reason . If Employee’s employment is involuntarily terminated without Cause (and other than due to Employee's death or Incapacity) within two (2) years after a Change of Control shall have occurred or if Employee resigns for Good Reason within two (2) years after a Change of Control shall have occurred, then the Bank shall pay to Employee (subject to any applicable payroll or other taxes required to be withheld), (i) (A) any unpaid base salary for time worked through the date of termination payable in a lump sum as soon as administratively feasible following termination, but not later than thirty (30) days thereafter; (B) any annual incentive compensation earned during the calendar year preceding the calendar year of termination, but not yet paid as of the date of termination, payable on the earlier of the thirtieth (30 th ) day after the date of termination, or when otherwise due; and (C) any benefits or awards vested, due and owing pursuant to the terms of any other plans, policies or programs, payable when otherwise due (hereinafter subsections (a)(i)(A) – (C) collectively are referred to as the “Accrued Obligations”) and (ii) subject to Employee’s signing, delivering and not revoking the Release attached as Exhibit A, which Release must be signed, delivered and not revoked within the time period set forth therein, the following:

(A)          An amount equal to 1.50 times Employee’s base salary as in effect at the time of termination, payable over a period of twelve (12) months in accordance with the regular pay periods of Old Point (but not less frequently than monthly and in equal installments) beginning on the first payroll following the date of termination of employment, provided, however, that all payments otherwise due during the first sixty (60) days following termination of employment shall be accumulated and, if the Release requirements have been met, paid on the sixtieth (60 th ) day following termination of employment.

(B)          An amount equal to 1.50 times the average annual bonus payable for the five years preceding the calendar year in which the termination occurs (or the average for the number of years the Agreement has been in effect if less than five (5) years.) If the Agreement was in effect and no bonus was paid for a calendar year, then the amount to be used for that year in computing the average shall be zero. The bonus amount shall be payable over a period of twelve (12) months in accordance with the regular pay periods of the Bank (but not less frequently than monthly and in equal installments), payable in the same manner and at the same time as the payments in Section 2(a)(A).

(C)          An amount equal to the product of twenty-four (24) times the monthly rate of the Bank’s subsidy for coverage in its medical, dental and vision plans for active employees (including any applicable coverage for spouses and dependents) in effect on the date of termination, payable in a lump sum on the sixtieth (60 th ) day following termination of employment.

(b)            Modified Cutback of Compensation Deemed to be Contingent on a Change of Control . If any benefits or payments are to be made under the terms of this Agreement or any other agreement between Employee and Old Point or a subsidiary following a transaction that constitutes a change in the ownership or effective control of Old Point or in the ownership of a substantial portion of the assets of Old Point such that the provisions of Section 280G of the Internal Revenue Code of 1986, as amended, and any regulations thereunder (“Code Section 280G”) or Section 4999 of the Internal Revenue Code and any regulations thereunder could potentially apply to such compensation, then the following provisions shall be applicable:
 
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(i)           In the event the independent accountants serving as auditors for Old Point on the date of a change of control within the meaning of Code Section 280G (or any other accounting firm designated by Old Point) determine that some or all of the payments or benefits scheduled under this Agreement, as well as any other payments or benefits on such change of control, would be nondeductible by Old Point or a subsidiary under Code Section 280G, then the payments scheduled under this Agreement and all other agreements between Employee and Old Point or a subsidiary will be reduced to one dollar less than the maximum amount which may be paid without causing any such payment or benefit to be nondeductible. Any reduction of benefits or payments required to be made under this Section 2(b)(i) shall be taken in the following order: first from cash compensation and then from payments or benefits not payable in cash, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the date of determination.

(ii)            Notwithstanding the foregoing Section 2(b)(i), in the event the independent accountants serving as auditors for Old Point on the date of a change of control within the meaning of Code Section 280G (or any other accounting firm designated by Old Point) determine that the net economic benefit to Employee after payment of all income and excise taxes is greater without giving effect to Section 2(b)(i) than Employee’s net economic benefit after a reduction by reason of the application of Section 2(b)(i), then Section 2(b)(i) shall be a nullity and without any force or effect. Any decisions regarding the requirement or implementation of the reductions to compensation described in Section 2(b)(i) shall be made by the independent accountants serving as auditors for Old Point on the date of a change of control within the meaning of Code Section 280G (or any other accounting firm designated by Old Point), shall be made at Old Point’s expense and shall be binding on the parties.

(c)            Other Terminations . If Employee’s employment is terminated for Cause or due to Employee's death or Incapacity or if Employee voluntarily terminates his employment other than for Good Reason, within two (2) years after a Change of Control shall have occurred, this Agreement shall terminate without any further obligation of the Bank to Employee other than the payment to Employee of any unpaid base salary for the time worked through the date of termination as soon as administratively feasible after termination but not later than thirty (30) days thereafter and the payment of any benefits vested, due and owing pursuant to the terms of any plans, policies or programs, payable when otherwise due.
 
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3.             Covenants .

(a)            Non-Competition . Notwithstanding the foregoing, all such payments and benefits otherwise due under Section 2(a) shall cease to be paid, and the Bank shall have no further obligation due with respect thereto, in the event Employee engages in any conduct prohibited in this Section 3. In exchange for this Agreement and other valuable consideration, Employee agrees that Employee will not engage in Competition for a period of twelve (12) months after Employee’s employment with the Bank ceases for any reason, regardless of whether any benefits are due under Section 2(a). For purposes hereof, “Competition” means Employee’s performing duties that are the same as or substantially similar to those duties performed by Employee for the Bank during the last twelve (12) months of Employee’s employment, as an officer, a director, an employee, a partner or in any other capacity, within twenty-five (25) miles of the headquarters of the Bank (or any Virginia headquarters of any successor) or any branch office of the Bank (or any successor (as to its Virginia branches only) as they are located as of the date Employee’s employment ceases, if those duties are performed for a bank of other financial institution that provides products or services that are the same as or substantially similar to, and competitive with, any of the products or services provided by the Bank at the time Employee’s employment ceases.

(b)            Non-Piracy. In exchange for the benefits promised in this Agreement and other valuable consideration, Employee agrees that for a period of twelve (12) months after Employee’s employment ceases for any reason, Employee will not, directly or indirectly, solicit, divert from the Bank or Old Point or do business with any “Customer” of the Bank with whom Employee had “Material Contact” during the last twelve (12) months of Employee’s employment or about whom Employee obtained information while acting within the scope of his or her employment during the last twelve (12) months of employment, if the purpose of such solicitation, diversion or transaction is to provide products or services that are the same as or substantially similar to those offered by the Bank at the time Employee’s employment ceases. “Material Contact” means that Employee personally communicated with the Customer, either orally or in writing, for the purpose of providing, offering to provide or assisting in providing products or services of the Bank. “Customer” means any person or entity with whom the Bank had a depository or other contractual relationship, pursuant to which the Bank provided products or services during the last twelve (12) months of Employee’s employment.

(c)            Non-Solicitation. In exchange for the benefits promised in this Agreement and other valuable consideration, Employee agrees that for a period of twelve (12) months after employment ceases, for any reason, Employee will not, directly or indirectly, hire or solicit for hire or induce any person to terminate his or her employment with the Bank, if the purpose is to compete with the Bank.

(d)            Confidentiality. As an employee of the Bank, Employee will have access to and may participate in the origination of non-public, proprietary and confidential information relating to the Bank and/or its affiliates, and Employee acknowledges a fiduciary duty owed to the Bank and its affiliates not to disclose impermissibly any such information. Confidential information may include, but is not limited to, trade secrets, customer lists and information, internal corporate planning, methods of marketing and operation, and other data or information of or concerning the Bank or its customers that is not generally known to the public or generally in the banking industry. Employee agrees that during employment and for a period of five (5) years following the cessation of employment, Employee will not use or disclose to any third party any such confidential information, either directly or indirectly, except as may be authorized in writing specifically by the Bank; provided, however that to the extent the information covered by this Section 8 is otherwise protected by the law, such as “trade secrets,” as defined by the Virginia Uniform Trade Secrets Act, or customer information protected by banking privacy laws, that information shall not be disclosed or used for however long the legal protections applicable to such information remain in effect.
 
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Notwithstanding the foregoing, nothing in this Agreement is intended to prohibit Employee from performing any duty or obligation that shall arise as a matter of law or limit Employee’s right to communicate with a government agency, as provided for, protected under or warranted by applicable law. Specifically, Employee shall continue to be under a duty to truthfully respond to any legal and valid subpoena or other legal process. In the event Employee is requested to disclose confidential information by subpoena or other legal process or lawful exercise of authority, Employee shall promptly provide the Bank with notice of the same and cooperate with the Bank in the Bank's effort, at its sole expense, to avoid disclosure.

Federal law provides certain protections to individuals who disclose a trade secret to their attorney, a court, or a government official in certain, confidential circumstances. Specifically, federal law provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret under either of the following conditions:

·
Where the disclosure is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney; and (B) solely for the purpose of reporting or investigating a suspected violation of law; or

·
Where the disclosure is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Federal law also provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.

(e)            Remedies . Employee acknowledges that the covenants set forth in Section 3 of this Agreement are just, reasonable, and necessary to protect the legitimate business interests of the Bank. Employee further acknowledges that if Employee breaches or threatens to breach any provision of Section 3, the Bank’s remedies at law will be inadequate, and the Bank will be irreparably harmed. Accordingly, the Bank shall be entitled to its attorney’s fees, costs and an injunction, both preliminary and permanent, restraining Employee from such breach or threatened breach, such injunctive relief not to preclude the Bank from pursuing all available legal and equitable remedies.
 
7

4.            Documents. All documents, records, tapes and other media of any kind or description relating to the business of the Bank or any of its affiliates (the “Documents”), whether or not prepared by Employee, shall be the sole and exclusive property of the Bank. The Documents (and any copies) shall be returned to the Bank upon Employee’s termination of employment for any reason or at such earlier time or times as the Board of Directors of the Bank or its designee may specify.

5.             Severability. If any provision of this Agreement, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Agreement and shall not invalidate or affect the other provisions of this Agreement, which shall remain in full force and effect and shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently.

6.            Governing Law/Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. The parties further agree that venue in the event of any dispute shall be exclusively in the Circuit Court of the City of Hampton, Virginia, or the Norfolk federal court, at the sole option of the Bank, and Employee agrees not to object to venue.

7.            Notices. All written notices required by this Agreement shall be deemed given when delivered personally or sent by registered or certified mail, return receipt requested, to the parties at their addresses set forth on the signature page of this Agreement. Each party may, from time to time, designate a different address to which notices should be sent.

8.            Amendment. This Agreement may not be varied, altered, modified or in any way amended except by an instrument in writing executed by the parties hereto or their legal representatives.

9.            Binding Effect. This Agreement shall be binding upon Employee and on the Bank, its successors and assigns, effective on the date first above written subject to the approval by the Boards of Directors of the Bank. The Bank will require any successor to all or substantially all of the business and/or assets of the Bank to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession had taken place. This Agreement shall be freely assignable by the Bank.

10.            No Construction Against Any Party. This Agreement is the product of informed negotiations between Employee and the Bank. If any part of this Agreement is deemed to be unclear or ambiguous, it shall be construed as if it were drafted jointly by all parties. Employee and the Bank agree that neither party was in a superior bargaining position regarding the substantive terms of this Agreement.

11.            Code Section 409A Compliance.

(a)            The intent of the parties is that payments and benefits under this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended, and applicable guidance thereunder (“Code Section 409A”) or comply with an exemption from the application of Code Section 409A and, accordingly, all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section 409A.
 
8

(b)            Neither Employee nor the Bank shall take any action to accelerate or delay the payment of any monies and/or provision of any benefits in any matter which would not be in compliance with Code Section 409A.

(c)            A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the form or timing of payment of any amounts or benefits upon or following a termination of employment unless such termination is also a “separation from service” (within the meaning of Code Section 409A) and, for purposes of any such provision of this Agreement under which (and to the extent) deferred compensation subject to Code Section 409A is paid, references to a “termination” or “termination of employment” or like references shall mean separation from service. A “separation from service” shall not occur under Code Section 409A unless such Employee has completely severed Employee’s relationship with the Bank or Employee has permanently decreased Employee’s services to twenty percent (20%) or less of the average level of bona fide services over the immediately preceding thirty-six (36) month period (or the full period if Employee has been providing services for less than thirty-six (36) months). A leave of absence shall only trigger a termination of employment that constitutes a separation from service at the time required under Code Section 409A. If Employee is deemed on the date of separation from service with the Bank to be a “specified employee”, within the meaning of that term under Code Section 409A(a)(2)(B) and using the identification methodology selected by the Bank from time to time, or if none, the default methodology, then with regard to any payment or benefit that is required to be delayed in compliance with Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six-month period measured from the date of Employee’s separation from service or (ii) the date of Employee’s death. In the case of benefits required to be delayed under Code Section 409A, however, Employee may pay the cost of benefit coverage, and thereby obtain benefits, during such six-month delay period and then be reimbursed by the Bank thereafter when delayed payments are made pursuant to the next sentence. On the first day of the seventh month following the date of Employee’s separation from service or, if earlier, on the date of Employee’s death, all payments delayed pursuant to this Section 11(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Employee in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. If any cash payment is delayed under this Section 11(c), then interest shall be paid on the amount delayed calculated at the prime rate reported in The Wall Street Journal for the date of Employee’s termination to the date of payment.

(d)            With regard to any provision herein that provides for reimbursement of expenses or in-kind benefits subject to Code Section 409A, except as permitted by Code Section 409A, (i) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, and (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect. All reimbursements shall be reimbursed in accordance with the Bank’s reimbursement policies but in no event later than the calendar year following the calendar year in which the related expense is incurred.
 
9

(e)            If under this Agreement, an amount is to be paid in two or more installments, for purposes of Code Section 409A, each installment shall be treated as a separate payment. In the event any payment payable upon termination of employment would be exempt from Code Section 409A under Treas. Reg. § 1.409A-1(b)(9)(iii) but for the amount of such payment, the determination of the payments to Employee that are exempt under such provision shall be made by applying the exemption to payments based on chronological order beginning with the payments paid closest in time on or after such termination of employment.

(f)            When, if ever, a payment under this Agreement specifies a payment period with reference to a number of days (e.g., “payment shall be made within ten (10) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Bank.

(g)            Notwithstanding any of the provisions of this Agreement, the Bank shall not be liable to Employee if any payment or benefit which is to be provided pursuant to this Agreement and which is considered deferred compensation subject to Code Section 409A otherwise fails to comply with, or be exempt from, the requirements of Code Section 409A.

12.            Regulatory Limitation. Notwithstanding any other provision of this Agreement, neither the Bank nor any affiliate shall be obligated to make, and Employee shall have no right to receive, any payment, benefit or amount under this Agreement that would violate any law, regulation or regulatory order applicable to the Bank or the affiliate at the time such payment is due, including without limitation, any regulation or order of the Federal Deposit Insurance Corporation or the Board of Governors of the Federal Reserve System or the Office of the Comptroller of the Currency.

13.            Entire Agreement. Except as otherwise provided herein, this Agreement constitutes the entire agreement of the parties with respect to the matters addressed herein and it supersedes all other prior agreements and understandings, both written and oral, express or implied, with respect to the subject matter of this Agreement. It is further specifically agreed and acknowledged that, except as provided herein, Employee shall not be entitled to severance payments or benefits under any severance or similar plan, program, arrangement or agreement of or the Bank for any cessation of employment occurring while this Agreement is in effect.

14.            Survivability. The provisions of Section 3 shall survive the termination of this Agreement other than due to the expiration or non-renewal of this Agreement.

15.            Title. The titles and sub-headings of each Section and Sub-Section in the Agreement are for convenience only and should not be considered part of the Agreement to aid in interpretation or construction.
 
10

IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by an officer thereunto duly authorized, and Employee has signed this Agreement, all effective as of the date first above written.

THE OLD POINT NATIONAL BANK OF PHOEBUS
 
DONALD S. BUCKLESS
       
     
 
By
 
   
       
Title
 
   

 
11

EXHIBIT A

RELEASE

For good and valuable consideration, the receipt of which is hereby acknowledged, Donald S. Buckless (“Employee”), hereby irrevocably and unconditionally releases, acquits, and forever discharges Old Point Financial Corporation and The Old Point National Bank of Phoebus (collectively, “the Bank”)   and each of its agents, directors, members, affiliated entities, officers, employees, former employees, attorneys, successors, predecessors, parents, subsidiaries and all persons acting by, through, under or in concert with any of them (collectively “Releasees”) from any and all charges, complaints, claims, liabilities, grievances, obligations, promises, agreements, controversies, damages, policies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, including, but not limited to, any rights arising out of alleged violations or breaches of any contracts, express or implied, or any tort, or any legal restrictions on the Bank   right to terminate employees, or any federal, state or other governmental statute, regulation, law or ordinance, including without limitation (1) Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991; (2) the Americans with Disabilities Act; (3) 42 U.S.C. § 1981; (4) the federal Age Discrimination in Employment Act (age discrimination); (5) the Older Workers Benefit Protection Act; (6) the Equal Pay Act; (7) the Family and Medical Leave Act; and (8) the Employee Retirement Income Security Act (“ERISA”) (“Claim” or “Claims”), which Employee now has, owns or holds, or claims to have, own or hold, or which Employee at any time heretofore had owned or held, or claimed to have owned or held, against each or any of the Releasees at any time up to and including the date of the execution of this Release.

Employee hereby acknowledges and agrees that the execution of this Release and the cessation of Employee’s employment and all actions taken in connection therewith are in compliance with the federal Age Discrimination in Employment Act and the Older Workers Benefit Protection Act and that the releases set forth above shall be applicable, without limitation, to any claims brought under these Acts. Employee further acknowledges and agrees that:

a.            The Release given by Employee is given solely in exchange for the consideration set forth in Section 2 of the Change of Control Severance Agreement by and between the Bank and Employee to which this Release was initially attached and such consideration is in addition to anything of value which Employee was entitled to receive prior to entering into this Release;

b.            By entering into this Release, Employee does not waive rights or claims that may arise after the date this Release is executed;

c.            Employee has been advised to consult an attorney prior to entering into this Release, and this provision of the Release satisfies the requirements of the Older Workers Benefit Protection Act that Employee be so advised in writing;
 

d.            Employee has been offered twenty-one (21) days [or forty-five (45) days, as applicable] from receipt of this Release within which to consider whether to sign this Release; and

e.            For a period of seven (7) days following Employee’s execution of this Release, Employee may revoke this Release and it shall not become effective or enforceable until such seven (7) day period has expired.

This Release shall be binding upon the heirs and personal representatives of Employee and shall inure to the benefit of the successors and assigns of the Bank.

 
 
 
Date
 
Employee

 
EXHIBIT 23
 
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements (No. 333-211800, 333-211799, 333-65684, 333-83175) on Form S-8 and (No. 333-222356) on Form S-4 of Old Point Financial Corporation and Subsidiaries of our report dated March 15, 2018, relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K of Old Point Financial Corporation and Subsidiaries for the year ended December 31, 2017.
 
/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia
March 15, 2018
 
 
EXHIBIT 24

Old Point Financial Corporation

Power of Attorney

I, Stephen C. Adams, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Stephen C. Adams
(SEAL)
Stephen C. Adams
 
 
Old Point Financial Corporation

Power of Attorney

I, James Reade Chisman, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ James Reade Chisman
(SEAL)
James Reade Chisman
 
 
Old Point Financial Corporation

Power of Attorney

I, Russell S. Evans, Jr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Russell S. Evans, Jr.
(SEAL)
Russell S. Evans, Jr.
 
 
Old Point Financial Corporation

Power of Attorney

I, Michael A. Glasser, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Michael A. Glasser 
(SEAL)
Michael A. Glasser
 
 
Old Point Financial Corporation

Power of Attorney

I, Dr. Arthur D. Greene, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Dr. Arthur D. Greene   
(SEAL)
Dr. Arthur D. Greene
 
 
Old Point Financial Corporation

Power of Attorney

I, John Cabot Ishon, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ John Cabot Ishon
(SEAL)
John Cabot Ishon
 
 
Old Point Financial Corporation

Power of Attorney

I, William F. Keefe, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ William F. Keefe
(SEAL)
William F. Keefe
 
 
Old Point Financial Corporation

Power of Attorney

I, Tom B. Langley, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Tom B. Langley 
(SEAL)
Tom B. Langley
 
 
Old Point Financial Corporation

Power of Attorney

I, Dr. H. Robert Schappert, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Dr. H. Robert Schappert
(SEAL)
Dr. H. Robert Schappert
 
 
Old Point Financial Corporation

Power of Attorney

I, Robert F. Shuford, Sr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Robert F. Shuford, Sr.
(SEAL)
Robert F. Shuford, Sr.
 
 
Old Point Financial Corporation

Power of Attorney

I, Robert F. Shuford, Jr., do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Robert F. Shuford, Jr.
(SEAL)
Robert F. Shuford, Jr.
 
 
Old Point Financial Corporation

Power of Attorney

I, Ellen Clark Thacker, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Ellen Clark Thacker
(SEAL)
Ellen Clark Thacker
 
 
Old Point Financial Corporation

Power of Attorney

I, Joseph R. Witt, do hereby constitute and appoint Robert F. Shuford, Sr. and Robert F. Shuford, Jr. my true and lawful attorney-in-fact, any of whom acting singly is hereby authorized for me and in my name and on my behalf as a director and/or officer of Old Point Financial Corporation (the "Corporation"), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended ("Act"), and any rules, regulations, policies or requirements of the Securities Exchange Commission (the "Commission") in respect thereof in connection with the preparation and filing by the Corporation with the Commission of its Annual Report on Form 10-K for the year ended December 31, 2017 and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

I do hereby ratify and confirm all my said attorneys or attorney shall do or cause to be done by virtue hereof.

WITNESS my execution hereof this 12th day of December, 2017.

/s/ Joseph R. Witt
(SEAL)
Joseph R. Witt
 
 
 
Exhibit 31.1
 
CERTIFICATIONS
 
I, Robert F. Shuford, Sr., certify that:
 
1.  I have reviewed this annual report on Form 10-K of Old Point Financial Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  March 15, 2018
 
 
/s/Robert F. Shuford, Sr.
 
Robert F. Shuford, Sr.
 
Chairman, President & Chief Executive Officer
 
 
Exhibit 31.2
 
CERTIFICATIONS

I, Jeffrey W. Farrar, certify that:
 
1.  I have reviewed this annual report on Form 10-K of Old Point Financial Corporation;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  March 15, 2018
 
 
/s/Jeffrey W. Farrar
 
Jeffrey W. Farrar
 
Chief Financial Officer & Senior Vice President/Finance
 
 
Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Old Point Financial Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/Robert F. Shuford, Sr.
 
Robert F. Shuford, Sr.
 
Chairman, President & Chief Executive Officer
   
March 15, 2018
 
   
/s/Jeffrey W. Farrar
 
Jeffrey W. Farrar
 
Chief Financial Officer & Senior Vice President/Finance
   
March 15, 2018