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

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20172018

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)

VIRGINIA54-1265373
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

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

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Large accelerated filer☐
Accelerated filer ☐☒
  
Non-accelerated filer
☐ (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 Exchange Act). ☐ Yes     ☒  No

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

4,987,6465,181,106 shares of common stock ($5.00 par value) outstanding as of July 31, 201725, 2018


OLD POINT FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION

  Page
   
Item 1.
Financial Statements
1
   
 
Consolidated Balance Sheets
as of June 30, 20172018 (unaudited) and December 31, 20162017
1
   
 
Consolidated Statements of Income
Three Months Ended (unaudited) for the three and six months ended June 30, 20172018 and 2016 (unaudited)
Six Months Ended June 30, 2017 and 2016 (unaudited)
2
   
 
Consolidated Statements of Comprehensive Income
Three Months Ended (Loss) (unaudited) for the three and six months ended June 30, 20172018 and 2016 (unaudited)
Six Months Ended June 30, 2017 and 2016 (unaudited)
3
   
 
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended (unaudited) for the six months ended June 30, 20172018 and 2016 (unaudited)2017
4
   
 
Consolidated Statements of Cash Flows
Six Months Ended (unaudited) for the six months ended June 30, 20172018 and 2016 (unaudited)2017
5
   
 
Notes to Consolidated Financial Statements (unaudited)
6
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3534
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4745
   
Item 4.
Controls and Procedures
4745
   
 PART II - OTHER INFORMATION 
   
Item 1.
Legal Proceedings
4846
   
Item 1A.
Risk Factors
4846
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4846
   
Item 3.
Defaults Upon Senior Securities
4846
   
Item 4.
Mine Safety Disclosures
4846
   
Item 5.
Other Information
4946
   
Item 6.
Exhibits
4947
   
 
Signatures
4947


i

GLOSSARY OF DEFINED TERMS

ALLLAllowance for Loan and Lease Losses
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankThe Old Point National Bank of Phoebus
CET1Common Equity Tier 1
CitizensCitizens National Bank
CompanyOld Point Financial Corporation
CRACommunity Reinvestment Act
ESPPEmployee Stock Purchase Plan
EVEEconomic Value of Equity
FASBFinancial Accounting Standards Board
FHLBFederal Home Loan Bank
FOMCFederal Open Market Committee
Federal ReserveBoard of Governors of the Federal Reserve System
FRBFederal Reserve Bank
GAAPGenerally Accepted Accounting Principles
Incentive Stock PlanOld Point Financial Corporation 2016 Incentive Stock Plan
IRSInternal Revenue Service
OAEMOther Assets Especially Mentioned
OCCOffice of the Comptroller of the Currency
OPMOld Point Mortgage
OREOOther Real Estate Owned
SECSecurities and Exchange Commission
TDRTroubled Debt Restructuring
TrustOld Point Trust & Financial Services N.A.
VIEVariable Interest Entities




PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

Old Point Financial Corporation and Subsidiaries
Consolidated Balance Sheets

 June 30, 2017  December 31, 2016  June 30, 2018  December 31, 2017 
 (dollars in thousands except per share data)  (in thousands except per share data) 
 (unaudited)     (unaudited)   * 
Assets             
             
Cash and due from banks $27,121  $21,885  $20,079  $13,420 
Interest-bearing due from banks  1,708   1,667   15,305   908 
Federal funds sold  1,543   2,302   1,902   84 
Cash and cash equivalents  30,372   25,854   37,286   14,412 
Securities available-for-sale, at fair value  167,586   199,365   142,981   157,121 
Restricted securities  3,102   970 
Restricted securities, at cost  3,869   3,846 
Loans held for sale  1,600   0   849   779 
Loans held for investment, net of allowance for loan losses of $8,710 and $8,245  671,079   595,637 
Loans, net  766,344   729,092 
Premises and equipment, net  38,370   39,324   37,775   37,197 
Bank-owned life insurance  25,604   25,206   26,363   25,981 
Other real estate owned, net of valuation allowance of $0 and $1,026  0   1,067 
Goodwill  1,620   621 
Other real estate owned, net  251   - 
Core deposit intangible, net  429   - 
Other assets  14,805   15,543   14,363   12,777 
Total assets $952,518  $902,966  $1,032,130  $981,826 
                
Liabilities & Stockholders' Equity                
                
Deposits:                
Noninterest-bearing deposits $224,785  $228,641  $245,069  $225,716 
Savings deposits  348,223   344,452   360,478   345,053 
Time deposits  204,172   211,409   234,788   212,825 
Total deposits  777,180   784,502   840,335   783,594 
Federal funds purchased  -   10,000 
Overnight repurchase agreements  23,221   18,704   26,048   20,693 
Federal Home Loan Bank advances  50,000   0   60,000   67,500 
Other borrowings  2,850   - 
Accrued expenses and other liabilities  5,209   5,770   3,604   3,651 
Total liabilities  855,610   808,976   932,837   885,438 
                
Commitments and contingencies                
                
Stockholders' equity:                
Common stock, $5 par value, 10,000,000 shares authorized; 4,984,151 and 4,961,258 shares issued and outstanding  24,921   24,806 
Common stock, $5 par value, 10,000,000 shares authorized; 5,181,106 and 5,019,703 shares outstanding (includes 12,083 and 2,245 shares of nonvested restricted stock, respectively)  25,847   25,087 
Additional paid-in capital  16,758   16,427   20,568   17,270 
Retained earnings  57,973   56,965   55,767   54,738 
Accumulated other comprehensive loss, net  (2,744)  (4,208)  (2,889)  (707)
Total stockholders' equity  96,908   93,990   99,293   96,388 
Total liabilities and stockholders' equity $952,518  $902,966  $1,032,130  $981,826 

See Notes to Consolidated Financial Statements.
*  Derived from audited Consolidated Financial Statements
- 1 -

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended June 30,  Six Months Ended June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
 (unaudited, dollars in thousands except per share data)  (unaudited, in thousands except per share data) 
Interest and Dividend Income:                        
Interest and fees on loans $7,110  $6,560  $13,890  $12,973  $8,688  $7,110  $16,583  $13,890 
Interest on due from banks  3   1   8   5   22   3   26   8 
Interest on federal funds sold  2   1   5   2   8   2   10   5 
Interest on securities:                                
Taxable  491   471   987   1,019   499   491   993   987 
Tax-exempt  420   376   847   760   302   420   646   847 
Dividends and interest on all other securities  35   26   49   41   75   35   135   49 
Total interest and dividend income  8,061   7,435   15,786   14,800   9,594   8,061   18,393   15,786 
                                
Interest Expense:                                
Interest on savings deposits  73   54   137   109   141   73   245   137 
Interest on time deposits  520   517   1,039   1,034   698   520   1,314   1,039 
Interest on federal funds purchased, securities sold under agreements to repurchase and other borrowings  8   8   13   14   42   8   52   13 
Interest on Federal Home Loan Bank advances  72   3   72   144   287   72   611   72 
Total interest expense  673   582   1,261   1,301   1,168   673   2,222   1,261 
Net interest income  7,388   6,853   14,525   13,499   8,426   7,388   16,171   14,525 
Provision for loan losses  1,000   1,250   1,650   1,400   575   1,000   1,100   1,650 
Net interest income, after provision for loan losses  6,388   5,603   12,875   12,099   7,851   6,388   15,071   12,875 
                                
Noninterest Income:                                
Income from fiduciary activities  951   877   1,917   1,778 
Fiduciary and asset management fees  916   951   1,899   1,917 
Service charges on deposit accounts  916   1,021   1,843   1,996   1,078   916   1,948   1,843 
Other service charges, commissions and fees  1,075   1,033   2,091   2,051   1,164   1,075   2,231   2,091 
Income from bank-owned life insurance  199   217   397   432 
Income from mortgage banking activities  284   80   290   89 
Gain on sale of available-for-sale securities, net  87   6   87   515 
Bank-owned life insurance income  173   199   382   397 
Mortgage banking income  236   284   377   290 
Gain on sale of securities, net  40   87   120   87 
Gain on acquisition of Old Point Mortgage  550   0   550   0   -   550   -   550 
Other operating income  29   52   79   90   40   29   45   79 
Total noninterest income  4,091   3,286   7,254   6,951   3,647   4,091   7,002   7,254 
                                
Noninterest Expense:                                
Salaries and employee benefits  5,449   4,890   10,546   10,044   5,935   5,449   11,412   10,546 
Occupancy and equipment  1,454   1,390   2,903   2,748   1,487   1,454   2,964   2,903 
Data processing  441   435   855   857   596   441   1,112   855 
FDIC insurance  98   156   194   321   186   98   377   194 
Customer development  154   154   298   304   135   154   317   298 
Legal and audit expenses  214   295   388   497 
Other outside service fees  306   178   505   361 
Professional services  537   520   1,025   893 
Employee professional development  219   179   455   327   208   219   400   455 
Capital stock tax  138   127   281   262 
Other taxes  142   138   312   281 
ATM and other losses  155   83   332   170   157   155   254   332 
Prepayment fee on Federal Home Loan Bank advance  0   0   0   391 
Loss (gain) on other real estate owned  (18)  9   (18)  108   86   (18)  86   (18)
Merger expenses  391   -   596   - 
Other operating expenses  660   589   1,237   1,186   581   660   1,215   1,237 
Total noninterest expense  9,270   8,485   17,976   17,576   10,441   9,270   20,070   17,976 
Income before income taxes  1,209   404   2,153   1,474   1,057   1,209   2,003   2,153 
Income tax expense (benefit)  48   (148)  50   (99)
Income tax expense  65   48   69   50 
Net income $1,161  $552  $2,103  $1,573  $992  $1,161  $1,934  $2,103 
                                
Basic earnings per share                
Basic earnings per share:                
Weighted average shares outstanding  4,984,151   4,959,009   4,980,728   4,959,009   5,177,233   4,984,151   5,099,088   4,980,728 
Net income per share of common stock $$0.23  $$0.11  $$0.42  $$0.32  $0.19  $0.23  $0.38  $0.42 
                                
Diluted earnings per share                
Diluted earnings per share:                
Weighted average shares outstanding  4,996,880   4,959,009   4,993,916   4,959,009   5,177,233   4,996,880   5,099,124   4,993,916 
Net income per share of common stock $$0.23  $$0.11  $$0.42  $$0.32  $0.19  $0.23  $0.38  $0.42 

See Notes to Consolidated Financial Statements.

- 2 -

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016 
 (unaudited, dollars in thousands) 
Net income $1,161  $552  $2,103  $1,573 
Other comprehensive income, net of tax                
Net unrealized gain on available-for-sale securities  1,036   1,661   1,464   2,176 
Comprehensive income $2,197  $2,213  $3,567  $3,749 
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2018  2017  2018  2017 
  (unaudited, in thousands) 
Net income $992  $1,161  $1,934  $2,103 
Other comprehensive income (loss), net of tax                
Net unrealized gain (loss) on available-for-sale securities  (120)  1,093   (1,871)  1,521 
Reclassification for gain included in net income  (32)  (57)  (95)  (57)
Other comprehensive income (loss), net of tax  (152)  1,036   (1,966)  1,464 
Comprehensive income (loss) $840  $2,197  $(32) $3,567 

See Notes to Consolidated Financial Statements.

- 3 -

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 
 (unaudited, in thousands except share and per share data) 
SIX MONTHS ENDED JUNE 30, 2018SIX MONTHS ENDED JUNE 30, 2018             
                  
Balance at beginning of period  5,017,458  $25,087  $17,270  $54,738  $(707) $96,388 
Net income  -   -   -   1,934   -   1,934 
Other comprehensive loss, net of tax  -   -   -   -   (1,966)  (1,966)
Issuance of common stock related to acquisition  149,625   750   3,207   -   -   3,957 
Reclassification of the stranded income tax effects of the Tax Cuts and Jobs Act from AOCI  -   -   -   139   (139)  - 
Reclassification of net unrealized gains on equity securities from AOCI per ASU 2016-01  -   -   -   77   (77)  - 
Employee Stock Purchase Plan share issuance  1,940   10   38   -   -   48 
Stock-based compensation expense  -   -   53   -   -   53 
Cash dividends ($0.22 per share)  -   -   -   (1,121)  -   (1,121)
                        
Balance at end of period  5,169,023  $25,847  $20,568  $55,767  $(2,889) $99,293 
 
Shares of
Common
Stock
  
Common
Stock
  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Loss
  Total                   
 (unaudited, dollars in thousands except per share data)                   
SIX MONTHS ENDED JUNE 30, 2017SIX MONTHS ENDED JUNE 30, 2017             SIX MONTHS ENDED JUNE 30, 2017                 
                                          
Balance at beginning of period  4,961,258  $24,806  $16,427  $56,965  $(4,208) $93,990   4,961,258  $24,806  $16,427  $56,965  $(4,208) $93,990 
Net income  0   0   0   2,103   0   2,103   -   -   -   2,103   -   2,103 
Other comprehensive income, net of tax  0   0   0   0   1,464   1,464   -   -   -   -   1,464   1,464 
Exercise of stock options  24,806   124   373   0   0   497   24,806   124   373   -   -   497 
Employee Stock Purchase Plan share issuance  1,687   9   38   0   0   47   1,687   9   38   -   -   47 
Repurchase of common stock related to stock option exercises  (3,600)  (18)  (80)  0   0   (98)
Repurchase and retirement of common stock  (3,600)  (18)  (80)  -   -   (98)
Cash dividends ($0.22 per share)  0   0   0   (1,095)  0   (1,095)  -   -   -   (1,095)  -   (1,095)
                                                
Balance at end of period  4,984,151  $24,921  $16,758  $57,973  $(2,744) $96,908   4,984,151  $24,921  $16,758  $57,973  $(2,744) $96,908 
                 
                 
SIX MONTHS ENDED JUNE 30, 2016                 
                        
Balance at beginning of period  4,959,009  $24,795  $16,392  $55,151  $(3,162) $93,176 
Net income  0   0   0   1,573   0   1,573 
Other comprehensive income, net of tax  0   0   0   0   2,176   2,176 
Cash dividends ($0.20 per share)  0   0   0   (992)  0   (992)
                        
Balance at end of period  4,959,009  $24,795  $16,392  $55,732  $(986) $95,933 

See Notes to Consolidated Financial Statements.
- 4 -

Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows

 Six Months Ended June 30,  Six Months Ended June 30, 
 2017  2016  2018  2017 
 (unaudited, dollars in thousands)  (unaudited, dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net income $2,103  $1,573  $1,934  $2,103 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  1,394   1,349   1,250   1,394 
Accretion related to acquisition, net  (121)  - 
Provision for loan losses  1,650   1,400   1,100   1,650 
Net gain on sale of available-for-sale securities  (87)  (515)
Gain on sale of securities, net  (120)  (87)
Net amortization of securities  1,178   1,060   928   1,178 
(Increase) in loans held for sale  (1,600)  0 
Net (gain) loss on disposal of premises and equipment  4   (3)
Increase in loans held for sale, net  (70) ��(1,600)
Net loss on disposal of premises and equipment  9   4 
Net (gain) loss on write-down/sale of other real estate owned  (18)  108   86   (18)
Income from bank owned life insurance  (397)  (432)  (382)  (397)
Deferred tax (benefit) expense  (352)  122 
Stock compensation expense  53   - 
Deferred tax benefit  -   (352)
(Increase) decrease in other assets  335   (1,459)  (41)   335 
Decrease in other liabilities  (560)  (316)
Decrease in accrued expenses and other liabilities  (371)  (560)
Net cash provided by operating activities  3,650   2,887   4,255   3,650 
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of available-for-sale securities  (22,899)  (83,098)  (9,815)  (22,899)
Cash used in purchases of restricted securities, net  (2,132)  (866)
Proceeds from redemption (cash used in purchases) of restricted securities, net  254   (2,132)
Proceeds from maturities and calls of available-for-sale securities  44,555   41,765   6,470   44,555 
Proceeds from sales of available-for-sale securities  6,480   61,680   11,039   6,480 
Paydowns on available-for-sale securities  4,770   5,899   5,014   4,770 
(Purchases) paydowns of consumer installment loans, net  (7,623)  0 
Net increase in all other loans (including repayments on student loans)  (69,469)  (30,889)
Proceeds from sale of loans held for investment  8,746   - 
Net increase in loans held for investment  (4,417)  (77,092)
Proceeds from sales of other real estate owned  1,084   924   93   1,084 
Payments for improvements to other real estate owned  0   (52)
Purchases of premises and equipment  (444)  (476)  (317)  (444)
Net cash used in investing activities  (45,678)  (5,113)
Cash paid in acquisition  (3,164)  - 
Cash acquired in acquisition  2,304   - 
Net cash provided by (used in) investing activities  16,207   (45,678)
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Decrease in noninterest-bearing deposits  (3,856)  (8,276)
Increase (decrease) in savings deposits  3,771   (9,438)
Increase (decrease) in noninterest-bearing deposits  13,040   (3,856)
Increase in savings deposits  8,050   3,771 
Decrease in time deposits  (7,237)  (1,756)  (8,310)  (7,237)
Increase (decrease) in federal funds purchased, repurchase agreements and other borrowings, net  4,517   (2,086)  (1,795)  4,517 
Increase in Federal Home Loan Bank advances  80,000   55,000   78,000   80,000 
Repayment of Federal Home Loan Bank advances  (30,000)  (35,000)  (85,500)  (30,000)
Proceeds from exercise of stock options and ESPP issuance  544   0   48   544 
Repurchase and retirement of common stock  (98)  0   -   (98)
Cash dividends paid on common stock  (1,095)  (992)  (1,121)  (1,095)
Net cash provided by (used in) financing activities  46,546   (2,548)
Net cash provided by financing activities  2,412   46,546 
                
Net increase (decrease) in cash and cash equivalents  4,518   (4,774)
Net increase in cash and cash equivalents  22,874   4,518 
Cash and cash equivalents at beginning of period  25,854   36,990   14,412   25,854 
Cash and cash equivalents at end of period $$30,372  $$32,216  $37,286  $30,372 
                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Cash payments for:                
Interest $1,236  $1,322  $2,128  $1,236 
Income tax $750  $0 
                
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS                
Unrealized gain on securities available-for-sale $2,218  $3,297 
Former bank property transferred from fixed assets to foreclosed properties $0  $127 
Securities sold but not settled $0  $24,483 
Unrealized gain (loss) on securities available-for-sale $(2,585) $2,218 
Loans transferred to other real estate owned $203  $- 
        
TRANSACTIONS RELATED TO ACQUISITIONS        
Assets acquired $50,446  $- 
Liabilities assumed $44,324  $- 
Common stock issued in acquisition $3,957  $- 

See Notes to Consolidated Financial Statements.
- 5 -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. GeneralAccounting Policies

The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (NASDAQ: OPOF) (the Company) and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP)GAAP for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial position at June 30, 20172018 and December 31, 2016,2017, the statements of income and comprehensive income for the three and six months ended June 30, 20172018 and 2016,2017, and the statements of changes in stockholders' equity and cash flows for the six months ended June 30, 20172018 and 2016.2017. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 20162017 annual report on Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation, none of which were material in nature.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services N.A. (Trust). Also included are the accounts of Old Point Mortgage, LLC (OPM) which became a wholly-owned subsidiary of the Bank in the second quarter of 2017 (see "Acquisitions" section below). All significant intercompany balances and transactions have been eliminated in consolidation. The

BUSINESS COMBINATIONS

On April 1, 2018, the Company consolidates subsidiariescompleted its acquisition of Citizens National Bank (Citizens) based in which it holds, directly or indirectly, more than 50 percentWindsor, Virginia for a purchase price of approximately $7.1 million. Under the terms of the voting rights or where it exercises control. Entities wheremerger agreement, Citizens common stockholders received 0.1041 shares of the Company's common stock and $2.19 in cash for each share of Citizens common stock, resulting in the Company holds 20 to 50 percentissuing 149,625 shares of the voting rights, or hasCompany's common stock.

In connection with the abilityacquisition, the Company recorded $999 thousand in goodwill and $440 thousand of amortizable assets, which relate to exercise significant influence, or both, arecore deposit intangibles. The transaction was accounted for underusing the equity method. As discussed below,acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the Company consolidates entities deemedacquisition date. Fair values are preliminary and subject to be variable interest entities (VIEs) when it is determinedrefinement for up to beone year after the primary beneficiary.closing date of the acquisition.

NATURE OF OPERATIONS

Old Point Financial Corporation is a holding company that conducts substantially all of its operations through two subsidiaries, The Old Point Nationalthe Bank of Phoebus and Old Point Trust & Financial Services, N.A.Trust. The Bank serves individual and commercial customers, the majority of which are in Hampton Roads, Virginia. As of June 30, 2017,2018, the Bank had 1819 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 subsidiary, Old Point Mortgage LLC. (OPM) 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.

VARIABLE INTEREST ENTITIES

A legal entity is referred to as a VIE if any of the following conditions exist, which are outlined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) variable interest accounting guidance (FASB ASC 810-10-15-14): (1) the total equity investment at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity's operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, as specifiedthe ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in VIE accounting guidance (FASB ASC 810-10-25-38),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 VIE must be consolidatedcommittee 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.

6
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if itthe quantitative impairment test is deemednecessary. 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. 2017‐08, "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 primary beneficiaryguidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the VIE,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.

In 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 does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities."  The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to:  measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018.  Early adoption is permitted. The Company does not expect the party involvedadoption of ASU 2018-03 to have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, "Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to non-employees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

ACCOUNTING STANDARDS ADOPTED IN 2018

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 VIE that will absorbchanges 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. The Company adopted ASU No. 2016-01 on January 1, 2018, and during the first quarter of 2018, measured its equity investments at fair value through net income and reclassified $77 thousand of AOCI to retained earnings, with no effect on total stockholders' equity. During the second quarter of 2018, the Company sold the equity investments, recognizing an additional gain on sale of $24 thousand, net of tax. The Company also measured the fair value of its loan portfolio and time deposits at June 30, 2018 using an exit price notion (see Note 9. Fair Value Measurements).

In 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 (AOCI) 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 March 31, 2018. The reclassification decreased AOCI and increased retained earnings by $139 thousand, with no effect on total stockholders' equity.

7
On January 1, 2018 the Company adopted ASU 2014-09 "Revenue from Contracts with Customers" and all subsequent amendments to the ASU (collectively, "ASC 606"). The majority of the expected losses, receive a majorityCompany's revenues are associated with financial instruments, including loans and securities, to which ASC 606 does not apply. ASC 606 is applicable to certain noninterest revenues including services charges on deposit accounts, interchange fees, merchant services income, trust and asset management income, and the sale of other real estate owned. However, the recognition of these revenue streams did not change upon adoption of ASC 606. Substantially all of the expected residual returns, or both. At June 30, 2017, the Company had no VIEs that were consolidated.Company's revenue is generated from contracts with customers. Noninterest revenue streams in-scope of ASC 606 are discussed below.
Fiduciary and Asset Management Fees

Fiduciary and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company's performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the applicable fee schedule or contract terms. Payment is generally received immediately or in the following month. The Company does not earn performance-based incentives. Additional services such as tax return preparation services are transactional-based, and the performance obligation is generally satisfied, and related revenue recognized, as incurred. Payment is received shortly after services are rendered.
ACQUISITIONS
Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company's performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers' accounts.

Other Service Charges, Commissions and Fees

Other service charges, commissions and fees are primarily comprised of debit card income, ATM fees, merchant services income, investment services income, and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company's debit and credit cards are processed through card payment networks. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Investment services income relates to commissions earned on brokered trades of investment securities. Other service charges include revenue from processing wire transfers, safe deposit box rentals, cashier's checks, and other services. The Company's performance obligation for other service charges, commission and fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Other Operating Income

Other operating income mainly consists of check sales to customers and fees charged for the early redemption of time deposits. Other operating income is largely transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment is generally received immediately.

8
Note 2. Acquisitions

On September 10, 2007,April 1, 2018, the Bank entered into 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. PerCompany completed its acquisition of Citizens. Under the terms of the joint venturemerger agreement, TMSICitizens shareholders received 0.1041 shares of the Company's common stock and $2.19 in cash for each share of Citizens common stock, resulting in the Bank owned 51% and 49%, respectively,Company issuing 149,625 shares of OPM, and TMSI was the managing member.Company's common stock at a fair value of $4.0 million, for a total purchase price of $7.1 million. Citizens is operating as a division of the Bank.

On January 13, 2017,The transaction was accounted for using the Bank entered into a membership interest purchase agreement (the Purchase Agreement) with TMSIacquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to purchase TMSI's 51% interest in OPM, withrefinement for up to one year after the Bank to be the sole member of OPM upon completionclosing date of the purchase. The purchase price was equal to the book value of TMSI's capital account based on the financial statements of OPM as of March 31, 2017.
- 6 -
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 is based on its financials as of March 31, 2017 and was determined by an independent third party. As a result of the fair value calculation, the Company recognized income of $550 thousand on the purchase in the second quarter of 2017, as indicated in the Consolidated Statements of Income. This gain was recordedacquisition, in accordance with GAAPASC 350, Intangibles-Goodwill and Other. The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in orderthousands):

  As Recorded by Citizens  Fair Value Adjustments  As Recorded by the Company 
Consideration paid:         
Cash       $3,164 
Company common stock        3,957 
Total purchase price        7,121 
           
Identifiable assets acquired:          
Cash and cash equivalents $2,304  $-  $2,304 
Securities available for sale  1,959   -   1,959 
Restricted securities, at cost  278   -   278 
Loans, net  42,824   (34)  42,790 
Premises and equipment  1,070   450   1,520 
Other real estate owned  237   (11)  226 
Core deposit intangibles  -   440   440 
Other assets  1,055   (126)  929 
Total assets $49,727  $719  $50,446 
             
Identifiable liabilities assumed:            
Deposits $43,754  $246  $44,000 
Other liabilities  324   -   324 
Total liabilities $44,078  $246  $44,324 
             
Net assets acquired         $6,122 
Preliminary goodwill         $999 

Goodwill and intangible assets acquired in a purchase business combination and determined to reflecthave an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed.  Purchased intangible assets subject to amortization, such as the core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the previous 49% equity interest.asset.

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

The factorsacquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that contributed todo not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (acquired performing). The fair values of the goodwill recognition were:acquired performing loans were $42.1 million and the fair value of the acquired impaired loans were $710 thousand.
·The Bank's purchase of TMSI's 51% ownership at a price below fair value.
9
·The estimated reduction in operating expense from the elimination of management fees that were being paid to TMSI and the outsourcing of underwriting and secondary market sales.
The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):

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

The table below summarizesamortization and accretion of premiums and discounts associated with the goodwill recognition:

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 


The Bank recognized approximately $62 thousand in expensesCompany's acquisition accounting adjustments related to the merger; $50 thousand ofCitizens acquisition had the total was related to legal advice, and $12 thousand was related to valuation services. These were included in legal and other outside service expenses infollowing impact on the Consolidatedconsolidated Statements of Income for 2016during the three months ended June 30, 2018 (dollars in thousands). The acquisition occurred on April 1, 2018, therefore the first quarter of 2018 and the first six months of 2017.comparative 2017 periods had no impact.

  Three Months Ended 
  June 30, 2018 
Acquired performing loans $92 
Acquired impaired loans  1 
Certificate of deposit valuation  39 
Amortization of core deposit intangible  (11)
Net impact to income before taxes $121 

Note 2.3. Securities

Amortized costs and fair values of securities available-for-sale as of the dates indicated are as follows:

  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
  (in thousands) 
June 30, 2017            
Obligations of  U.S. Government agencies $9,405  $3  $(90) $9,318 
Obligations of state and political subdivisions  69,532   691   (131)  70,092 
Mortgage-backed securities  81,018   0   (1,116)  79,902 
Money market investments  748   0   0   748 
Corporate bonds and other securities  7,199   152   (6)  7,345 
Other marketable equity securities  100   81   0   181 
Total $168,002  $927  $(1,343) $167,586 
                 
December 31, 2016                
U.S. Treasury securities $20,000  $0  $0  $20,000 
Obligations of  U.S. Government agencies  9,361   0   (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   0   0   647 
Corporate bonds and other securities  7,598   92   (12)  7,678 
Other marketable equity securities  100   64   0   164 
Total $202,000  $532  $(3,167) $199,365 

- 7 -


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

 Three Months Ended Six Months Ended 
 June 30, June 30, 
 2017 2016 2017 2016 
Securities Available-for-sale        
Realized gains on sales of securities $87  $6  $87  $554 
Realized losses on sales of securities  0   0   0   (39)
Net realized gain $87  $6  $87  $515 

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, which are 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.
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
  (in thousands) 
June 30, 2018            
U.S. Treasury securities $6,844  $-  $(26) $6,818 
Obligations of  U.S. Government agencies  11,519   -   (160)  11,359 
Obligations of state and political subdivisions  51,846   111   (716)  51,241 
Mortgage-backed securities  71,152   -   (2,893)  68,259 
Money market investments  1,326   -   -   1,326 
Corporate bonds and other securities  3,950   44   (16)  3,978 
Total $146,637  $155  $(3,811) $142,981 
                 
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 

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.

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The Company has not recorded impairment charges through income on securities for the three or six months ended June 30, 20172018 or the year ended December 31, 2016.
- 8 -
2017.

TEMPORARILY IMPAIRED SECURITIESThe following table summarizes net realized gains and losses on the sale of investment securities during the periods indicated (dollars in thousands):

 Three Months Ended Six Months Ended 
 June 30, June 30, 
 2018 2017 2018 2017 
Securities Available-for-sale        
Realized gains on sales of securities $51  $87  $131  $87 
Realized losses on sales of securities  (11)  -   (11)  - 
Net realized gain $40  $87  $120  $87 


The following table shows the number of securities with unrealized losses, and the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be temporarilyother-than-temporarily impaired as of June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:

June 30, 2017 
June 30, 2018June 30, 2018 
Less Than Twelve Months More Than Twelve Months  Total 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
 
Gross
Unrealized
Losses
 
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(dollars in thousands) (dollars in thousands) 
Securities Available-for-Sale                          
U.S. Treasury securities $26  $6,818  $-  $-  $26  $6,818 
Obligations of U.S. Government agencies $3  $2,263  $87  $3,331  $90  $5,594   7   37   7,678   123   3,481   160   11,159 
Obligations of state and political subdivisions  131   14,938   0   0   131   14,938   20   332   20,739   384   10,625   716   31,364 
Mortgage-backed securities  1,116   79,902   0   0   1,116   79,902   24   130   4,170   2,763   64,089   2,893   68,259 
Corporate bonds  5   1,994   1   100   6   2,094   14   4   996   12   188   16   1,184 
Total securities available-for-sale $1,255  $99,097  $88  $3,431  $1,343  $102,528   65  $529  $40,401  $3,282  $78,383  $3,811  $118,784 

December 31, 2016 
December 31, 2017December 31, 2017 
Less Than Twelve Months More Than Twelve Months Total 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
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(dollars in thousands) (dollars in thousands) 
Securities Available-for-Sale                          
Obligations of U.S. Government agencies $166  $9,195  $0  $0  $166  $9,195   6  $11  $3,189  $111  $3,089  $122  $6,278 
Obligations of state and political subdivisions  1,016   38,020   0   0   1,016   38,020   56   32   11,141   105   10,999   137   22,140 
Mortgage-backed securities  1,973   80,680   0   0   1,973   80,680   23   67   9,742   1,543   64,554   1,610   74,296 
Corporate bonds  11   1,787   1   100   12   1,887   13   2   1,098   8   792   10   1,890 
Total securities available-for-sale $3,166  $129,682  $1  $100  $3,167  $129,782   98  $112  $25,170  $1,767  $79,434  $1,879  $104,604 


The number of investments at an unrealized loss position as of June 30, 2018 and December 31, 2017 were 103 and 77, respectively. Certain investments within the Company's portfolio had unrealized losses for more than twelve months at June 30, 20172018 and December 31, 2016,2017, as shown in the tables above. The unrealized losses were caused by increases in market interest rates. Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 20172018 or December 31, 2016.2017.

Restricted Securities
The restricted security category is comprised of stock in the Federal Home Loan Bank of Atlanta (FHLB) and, the Federal Reserve Bank (FRB), and Community Bankers' Bank (CBB). These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB, FRB, and FRBCBB stock isare 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.
- 9 -11

Note 3.4. Loans and the Allowance for Loan Losses

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

 June 30, 2017  December 31, 2016  June 30, 2018  December 31, 2017 
 (in thousands)  (in thousands) 
Mortgage loans on real estate:            
Residential 1-4 family $100,381  $94,827  $109,961  $101,021 
Commercial  286,512   285,429   301,241   289,682 
Construction  25,768   23,116   36,929   27,489 
Second mortgages  17,390   17,128   18,007   17,918 
Equity lines of credit  53,467   51,024   55,250   56,610 
Total mortgage loans on real estate  483,518   471,524   521,388   492,720 
Commercial loans  57,585   54,434 
Consumer loans  126,132   58,907 
Commercial and industrial loans  64,701   60,398 
Consumer automobile loans  125,866   119,251 
Other consumer loans  52,109   54,974 
Other  12,554   19,017   12,153   11,197 
Total loans, net of deferred fees (1)  679,789   603,882   776,217   738,540 
Less: Allowance for loan losses  (8,710)  (8,245)  (9,873)  (9,448)
Loans, net of allowance and deferred fees (1) $671,079  $595,637 
Loans, net of allowance and deferred fees and costs (1) $766,344  $729,092 

(1) Net deferred loan fees totaled $764$925 thousand and $522$916 thousand at June 30, 20172018 and December 31, 2016,2017, respectively.

Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $495$613 thousand and $536$594 thousand at June 30, 20172018 and December 31, 2016,2017, respectively.

Acquired Loans

The Company had no acquired loans as of December 31, 2017. The outstanding principal balance and the carrying amount of acquired loans included in the consolidated balance sheet as of June 30, 2018 are as follows:

 June 30, 2018 
 (in thousands) 
Outstanding principal balance $37,528 
Carrying amount  36,923 


The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies FASB ASC 310-30 to account for interest earned, as of June 30, 2018 are as follows:

 June 30, 2018 
 (in thousands) 
Outstanding principal balance $686 
Carrying amount  458 


The following table presents changes in the accretable yield on acquired impaired loans, for which the Company applies FASB ASC 310-30, at June 30, 2018:

  June 30, 2018 
  (in thousands) 
Balance at January 1, 2018 $- 
Additions from acquisition of Citizens  110 
Accretion  (11)
Other changes, net  - 
Balance at end of period $99 


12
CREDIT QUALITY INFORMATION

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

The Company's internally assigned risk grades are as follows:

Pass: Loans are of acceptable risk.

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

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

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

Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
- 10 -


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

Credit Quality InformationCredit Quality Information Credit Quality Information 
As of June 30, 2017 
As of June 30, 2018As of June 30, 2018 
(in thousands)(in thousands) (in thousands) 
 Pass  OAEM  Substandard  Doubtful  Total  Pass  OAEM  Substandard  Doubtful  Total 
Mortgage loans on real estate:                              
Residential 1-4 family $98,779  $0  $1,602  $0  $100,381  $107,835  $-  $2,126  $-  $109,961 
Commercial  263,009   9,516   13,987   0   286,512   275,700   6,147   19,394   -   301,241 
Construction  24,963   75   730   0   25,768   36,135   73   721   -   36,929 
Second mortgages  16,773   456   161   0   17,390   17,250   413   344   -   18,007 
Equity lines of credit  53,117   0   350   0   53,467   54,896   -   354   -   55,250 
Total mortgage loans on real estate  456,641   10,047   16,830   0   483,518   491,816   6,633   22,939   -   521,388 
Commercial loans  54,721   1,124   1,740   0   57,585 
Consumer loans  125,998   0   134   0   126,132 
Commercial and industrial loans  62,297   1,932   472   -   64,701 
Consumer automobile loans  125,506   -   360   -   125,866 
Other consumer loans  52,063   -   46   -   52,109 
Other  12,554   0   0   0   12,554   12,153   -   -   -   12,153 
Total $649,914  $11,171  $18,704  $0  $679,789  $743,835  $8,565  $23,817  $-  $776,217 

Credit Quality InformationCredit Quality Information Credit Quality Information 
As of December 31, 2016 
As of December 31, 2017As of December 31, 2017 
(in thousands)(in thousands) (in thousands) 
 Pass  OAEM  Substandard  Doubtful  Total  Pass  OAEM  Substandard  Doubtful  Total 
Mortgage loans on real estate:                              
Residential 1-4 family $92,458  $1,138  $1,231  $0  $94,827  $98,656  $-  $2,365  $-  $101,021 
Commercial  260,948   10,014   14,467   0   285,429   264,275   10,526   14,881   -   289,682 
Construction  22,219   162   735   0   23,116   26,694   74   721   -   27,489 
Second mortgages  16,445   475   208   0   17,128   17,211   431   276   -   17,918 
Equity lines of credit  50,387   500   137   0   51,024   56,318   -   292   -   56,610 
Total mortgage loans on real estate  442,457   12,289   16,778   0   471,524   463,154   11,031   18,535   -   492,720 
Commercial loans  49,979   2,278   2,177   0   54,434 
Consumer loans  58,741   0   166   0   58,907 
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  19,017   0   0   0   19,017   11,197   -   -   -   11,197 
Total $570,194  $14,567  $19,121  $0  $603,882  $706,579  $12,500  $19,461  $-  $738,540 
- 11 -13

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 June 30, 2017 
Age Analysis of Past Due Loans as of June 30, 2018Age Analysis of Past Due Loans as of June 30, 2018 
 
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
  
30 - 59
Days Past
Due
  
60 - 89
Days Past
Due
  
90 or More
Days Past
Due
  Acquired Impaired  
Total
Current
Loans (1)
  
Total
Loans
  
Recorded
Investment
> 90 Days
Past Due
and
Accruing
 
 (in thousands)  (in thousands) 
Mortgage loans on real estate:                                          
Residential 1-4 family $408  $0  $1,042  $1,450  $98,931  $100,381  $394  $503  $-  $941  $350  $108,167  $109,961  $262 
Commercial  180   3,718   803   4,701   281,811   286,512   0   626   -   3,235   108   297,272   301,241   - 
Construction  0   0   0   0   25,768   25,768   0   -   -   721   -   36,208   36,929   - 
Second mortgages  62   0   0   62   17,328   17,390   0   13   -   95   -   17,899   18,007   52 
Equity lines of credit  27   0   451   478   52,989   53,467   150   29   20   53   -   55,148   55,250   - 
Total mortgage loans on real estate  677   3,718   2,296   6,691   476,827   483,518   544   1,171   20   5,045   458   514,694   521,388   314 
Commercial loans  473   630   124   1,227   56,358   57,585   0   -   -   -   -   64,701   64,701   - 
Consumer loans  1,604   538   2,904   5,046   121,086   126,132   2,823 
Consumer automobile loans  925   63   95   -   124,783   125,866   95 
Other consumer loans  850   151   1,880   -   49,228   52,109   1,880 
Other  55   5   3   63   12,491   12,554   3   79   11   6   -   12,057   12,153   6 
Total $2,809  $4,891  $5,327  $13,027  $666,762  $679,789  $3,370  $3,025  $245  $7,026  $458  $765,463  $776,217  $2,295 

(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 loans 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 $4.1$2.7 million at June 30, 2017.2018.

Age Analysis of Past Due Loans as of December 31, 2016 
Age Analysis of Past Due Loans as of December 31, 2017Age 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
  
30 - 59
Days Past
Due
  
60 - 89
Days Past
Due
  
90 or More
Days Past
Due
  
Total
Current
Loans (1)
  
Total
Loans
  
Recorded
Investment
> 90 Days
Past Due
and
Accruing
 
 (in thousands)  (in thousands) 
Mortgage loans on real estate:                           ��           
Residential 1-4 family $564  $0  $496  $1,060  $93,767  $94,827  $218  $229  $153  $1,278  $99,361  $101,021  $261 
Commercial  2,280   1,625   227   4,132   281,297   285,429   0   194   771   1,753   286,964   289,682   - 
Construction  162   0   0   162   22,954   23,116   0   -   -   721   26,768   27,489   - 
Second mortgages  0   200   188   388   16,740   17,128   58   15   -   163   17,740   17,918   45 
Equity lines of credit  394   9   86   489   50,535   51,024   0   75   19   53   56,463   56,610   - 
Total mortgage loans on real estate  3,400   1,834   997   6,231   465,293   471,524   276   513   943   3,968   487,296   492,720   306 
Commercial loans  5   0   86   91   54,343   54,434   0   709   -   1,060   58,629   60,398   471 
Consumer loans  1,876   713   2,684   5,273   53,634   58,907   2,603 
Consumer automobile loans  517   122   41   118,571   119,251   41 
Other consumer loans  2,222   544   2,360   49,848   54,974   2,360 
Other  41   12   5   58   18,959   19,017   5   84   9   4   11,100   11,197   4 
Total $5,322  $2,559  $3,772  $11,653  $592,229  $603,882  $2,884  $4,045  $1,618  $7,433  $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 loans 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$4.2 million at December 31, 2016.2017.
- 12 -14

Although the portion of the student loan portfolio that is 90 days or more past due would normally be considered impaired, the Company does not include these loans in its impairment analysis. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect significant increases in past due student loans to have a material effect on the Company.

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 ClassNonaccrual Loans by Class Nonaccrual Loans by Class 
 June 30, 2017  December 31, 2016  June 30, 2018  December 31, 2017 
 (in thousands)  (in thousands) 
Mortgage loans on real estate            
Residential 1-4 family $648  $598  $1,540  $1,447 
Commercial  8,916   6,033   10,802   9,468 
Construction  722   721 
Second mortgages  0   129   154   118 
Equity lines of credit  301   87   354   292 
Total mortgage loans on real estate  9,865   6,847   13,572   12,046 
Commercial loans  1,610   231   319   836 
Consumer loans  81   81 
Total $11,556  $7,159  $13,891  $12,882 

No acquired impaired loans were on nonaccrual status at June 30, 2018.

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:

 Six Months Ended June 30, 
 2017  2016 
 (in thousands) 
Interest income that would have been recorded under original loan terms $241  $101 
Actual interest income recorded for the period  180   85 
Reduction in interest income on nonaccrual loans $61  $16 

 Six Months Ended June 30, 
 2018  2017 
 (in thousands) 
Interest income that would have been recorded under original loan terms $235  $241 
Actual interest income recorded for the period  173   180 
Reduction in interest income on nonaccrual loans $62  $61 
- 13 -15

TROUBLED DEBT RESTRUCTURINGS

The Company's loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company defines a TDR as nonperforming if the TDR is in nonaccrual status or is 90 days or more past due and still accruing interest at the report date.

When the Company modifies a loan, management evaluates any possible impairment as stated in the impaired loan section below.

The following tables present TDRs during the periods indicated, by class of loan.

There were no troubled debt restructurings in the three or six months ended June 30, 2016.2018.

Troubled Debt Restructurings by ClassTroubled Debt Restructurings by Class Troubled Debt Restructurings by Class 
For the Three Months Ended June 30, 2017For the Three Months Ended June 30, 2017 For the Three Months Ended June 30, 2017 
 Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  
Current Investment on
June 30, 2017
  Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  
Current Investment on
June 30, 2017
 
 (dollars in thousands)  (dollars in thousands) 
Commercial real estate  2  $3,663  $3,663  $3,663 
Mortgage loans on real estate:            
Commercial  2  $3,663  $3,663  $4 

Troubled Debt Restructurings by ClassTroubled Debt Restructurings by Class Troubled Debt Restructurings by Class 
For the Six Months Ended June 30, 2017For the Six Months Ended June 30, 2017 For the Six Months Ended June 30, 2017 
 Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  
Current Investment on
June 30, 2017
  Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  Current Investment on June 30, 2017 
 (dollars in thousands)  (dollars in thousands) 
Mortgage loans on real estate:                        
Residential 1-4 family  1  $142  $142  $142   1  $142  $142  $142 
Commercial  2   3,663   3,663   3,663   2   3,663   3,663   3,663 
Total  3  $3,805  $3,805  $3,805   3  $3,805  $3,805  $3,805 

Troubled Debt Restructurings by Class 
For the Six Months Ended June 30, 2016 
  Number of Modifications  Recorded Investment Prior to Modification  Recorded Investment After Modification  Current Investment on June 30, 2016 
  (dollars in thousands) 
Commercial loans  1  $152  $152  $110 

The three loans restructured in the first six months ofended June 30, 2017 and 2016 were given below-market rates for debt with similar risk characteristics.characteristics. At June 30, 20172018 and December 31, 2016,2017, the Company had no outstanding commitments to disburse additional funds on any TDR. At December 31, 2016,June 30, 2018 the Company had $10 thousand inno loans secured by residential 1 - 4 family real estate that were in the process of foreclosure. ThereAt December 31, 2017, loans totaling $77 thousand were no loans secured by residential 1 - 4 family real estate in the process of foreclosure at June 30, 2017.foreclosure.

In the three and six months ended June 30, 20172018 and 2016,2017, 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.

- 14 -16

IMPAIRED LOANS

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

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. 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.
- 15 -


The following table includes the recorded investment and unpaid principal balances (a portion of which may have been charged off) for impaired loans, exclusive of acquired 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 ClassImpaired Loans by Class Impaired Loans by Class 
As of June 30, 2017 
For the six months ended
June 30, 2017
 As of June 30, 2018 
For the six months ended
June 30, 2018
 
  Recorded Investment         Recorded Investment       
Unpaid
Principal
Balance
 
Without
Valuation
Allowance
 
With
Valuation
Allowance
 
Associated
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Unpaid
Principal
Balance
 
Without
Valuation
Allowance
 
With
Valuation
Allowance
 
Associated
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands) (in thousands) 
Mortgage loans on real estate:                        
Residential 1-4 family $2,512  $2,001  $457  $56  $2,435  $45  $2,186  $1,777  $390  $151  $2,111  $29 
Commercial  13,232   11,888   436   53   14,361   276   15,619   13,254   608   111   14,807   131 
Construction  94   0   94   20   357   3   817   721   94   20   815   5 
Second mortgages  485   203   254   16   511   10   502   350   132   14   490   6 
Equity lines of credit  335   53   248   19   203   0   355   102   253   24   335   1 
Total mortgage loans on real estate $16,658  $14,145  $1,489  $164  $17,867  $334  $19,479  $16,204  $1,477  $320  $18,558  $172 
Commercial loans  1,660   103   1,507   496   1,772   42   357   319   -   -   583   - 
Consumer loans  81   81   0   0   81   0 
Other consumer loans  32   -   -   -   85   - 
Total $18,399  $14,329  $2,996  $660  $19,720  $376  $19,868  $16,523  $1,477  $320  $19,226  $172 

Impaired Loans by ClassImpaired Loans by Class Impaired Loans by Class 
 As of December 31, 2016 
For the Year Ended
December 31, 2016
  As of December 31, 2017 
For the Year Ended
December 31, 2017
 
   Recorded Investment          Recorded Investment       
 
Unpaid
Principal
Balance
 
Without
Valuation
Allowance
 
With
Valuation
Allowance
 
Associated
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
  
Unpaid
Principal
Balance
 
Without
Valuation
Allowance
 
With
Valuation
Allowance
 
Associated
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 (in thousands)  (in thousands) 
Mortgage loans on real estate:                          
Residential 1-4 family $2,496  $1,835  $622  $75  $2,741  $119  $2,873  $2,499  $316  $52  $2,525  $90 
Commercial  16,193   11,095   4,274   415   11,885   727   15,262   11,622   1,644   1   13,541   579 
Construction  619   528   96   22   496   43   814   721   92   18   406   23 
Second mortgages  526   309   141   17   511   25   473   318   135   14   464   20 
Equity lines of credit  87   86   0   0   46   3   293   53   239   10   261   - 
Total mortgage loans on real estate $19,921  $13,853  $5,133  $529  $15,679  $917  $19,715  $15,213  $2,426  $95  $17,197  $712 
Commercial loans  1,077   0   989   271   827   74   1,115   836   -   -   1,388   30 
Consumer loans  81   81   0   0   68   1 
Other consumer loans  -   -   -   -   41   - 
Total $21,079  $13,934  $6,122  $800  $16,574  $992  $20,830  $16,049  $2,426  $95  $18,626  $742 

17
MONITORING OF LOANS AND EFFECT OF MONITORING FOR THE ALLOWANCE FOR LOAN LOSSES

Loan officers are responsible for continual portfolio analysis and prompt identification and reporting of problem loans, which includes assigning a risk grade to each applicable loan at its origination and revising such grade as the situation dictates. Loan officers maintain frequent contact with borrowers, which should enable the loan officer to identify potential problems before other personnel. In addition, meetings with loan officers and upper management are held to discuss problem loans and review risk grades. Nonetheless, in order to avoid over-reliance upon loan officers for problem loan identification, the Company's loan review system provides for review of loans and risk grades by individuals who are independent of the loan approval process. Risk grades and historical loss rates (determined by migration analysis) by risk grades are used as a component of the calculation of the allowance for loan losses.
- 16 -

ALLOWANCE FOR LOAN LOSSES

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

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

Each portfolio segment has risk characteristics as follows:

·
Commercial: 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. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. A historical loss percentage is then calculated by migration analysis and applied to each pool. The migration analysis applied to all pools is able to track the risk grading and historical performance of individual loans throughout a number of periods set by management, which provides management with information regarding trends (or migrations) in a particular loan segment. At June 30, 2018 and December 31, 2016 and June 30, 2017 management used foureight twelve-quarter migration periods.

Management also provides an allocated component of the allowance for loans that are specifically identified that may be impaired, and are individually analyzed for impairment. An allocated allowance is established when the present value of expected future cash flows from the impaired loan (or the collateral value or observable market price of the impaired loan) is lower than the carrying value of that loan.

Based on credit risk assessments and management's analysis of qualitative factors, additional loss factors are applied to loan balances. These additional qualitative factors include: economic conditions, trends in growth, loan concentrations, changes in certain loans, changes in underwriting, changes in management and changes in the legal and regulatory environment.

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

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

Acquired performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the acquired performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used.


- 17 -18

ALLOWANCE FOR LOAN LOSSES BY SEGMENT

The total allowance reflects management's estimate of losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $8.7$9.9 million adequate to cover probable loan losses inherent in the loan portfolio at June 30, 2017.2018.

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 LOANSALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS 
(in thousands)(in thousands) (in thousands) 
For the Six Months Ended
June 30, 2017
 Commercial  
Real Estate -
Construction
  
Real Estate -
Mortgage (1)
  Consumer  Other  Total 
For the Six Months Ended
June 30, 2018
 Commercial  
Real Estate -
Construction
  
Real Estate -
Mortgage (1)
  
Consumer (2)
  Other  Total 
Allowance for Loan Losses:                                    
Balance at the beginning of period $1,493  $846  $5,267  $455  $184  $8,245  $1,889  $541  $5,217  $1,644  $157  $9,448 
Charge-offs  (138)  0   (983)  (63)  (72)  (1,256)  (81)  -   (422)  (344)  (160)  (1,007)
Recoveries  25   0   6   11   29   71   67   -   80   139   46   332 
Provision for loan losses  342   (456)  985   780   (1)  1,650   443   (258)  732   60   123   1,100 
Ending balance $1,722  $390  $5,275  $1,183  $140  $8,710  $2,318  $283  $5,607  $1,499  $166  $9,873 
Ending balance individually evaluated for impairment $496  $20  $144  $0  $0  $660  $-  $20  $300  $-  $-  $320 
Ending balance collectively evaluated for impairment  1,226   370   5,131   1,183   140   8,050   2,318   263   5,307   1,499   166   9,553 
Ending balance acquired impaired loans  -   -   -   -   -   - 
Ending balance $1,722  $390  $5,275  $1,183  $140  $8,710  $2,318  $283  $5,607  $1,499  $166  $9,873 
Loan Balances:                                                
Ending balance individually evaluated for impairment $1,610  $94  $15,540  $81  $0  $17,325  $319  $815  $16,866  $-  $-  $18,000 
Ending balance collectively evaluated for impairment  55,975   25,674   442,210   126,051   12,554   662,464   64,274   36,114   467,243   177,975   12,153   757,759 
Ending balance acquired impaired loans  108   -   350   -   -   458 
Ending balance $57,585  $25,768  $457,750  $126,132  $12,554  $679,789  $64,701  $36,929  $484,459  $177,975  $12,153  $776,217 


For the Year Ended
December 31, 2016
 Commercial  
Real Estate -
Construction
  
Real Estate -
Mortgage (1)
  Consumer  Other  Total 
For the Year Ended
December 31, 2017
 Commercial  
Real Estate -
Construction
  
Real Estate -
Mortgage (1)
  Consumer  Other  Total 
Allowance for Loan Losses:                                    
Balance at the beginning of period $633  $985  $5,628  $279  $213  $7,738  $1,493  $846  $5,267  $455  $184  $8,245 
Charge-offs  (915)  0   (504)  (204)  (147)  (1,770)  (807)  -   (1,934)  (279)  (267)  (3,287)
Recoveries  79   3   197   28   40   347   37   104   45   56   88   330 
Provision for loan losses  1,696   (142)  (54)  352   78   1,930   1,166   (409)  1,839   1,412   152   4,160 
Ending balance $1,493  $846  $5,267  $455  $184  $8,245  $1,889  $541  $5,217  $1,644  $157  $9,448 
Ending balance individually evaluated for impairment $271  $22  $507  $0  $0  $800  $-  $18  $77  $-  $-  $95 
Ending balance collectively evaluated for impairment  1,222   824   4,760   455   184   7,445   1,889   523   5,140   1,644   157   9,353 
Ending balance $1,493  $846  $5,267  $455  $184  $8,245  $1,889  $541  $5,217  $1,644  $157  $9,448 
Loan Balances:                                                
Ending balance individually evaluated for impairment $989  $624  $18,362  $81  $0  $20,056  $836  $813  $16,826  $-  $-  $18,475 
Ending balance collectively evaluated for impairment  53,445   22,492   430,046   58,826   19,017   583,826   59,562   26,676   448,405   174,225   11,197   720,065 
Ending balance $54,434  $23,116  $448,408  $58,907  $19,017  $603,882  $60,398  $27,489  $465,231  $174,225  $11,197  $738,540 

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

CHANGES IN ACCOUNTING METHODOLOGY

There were no changes in the Company's accounting methodology for the allowance for loan losses in the first six months of 2017.(2) The consumer segment includes consumer automobile loans.
- 18 -19


Note 4.5. Low-Income Housing Tax Credits

The Company was invested in 4 separate housing equity funds at both June 30, 20172018 and December 31, 2016.2017. 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 $3.7$3.4 million and $3.9$3.5 million at June 30, 20172018 and December 31, 2016,2017, respectively. The expected terms of these investments and the related tax benefits run through 2032.2033. Total projected tax credits to be received for 20172018 are $466$495 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $1.2$1.1 million at both June 30, 20172018 and $1.1 million at December 31, 2016,2017, respectively, and are recorded in accrued expenses and other liabilities on the corresponding consolidated balance sheet.

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
Affected Line Item on
Consolidated Statements of Income
 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016  2018  2017  2018  2017 
Affected Line Item on
Consolidated Statements of Income
 (in thousands)   (in thousands)  
Tax credits and other tax benefits                                  
Amortization of operating losses $98  $74  $178  $147 ATM and other losses $80  $98  $160  $178 Other operating expenses
Tax benefit of operating losses*  33   25   61   50 Income tax expense  17   33   34   61 Income tax expense
                                                    
Tax credits  138   71   233   172 Income tax expense  123   138   247   233 Income tax expense
                                                    
Total tax benefits $171  $96  $294  $222   $140  $171  $281  $294  
                                                    
* Computed using a 34% taxable rate                         
* Computed using a 21% tax rate for 2018 and a 34% tax rate for 2017* Computed using a 21% tax rate for 2018 and a 34% tax rate for 2017        

Note 5.6. 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 June 30, 20172018 and December 31, 20162017 the remaining credit available from these lines totaled $55.0 million.million and $45.0 million, respectively. The Company has a collateral dependent line of credit with the FHLB with remaining credit availability of $225.1$236.3 million and $270.0$217.0 as of June 30, 20172018 and December 31, 2016,2017, respectively.

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

 June 30, 2017  December 31, 2016  June 30, 2018  December 31, 2017 
 (in thousands)  (in thousands) 
Federal funds purchased $-  $10,000 
Overnight repurchase agreements $23,221  $18,704   26,048   20,693 
FHLB advances  50,000   0   30,000   47,500 
Total short-term borrowings $73,221  $18,704  $56,048  $78,193 
                
Maximum month-end outstanding balance $73,221  $68,864  $99,898  $79,819 
Average outstanding balance during the period  36,406   39,364  $79,960  $53,165 
Average interest rate (year-to-date)  0.46%  0.59%  1.13%  0.72%
Average interest rate at end of period  0.85%  0.10%  1.10%  1.27%

Long-Term Borrowings
20
LONG-TERM BORROWINGS
The Company had long-term FHLB advances totaling $30.0 million outstanding at June 30, 2018 and $20.0 million outstanding at December 31, 2017. Scheduled maturity dates of the advances at June 30, 2018 range from February 28, 2019 to June 19, 2020, and the interest rates range from 1.54% to 2.77%.

The Company had no long-term borrowingsalso obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms of the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At June 30, 2018 the outstanding balance was $2.9 million, and the then-current interest rate was 4.48%.

The loan agreement with the lender contains financial covenants including minimum return on average asset ratio and Bank capital leverage ratio, maintenance of a well-capitalized position as defined by regulatory guidance and a maximum level of non-performing assets as a percentage of capital plus the allowance for loan losses. The Company was in compliance with each covenant at June 30, 2017 or December 31, 2016.

Note 6. Share-Based Compensation

The Company has adopted an employee stock purchase plan and offers share-based compensation through its equity compensation plans. Share-based compensation arrangements include stock options, restricted and unrestricted stock awards, restricted stock units, performance-based awards 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.
- 19 -

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. Options to purchase 35,799 shares of common stock were outstanding under the Company's 1998 Stock Option Plan at June 30, 2017. The exercise price of each option equals the market price of the Company's common stock on the date of the grant and each option's maximum term is ten years.

Stock option activity for the six months ended June 30, 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  0   0     
Exercised  (24,806)  20.05     
Canceled or expired  0   0     
Options outstanding, June 30, 2017  35,799  $20.05   0.29  $459 
Options exercisable, June 30, 2017  35,799  $20.05   0.29  $459 

The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current fair value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2017. This amount changes based on changes in the fair value of the Company's common stock.

During the six months ended June 30, 2017, the Company received $497 thousand from the exercise of stock options. No options were exercised during the six months ended June 30, 2016.

No options were granted during the six months ended June 30, 2017 or the six months ended June 30, 2016. As of June 30, 2017, all outstanding stock options were fully vested and there was no unrecognized stock-based compensation expense.

The Old Point Financial Corporation 2016 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 or the six months ended June 30, 2017.

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

Total stock purchases under the ESPP amounted to 999 shares during 2016. 1,687 shares were purchased under the ESPP during the six months ended June 30, 2017. At June 30, 2017, the Company had 247,314 remaining shares reserved for issuance under this plan.
- 20 -
2018.


Note 7. Pension PlanCommitments 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 provides pension benefitsfollows the same credit policies in making such commitments as it does for eligible participants through a non-contributory defined benefit pension plan. The plan was frozen effective September 30, 2006; therefore, no additional participants will be added to the plan. The components of net periodic pension plan cost are as follows for the periods indicated:on-balance-sheet instruments.

Three months ended June 30, 2017  2016 
  (in thousands) 
Interest cost $67  $70 
Expected return on plan assets  (94)  (98)
Amortization of net loss  123   140 
Net periodic pension plan cost $96  $112 

Six months ended June 30, 2017  2016 
  (in thousands) 
Interest cost $134  $140 
Expected return on plan assets  (188)  (196)
Amortization of net loss  245   280 
Net periodic pension plan cost $191  $224 

On November 23, 2016, the Company's Board of Directors voted to terminate the pension plan, effective January 31, 2017.

The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the plan by the end of the fourth quarter of 2017. Atfollowing financial instruments whose contract amounts represent credit risk were outstanding at June 30, 2017, management had not yet determined the amount to be contributed to terminate the pension plan.2018 and December 31, 2017:

  June 30, 2018  December 31, 2017 
  (in thousands) 
       
Commitments to extend credit:      
Home equity lines of credit $61,086  $56,486 
Commercial real estate, construction and development loans committed but not funded  41,282   19,526 
Other lines of credit (principally commercial)  68,877   68,101 
Total $171,245  $144,113 
         
Letters of credit $3,747  $3,331 


21
Note 8. Stockholders' Equity and Earnings per Share

STOCKHOLDERS' EQUITY – Accumulated Other Comprehensive LossShare-Based Compensation

The following table presents informationCompany 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 amounts reclassified outthe date of accumulated other comprehensive loss, by category,grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the periods indicated:vesting period as they occur.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Affected Line Item on
Consolidated Statements of Income
 2017 2016 2017 2016 
 (in thousands)  
Available-for-sale securities             
Realized gains on sales of securities $87  $6  $87  $515 Gain on sale of available-for-sale securities, net
Tax effect  30   2   30   175 Income tax expense
  $57  $4  $57  $340  
- 21 -


The following table presents2016 Incentive Stock Plan (the Incentive Stock Plan) permits the changesissuance 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 accumulated other comprehensive loss, by category, netthe form of tax,stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of June 30, 2018 only restricted stock units have been granted under the Incentive Stock Plan.

Restricted stock activity for the periods indicated:six months ended June 30, 2018 is summarized below:

  Unrealized Gains (Losses) on Available-for-Sale Securities  Defined Benefit Pension Plans  Accumulated Other Comprehensive Loss 
  (in thousands) 
          
Six Months Ended June 30, 2017         
Balance at beginning of period $ (1,739) $ (2,469) $ (4,208)
Net change for the period  1,464   0   1,464 
Balance at end of period $ (275) $ (2,469) $ (2,744)
             
             
Six Months Ended June 30, 2016            
Balance at beginning of period $ (576) $ (2,586) $ (3,162)
Net change for the period  2,176   0   2,176 
Balance at end of period $1,600  $ (2,586) $ (986)
  Shares  Weighted Average Grant Date Fair Value 
Nonvested, January 1, 2018  2,245  $33.60 
Issued  9,838   25.96 
Vested  -   - 
Forfeited  -   - 
Nonvested, June 30, 2018  12,083  $27.38 

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

 Six Months Ended June 30, 2017 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized gains on available-for-sale securities:         
Unrealized holding gains arising during the period $2,305  $784  $1,521 
Reclassification adjustment for gains recognized in income  (87)  (30)  (57)
             
Total change in accumulated other comprehensive loss, net $2,218  $754  $1,464 

 Six Months Ended June 30, 2016 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized gains on available-for-sale securities:         
Unrealized holding gains arising during the period $3,812  $1,296  $2,516 
Reclassification adjustment for gains recognized in income  (515)  (175)  (340)
             
Total change in accumulated other comprehensive loss, net $3,297  $1,121  $2,176 

- 22 -
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 shareperiod over which nonvested awards are expected to be recognized 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.1.64 years.

The following is a reconciliationfair value of restricted stock granted during the denominatorssix months ended June 30, 2018 was $255 thousand.

The remaining unrecognized compensation expense for non-vested restricted stock shares totaled $260 thousand as of the basicJune 30, 2018.

Stock-based compensation expense was $45 thousand and diluted EPS computations$53 thousand for the three and six months ended June 30, 2017 and 2016:

  Net Income Available to Common Shareholders (Numerator)  Weighted Average Common Shares (Denominator)  Per Share Amount 
  (in thousands except per share data) 
Three Months Ended June 30, 2017         
Net income, basic $1,161   4,984  $0.23 
Potentially dilutive common shares - stock options  0    13   0 
Potentially dilutive common shares - employee stock purchase program  0    0   0 
Diluted $1,161   4,997  $0.23 
             
Three Months Ended June 30, 2016            
Net income, basic $552   4,959  $0.11 
Potentially dilutive common shares - stock options  0    0   0 
Potentially dilutive common shares - employee stock purchase program  0    0   0 
Diluted $552   4,959  $0.11 
             
Six Months Ended June 30, 2017            
Net income, basic $2,103   4,981  $0.42 
Potentially dilutive common shares - stock options  0    13   0 
Potentially dilutive common shares - employee stock purchase program  0    0   0 
Diluted $2,103   4,994  $0.42 
             
Six Months Ended June 30, 2016            
Net income, basic $1,573   4,959  $0.32 
Potentially dilutive common shares - stock options  0    0   0 
Potentially dilutive common shares - employee stock purchase program  0    0   0 
Diluted $1,573   4,959  $0.32 

The Company had2018, respectively. There was no antidilutive shares instock compensation expense for the second quarter or first six months of 2017. The Company did not include an average of 69 thousand potential common shares attributable to outstanding stock options in the diluted earnings per share calculation for both the three and six months ended June 30, 2016.
- 23 -
Note 9. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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.

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.2017.

During August 2016,Under the FASBCompany'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 ASU No. 2016-15, "Statementquarterly at a discount to the market price of Cash Flows (Topic 230): Classificationthe Company's stock on the day of Certain Cash Receiptspurchase, which can range from 0-15% 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 effectivewas set at 5% 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 somethe first six months 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.2018.

During January 2017,1,940 shares were purchased under the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): ClarifyingESPP during the Definition of a Business." The amendments insix months ended June 30, 2018. At June 30, 2018, the Company had 243,513 remaining shares reserved for issuance under 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.plan.
- 24 -22

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 does not expect the adoption of ASU 2017-07 to 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 is currently assessing the impact that ASU 2017‐08 will have on its consolidated financial statements.

Note 9. Stockholders' Equity and Earnings per Share

STOCKHOLDERS' EQUITY – Accumulated Other Comprehensive Loss

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 2018 2017 2018 2017 
Affected Line Item on
Consolidated Statements of Income
 (in thousands)  
Available-for-sale securities             
Realized gains on sales of securities $40  $87  $120  $87 Gain on sale of available-for-sale securities, net
Tax effect  8   30   25   30 Income tax expense
  $32  $57  $95  $57  

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

  Unrealized Gains (Losses) on Available-for-Sale Securities  Defined Benefit Pension Plans  Accumulated Other Comprehensive Loss 
  (in thousands) 
          
Three Months Ended June 30, 2018         
Balance at beginning of period 
$ 
(2,737) $-  
$ 
(2,737)
Net other comprehensive loss  (152)  -   (152)
Balance at end of period 
$ 
(2,889) $-  
$ 
(2,889)
             
             
Three Months Ended June 30, 2017            
Balance at beginning of period 
$ 
(1,311) 
$ 
(2,469) 
$ 
(3,780)
Net other comprehensive income  1,036   -   1,036 
Balance at end of period 
$ 
(275) 
$ 
(2,469) 
$ 
(2,744)


  Unrealized Gains (Losses) on Available-for-Sale Securities  Defined Benefit Pension Plans  Accumulated Other Comprehensive Loss 
  (in thousands) 
          
Six Months Ended June 30, 2018         
Balance at beginning of period 
$ 
(707) $-  
$ 
(707)
Net other comprehensive loss  (1,966)  -   (1,966)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from AOCI  (139)  -   (139)
Reclassification of net unrealized gains on equity securities from AOCI per ASU 2016-01  (77)  -   (77)
Balance at end of period 
$ 
(2,889) $-  
$ 
(2,889)
             
             
Six Months Ended June 30, 2017            
Balance at beginning of period 
$ 
(1,739) 
$ 
(2,469) 
$ 
(4,208)
Net other comprehensive income  1,464   -   1,464 
Balance at end of period 
$ 
(275) 
$ 
(2,469) 
$ 
(2,744)
23

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

 Three Months Ended June 30, 2018 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized losses on available-for-sale securities:         
Unrealized holding losses arising during the period $(152) $(32) $(120)
Reclassification adjustment for gains recognized in income  (40)  (8)  (32)
             
Total change in accumulated other comprehensive loss, net $(192) $(40) $(152)

 Three Months Ended June 30, 2017 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized gains on available-for-sale securities:         
Unrealized holding gains arising during the period $1,657  $564  $1,093 
Reclassification adjustment for gains recognized in income  (87)  (30)  (57)
             
Total change in accumulated other comprehensive loss, net $1,570  $534  $1,036 



 Six Months Ended June 30, 2018 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized losses on available-for-sale securities:         
Unrealized holding losses arising during the period $(2,368) $(497) $(1,871)
Reclassification adjustment for gains recognized in income  (120)  (25)  (95)
             
Total change in accumulated other comprehensive loss, net $(2,488) $(522) $(1,966)

 Six Months Ended June 30, 2017 
 Pretax Tax Net-of-Tax 
 (in thousands) 
       
Unrealized gains on available-for-sale securities:         
Unrealized holding gains arising during the period $2,305  $784  $1,521 
Reclassification adjustment for gains recognized in income  (87)  (30)  (57)
             
Total change in accumulated other comprehensive loss, net $2,218  $754  $1,464 

24
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 three and six months ended June 30, 2018 and 2017:

  Net Income Available to Common Shareholders (Numerator)  Weighted Average Common Shares (Denominator)  Per Share Amount 
  (in thousands except per share data) 
Three Months Ended June 30, 2018         
Net income, basic $992   5,177  $0.19 
Potentially dilutive common shares - stock options  -   -   - 
Potentially dilutive common shares - employee stock purchase program  -   -   - 
Diluted $992   5,177  $0.19 
             
Three Months Ended June 30, 2017            
Net income, basic $1,161   4,984  $0.23 
Potentially dilutive common shares - stock options  -   13   - 
Potentially dilutive common shares - employee stock purchase program  -   -   - 
Diluted $1,161   4,997  $0.23 
             
Six Months Ended June 30, 2018            
Net income, basic $1,934   5,099  $0.38 
Potentially dilutive common shares - stock options  -   -   - 
Potentially dilutive common shares - employee stock purchase program  -   -   - 
Diluted $1,934   5,099  $0.38 
             
Six Months Ended June 30, 2017            
Net income, basic $2,103   4,981  $0.42 
Potentially dilutive common shares - stock options  -   13   - 
Potentially dilutive common shares - employee stock purchase program  -   -   - 
Diluted $2,103   4,994  $0.42 

The Company had no antidilutive shares outstanding in the six months ended June 30, 2018 and 2017. 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.

25
Note 10. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the "Fair Value Measurements and Disclosures" topics of FASB ASU 2010-06, FASB ASU 2011-04, and FASB ASU 2011-04,2016-01, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability 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.
- 25 -

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 –
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 –
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 –
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.
- 26 -

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 June 30, 2017 Using   Fair Value Measurements at June 30, 2018 Using 
Balance 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Balance 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands) (in thousands) 
Available-for-sale securities                
U.S. Treasury securities $6,818  $-  $6,818  $- 
Obligations of U.S. Government agencies $9,318  $0  $9,318  $0   11,359   -   11,359   - 
Obligations of state and political subdivisions  70,092   0   70,092   0   51,241   -   51,241   - 
Mortgage-backed securities  79,902   0   79,902   0   68,259   -   68,259   - 
Money market investments  748   0   748   0   1,326   -   1,326   - 
Corporate bonds  7,345   0   7,345   0   3,978   -   3,978   - 
Other marketable equity securities  181   0   181   0 
Total available-for-sale securities $167,586  $0  $167,586  $0  $142,981  $-  $142,981  $- 

  Fair Value Measurements at December 31, 2016 Using   Fair Value Measurements at December 31, 2017 Using 
Balance Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 Significant
Unobservable
Inputs
(Level 3)
 Balance 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 (in thousands) (in thousands) 
Available-for-sale securities                    
U.S. Treasury securities $20,000  $0  $20,000  $0 
Obligations of U.S. Government agencies  9,195   0   9,195   0  $9,435  $-  $9,435  $- 
Obligations of state and political subdivisions  77,987   0   77,987   0   64,765   -   64,765   - 
Mortgage-backed securities  83,694   0   83,694   0   74,296   -   74,296   - 
Money market investments  647   0   647   0   1,194   -   1,194   - 
Corporate bonds  7,678   0   7,678   0   7,234   -   7,234   - 
Other marketable equity securities  164   0   164   0   197   -   197   - 
Total available-for-sale securities $199,365  $0  $199,365  $0  $157,121  $-  $157,121  $- 

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

Impaired loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts when due from the borrower in accordance with the contractual terms of the loan.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.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.
- 27 -

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

Other Real Estate Owned (OREO)
Loans are transferred to OREO when the collateral securing them is foreclosed on. The measurement of gain or loss associated with 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.
- 28 -


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

  Carrying Value at June 30, 2017 Using     Carrying Value at June 30, 2018 Using 
 Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1)		  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  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)  (in thousands) 
Impaired loans                        
Mortgage loans on real estate:                        
Residential 1-4 family $401  $0  $0  $401  $240  $-  $-  $240 
Commercial  886   0   0   886   326   -   -   326 
Construction  74   0   0   74   74   -   -   74 
Equity lines of credit  229   0   0   229   229   -   -   229 
Total mortgage loans on real estate $1,590  $0  $0  $1,590 
Commercial loans  477   0   0   477 
Total $2,067  $0  $0  $2,067  $869  $-  $-  $869 
                                
Loans                                
Loans held for sale $1,600  $0  $1,600  $1,600  $849  $-  $849  $- 
                
Other real estate owned                
Commercial real estate $118  $-  $118  $- 
Construction  133  $-  $-   133 
Total $251  $-  $118  $133 

  Carrying Value at December 31, 2016 Using     Carrying Value at December 31, 2017 Using 
 Fair Value 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  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)  (in thousands) 
Impaired loans                        
Mortgage loans on real estate:                        
Residential 1-4 family $400  $0  $0  $400  $264  $-  $-  $264 
Commercial  1,483   0   0   1,483 
Construction  74   0   0   74   74   -   -   74 
Total mortgage loans on real estate $1,957  $0  $0  $1,957 
Commercial loans  718   0   0   718 
Equity lines of credit  229   -   -   229 
Total $2,675  $0  $0  $2,675  $567  $-  $-  $567 
                                
Other real estate owned                
Construction $940  $0  $0  $940 
Loans                
Loans held for sale $779  $-  $779  $- 
- 29 -

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

Quantitative Information About Level 3 Fair Value MeasurementsQuantitative Information About Level 3 Fair Value Measurements Quantitative Information About Level 3 Fair Value Measurements 
 
Fair Value at
June 30, 2017
(dollars in thousands)
 Valuation TechniquesUnobservable Input Range (Weighted Average)  
Fair Value at
June 30, 2018
(dollars in thousands)
 Valuation TechniquesUnobservable Input Range (Weighted Average) 
Impaired loans              
Residential 1-4 family real estate $401 Market comparablesSelling costs  7.25% $240 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%       Liquidation discount  4.00%
Commercial real estate $886 Market comparablesSelling costs  7.25% $326 Market comparablesSelling costs  7.73%
       Liquidation discount  4.00%       Liquidation discount  7.64%
Construction $74 Market comparablesSelling costs  7.25% $74 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%       Liquidation discount  4.00%
Equity lines of credit $229 Market comparablesSelling costs  7.25% $229 Market comparablesSelling costs  6.69%
       Liquidation discount  4.00%       Liquidation discount  3.69%
Commercial not secured by real estate $477 Market comparablesLiquidation discount  42.89%
                  
Other real estate owned         
Construction $133 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%

Quantitative Information About Level 3 Fair Value MeasurementsQuantitative Information About Level 3 Fair Value Measurements Quantitative Information About Level 3 Fair Value Measurements 
 
Fair Value at
December 31, 2016
(dollars in thousands)
 Valuation TechniquesUnobservable Input Range (Weighted Average)  
Fair Value at
December 31, 2017
(dollars in thousands)
 Valuation TechniquesUnobservable Input Range (Weighted Average) 
Impaired loans              
Residential 1-4 family real estate $400 Market comparablesSelling costs  7.25% $264 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%       Liquidation discount  0.00% - 4.00% (2.91%)
Commercial real estate $1,483 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%
Construction $74 Market comparablesSelling costs  7.25% $74 Market comparablesSelling costs  7.25%
       Liquidation discount  4.00%       Liquidation discount  4.00%
Commercial loans $718 Market comparablesSelling costs  0.00%
Equity lines of credit $229 Market comparablesSelling costs  7.25%
       Liquidation discount  0.00% - 38.58% (32.40%)       Liquidation discount  4.00%
         
Other real estate owned         
Construction $940 Market comparablesSelling costs  7.25%
       Liquidation discount  0.00%

ASC 825, "Financial Instruments," requires disclosure about fair value of financial instruments for interim periods 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:

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 FRB 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 FRB 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. Instead, 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. 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. Fair values for non-performing loans are estimated as described above.
- 30 -
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.

DEPOSITS
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.

OVERNIGHT REPURCHASE AGREEMENTS
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.

FEDERAL HOME LOAN BANK ADVANCES
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 June 30, 2017 and December 31, 2016, the fair value of fees charged for loan commitments and irrevocable letters of credit was immaterial.
- 31 -

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 June 30, 2017 Using     Fair Value Measurements at June 30, 2018 Using 
 
Carrying
Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
  
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)  (in thousands) 
Assets                        
Cash and cash equivalents $30,372  $30,372  $0  $0  $37,036  $37,036  $-  $- 
Securities available-for-sale  167,586   0   167,586   0   142,981   -   142,981   - 
Restricted securities  3,102   0   3,102   0   4,119   -   4,119   - 
Loans held for sale  1,600   0   1,600   0   849   -   849   - 
Loans, net of allowances for loan losses  671,079   0   0   670,589 
Loans, net of allowances for loan losses *  766,344   -   -   745,163 
Bank-owned life insurance  25,604   0   25,604   0   26,363   -   26,363   - 
Accrued interest receivable  3,133   0   3,133   0   3,136   -   3,136   - 
                                
Liabilities                                
Deposits $$777,180  $$0  $$776,825  $$0  $840,335  $-  $841,189  $- 
Overnight repurchase agreements  23,221   0   23,221   0   26,048   -   26,048   - 
Federal Home Loan Bank advances  50,000   0   49,990   0   60,000   -   59,777   - 
Accrued interest payable  253   0   253   0   455   -   455   - 

   Fair Value Measurements at December 31, 2016 Using     Fair Value Measurements at December 31, 2017 Using 
 
Carrying
Value
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
  
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)  (in thousands) 
Assets                        
Cash and cash equivalents $$25,854  $$25,854  $$0  $$0  $14,412  $14,412  $-  $- 
Securities available-for-sale  199,365   0   199,365   0   157,121   -   157,121   - 
Restricted securities  970   0   970   0   3,846   -   3,846   - 
Loans, net of allowances for loan losses  595,637   0   0   594,190 
Loans held for sale  779   -   779   - 
Loans, net of allowances for loan losses *  729,092   -   -   722,464 
Bank-owned life insurance  25,206   0   25,206   0   25,981   -   25,981   - 
Accrued interest receivable  3,189   0   3,189   0   3,254   -   3,254   - 
                                
Liabilities                                
Deposits $$784,502  $$0  $$783,450  $$0  $783,594  $-  $782,539  $- 
Federal funds purchased  10,000   -   10,000   - 
Overnight repurchase agreements  18,704   0   18,704   0   20,693   -   20,693   - 
Federal Home Loan Bank advances  67,500   -   67,329   - 
Accrued interest payable  228   0   228   0   360   -   360   - 

* In accordance with the adoption of ASU 2016-01, the fair values of loans held for investment and time deposits as of June 30, 2018 were measured using an exit price notion. The fair values of loans held for investment and time deposits as of December 31, 2017 were measured using an entry price notion.


31
Note 11. Segment Reporting

The Company operates in a decentralized fashion in three principal business segments: The Old Point National Bank of Phoebus (the Bank), Old Point Trust & Financial Services, N. A. (Trust), and the Company as a separate segment (for purposes of this Note, the Parent). Revenues from the Bank's operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Trust's operating revenues consist principally of income from fiduciary activities. The Parent's revenues are mainly fees and dividends received from the Bank and Trust companies. The Company has no other segments.

The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.
- 32 -

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three and six months ended June 30, 20172018 and 20162017 follows:

 Three Months Ended June 30, 2017  Three Months Ended June 30, 2018 
 Bank  Trust  Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
 (in thousands)  (in thousands) 
Revenues                              
Interest and dividend income $8,043  $17  $1,311  $(1,310) $8,061  $9,571  $22  $1,524  $(1,523) $9,594 
Income from fiduciary activities  0   951   0   0   951   -   916   -   -   916 
Other income  2,903   252   50   (65)  3,140   2,455   261   80   (65)  2,731 
Total operating income  10,946   1,220   1,361   (1,375)  12,152   12,026   1,199   1,604   (1,588)  13,241 
                                        
Expenses                                        
Interest expense  672   0   0   1   673   1,135   -   33   -   1,168 
Provision for loan losses  1,000   0   0   0   1,000   575   -   -   -   575 
Salaries and employee benefits  4,654   684   111   0   5,449   5,076   749   110   -   5,935 
Other expenses  3,471   249   166   (65)  3,821   3,782   271   518   (65)  4,506 
Total operating expenses  9,797   933   277   (64)  10,943   10,568   1,020   661   (65)  12,184 
                                        
Income before taxes  1,149   287   1,084   (1,311)  1,209   1,458   179   943   (1,523)  1,057 
                                        
Income tax expense (benefit)  27   98   (77)  0   48   76   38   (49)  -   65 
                                        
Net income $1,122  $189  $1,161  $(1,311) $1,161  $1,382  $141  $992  $(1,523) $992 
                                        
Capital expenditures $195  $0  $0  $0  $195  $127  $1  $-  $-  $128 
                                        
Total assets $946,734  $5,956  $96,942  $(97,114) $952,518  $1,026,571  $6,110  $102,239  $(102,790) $1,032,130 

 Three Months Ended June 30, 2016  Three Months Ended June 30, 2017 
 Bank  Trust  Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
 (in thousands)  (in thousands) 
Revenues                              
Interest and dividend income $7,420  $15  $725  $(725) $7,435  $8,043  $17  $1,311  $(1,310) $8,061 
Income from fiduciary activities  0   877   0   0   877   -   951   -   -   951 
Other income  2,174   250   50   (65)  2,409   2,903   252   50   (65)  3,140 
Total operating income  9,594   1,142   775   (790)  10,721   10,946   1,220   1,361   (1,375)  12,152 
                                        
Expenses                                        
Interest expense  582   0   0   0   582   672   -   -   1   673 
Provision for loan losses  1,250   0   0   0   1,250   1,000   -   -   -   1,000 
Salaries and employee benefits  4,124   679   87   0   4,890   4,654   684   111   -   5,449 
Other expenses  3,183   251   226   (65)  3,595   3,471   249   166   (65)  3,821 
Total operating expenses  9,139   930   313   (65)  10,317   9,797   933   277   (64)  10,943 
                                        
Income before taxes  455   212   462   (725)  404   1,149   287   1,084   (1,311)  1,209 
                                        
Income tax expense (benefit)  (131)  72   (89)  0   (148)  27   98   (77)  -   48 
                                        
Net income $586  $140  $551  $(725) $552  $1,122  $189  $1,161  $(1,311) $1,161 
                                        
Capital expenditures $105  $0  $0  $0  $105  $195  $-  $-  $-  $195 
                                        
Total assets $891,786  $5,814  $95,933  $(95,860) $897,673  $946,734  $5,956  $96,942  $(97,114) $952,518 

- 33 -32

 Six Months Ended June 30, 2017  Six Months Ended June 30, 2018 
 Bank  Trust  Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
 (in thousands)  (in thousands) 
Revenues                              
Interest and dividend income $15,751  $34  $2,352  $(2,351) $15,786  $18,348  $43  $2,812  $(2,810) $18,393 
Income from fiduciary activities  0   1,917   0   0   1,917   -   1,899   -   -   1,899 
Other income  4,858   510   100   (131)  5,337   4,582   521   130   (130)  5,103 
Total operating income  20,609   2,461   2,452   (2,482)  23,040   22,930   2,463   2,942   (2,940)  25,395 
                                        
Expenses                                        
Interest expense  1,260   0   0   1   1,261   2,189   -   33   -   2,222 
Provision for loan losses  1,650   0   0   0   1,650   1,100   -   -   -   1,100 
Salaries and employee benefits  8,909   1,411   226   0   10,546   9,702   1,494   216   -   11,412 
Other expenses  6,796   514   251   (131)  7,430   7,421   535   833   (131)  8,658 
Total operating expenses  18,615   1,925   477   (130)  20,887   20,412   2,029   1,082   (131)  23,392 
                                        
Income before taxes  1,994   536   1,975   (2,352)  2,153   2,518   434   1,860   (2,809)  2,003 
                                        
Income tax expense (benefit)  (5)  183   (128)  0   50   51   92   (74)  -   69 
                                        
Net income $1,999  $353  $2,103  $(2,352) $2,103  $2,467  $342  $1,934  $(2,809) $1,934 
                                        
Capital expenditures $444  $0  $0  $0  $444  $316  $1  $-  $-  $317 
                                        
Total assets $946,734  $5,956  $96,942  $(97,114) $952,518  $1,026,571  $6,110  $102,239  $(102,790) $1,032,130 

 Six Months Ended June 30, 2016  Six Months Ended June 30, 2017 
 Bank  Trust  Parent  Eliminations  Consolidated  Bank  Trust  Parent  Eliminations  Consolidated 
 (in thousands)  (in thousands) 
Revenues                              
Interest and dividend income $14,771  $29  $1,871  $(1,871) $14,800  $15,751  $34  $2,352  $(2,351) $15,786 
Income from fiduciary activities  0   1,778   0   0   1,778   -   1,917   -   -   1,917 
Other income  4,677   526   100   (130)  5,173   4,858   510   100   (131)  5,337 
Total operating income  19,448   2,333   1,971   (2,001)  21,751   20,609   2,461   2,452   (2,482)  23,040 
                                        
Expenses                                        
Interest expense  1,301   0   0   0   1,301   1,260   -   -   1   1,261 
Provision for loan losses  1,400   0   0   0   1,400   1,650   -   -   -   1,650 
Salaries and employee benefits  8,486   1,357   201   0   10,044   8,909   1,411   226   -   10,546 
Other expenses  6,798   512   352   (130)  7,532   6,796   514   251   (131)  7,430 
Total operating expenses  17,985   1,869   553   (130)  20,277   18,615   1,925   477   (130)  20,887 
                                        
Income before taxes  1,463   464   1,418   (1,871)  1,474   1,994   536   1,975   (2,352)  2,153 
                                        
Income tax expense (benefit)  (103)  158   (154)  0   (99)  (5)  183   (128)  -   50 
                                        
Net income $1,566  $306  $1,572  $(1,871) $1,573  $1,999  $353  $2,103  $(2,352) $2,103 
                                        
Capital expenditures $472  $4  $0  $0  $476  $444  $-  $-  $-  $444 
                                        
Total assets $891,786  $5,814  $95,933  $(95,860) $897,673  $946,734  $5,956  $96,942  $(97,114) $952,518 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company's 20162017 annual report on Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.

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 does not have a single external customer from which it derives 10 percent of more of its revenues.

33
Note 12. Commitments and Contingencies

There have been no material changes in the Company's commitments and contingencies from those disclosed in the Company's 2016 annual report on Form 10-K.
- 34 -


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

Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Old Point Financial Corporation and its subsidiaries (collectively, the Company). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company's Annual Report on Form 10-K and management's discussion and analysis for the year ended December 31, 2016.2017. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three and six months ended June 30, 20172018 and 20162017 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

Caution About Forward-Looking Statements
In addition to historical information, certain statements in this report which use language such as "believes," "expects," "plans," "may," "will," "should," "projects," "contemplates," "anticipates," "forecasts," "intends" and similar expressions, may containidentify 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 mayare based on the beliefs of the Company's management, as well as estimates and assumptions made by, and information currently available to, management. These statements are inherently uncertain, and there can be no assurance that the underlying estimates, assumptions or beliefs will prove to be accurate. Actual results could differ materially from historical results or those anticipated by such statements. Forward-looking statements in this report include, but are not limited to,without limitation: statements regarding profitability,future financial performance and profitability; future impacts of the Tax Cuts and Jobs Act on the Company's operations; performance of the investment and loan portfolios, including performance of the focus on reducing higher-cost time deposits; the net interest margin; strategies for managing the net interest marginconsumer auto loan portfolio and the expected impact of such efforts; levels and sources of liquidity; thepurchased student loan portfolio and expected trends in the quality of the loan portfolio; the effecteffects of increaseddiversifying the loan portfolio; strategic business and growth initiatives; management's efforts to reposition the balance sheet; deposit growth; levels and sources of liquidity; the securities portfolio; use of proceeds from the sale of securities; future levels of past due student loans;charge-offs or net recoveries; the allowanceimpact of increases in NPAs on future earnings; write-downs and provision for loan losses; the securities portfolio;expected sales of other real estate owned; income taxes; monetary policy actions of the Federal Open Market Committee; and changes in interest rates; interest rate sensitivity; asset quality; levels of net loan charge-offs and nonperforming assets; levels of interest expense; levels and components of noninterest income and noninterest expense; income taxes; expected yieldsrates.

Factors that could have a material adverse effect on the loanoperations and securities portfolios; expected rates on interest-bearing liabilities; expected timingfuture prospects of and expense in connection withthe Company include, but are not limited to: the possibility that any of the anticipated terminationbenefits of the pension plan; effectacquisition of Citizens will not be realized or will not be realized within the marketing agreement for insurance products; estimated levelsexpected time period; expected revenue synergies and cost savings from the acquisition of future tax creditsCitizens may not be fully realized or realized within the expected timeframe; revenues following the acquisition of Citizens may be lower than expected; customer and capital calls in connection with the Company's investment in housing equity funds; market risk;employee relationships and 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 alsooperations may be identifieddisrupted 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 manyacquisition of Citizens. Other factors that could have a material adverse effect on the operations and future prospects of the Company including,include, but are not limited to, changes inin: interest rates and yields; general economic and general business conditions, including unemployment levels; uncertainty over future federal spending ordemand for loan products; the budget prioritiesperformance of the new presidential administration, particularly in connectionCompany's dealer lending program; the legislative/regulatory climate; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board and any changes associated with the Department of Defense, on the Company's service area;current administration; the quality or composition of the loan or securities portfolios; changes in the volume and mix of interest-earning assets and interest-bearing liabilities; the effects of management's investment strategy and strategy to manage the net interest margin; the adequacy of the Company's credit quality review processes; the level of nonperforming assets and related charge-offs and recoveries; the performance of the Company's dealer lending program; the federalU.S. government's guarantee of repayment of student loans purchased by the Company; the abilitylevel of the Company to diversify its sources of noninterest income; 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;net charge-offs on loans; deposit flows; competition; demand for loan and other banking products and financial services in the Company's primary servicemarket area; levelsimplementation of noninterest incomenew technologies; the Company's ability to develop and expense; deposit flows; competition; the use of inaccurate assumptions in management's modelingmaintain secure and reliable electronic systems; technology; 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; adequacythe use of inaccurate assumptions in management's modeling systems; technological risks and developments and cyber-attacks, threats and events; the allowance for loan losses; and changes inreal estate market; accounting principles, policies and guidelines. The Company could alsoguidelines; and other factors detailed in the Company's publicly filed documents, including the Company's 2017 Annual Report on Form 10-K. These risks and uncertainties should be adversely affected by monetaryconsidered in evaluating the forward-looking statements contained herein, and fiscal policiesreaders are cautioned not to place undue reliance on such statements, which speak only as of date 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 Office of the Comptroller of the Currency, U.S. Treasury and the Federal Reserve Board.report.

These risks and uncertainties, in addition to the risks and uncertainties identified in the Company's 2016 annual report2017 Annual Report on Form 10-K, should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results.We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.

Available Information
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Company's Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-Q or other SEC filings. The information available on the Company's Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The public may read and copy any documents the Company files with or furnishes to the SEC 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.

- 35 -34

GeneralAbout Old Point Financial Corporation
The Company is the parent company of The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust). The Bank is a locally managed community bank serving the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County. The Bank currently has 1819 branch offices and is the parent company of Old Point Mortgage, LLC (OPM), which provides mortgage origination services.offices. Trust is a wealth management services provider.

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

Critical Accounting Policies and Estimates
AsThe accounting and reporting policies of June 30, 2017, there have been no significantthe Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes with regard toin the Company's consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company's critical accounting policies and estimates disclosed inwith the Audit Committee of the Board of Directors.

The critical accounting and reporting policies include the Company's 2016 annual report on Form 10-K. The accounting policy that required management's most difficult, subjective or complex judgments continues to be the Company's allowance for loan losses. The Company's policies for calculating the allowance for loan losses, acquired loans, and goodwill and intangible assets. Accordingly, the Company's significant accounting policies are discussed in this Item 2 and in Note 34 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q, and are discussed in further detail in the Company's 2016 annual report2017 Annual Report on Form 10-K.

Executive Overview
During 2017, one of theThe Company's strategic initiatives has been to grow and diversify the loan portfolio. As part of that initiative, the Company expanded its dealer lending program, with the dealer loan portfolio growing $58.8 million between December 31, 2016 and June 30, 2017.

Netnet income for the first six months of 2017quarter ended June 30, 2018 was $2.1 million,$992 thousand, or $0.42$0.19 per diluted share, comparedwhich compares to net income of $1.6$1.2 million, or $0.32$0.23 per diluted share, for the second quarter of 2017. This decline was principally attributable to after tax merger costs of $391 thousand in the most recent quarter. Net interest income after provision for loan losses increased $1.5 million from the same period of the year prior primarily due to higher average loan balances and lower provisions for loan loss.

For the six months ended June 30, 2018 net income was $1.9 million, or $0.38 per diluted share. This compares to net income of $2.1 million, or $0.42 per diluted share, for the first six months of 2016. This 33.69% increase2017. The decrease in year-to-date net income was the net effectdriven primarily by after tax merger costs of higher$596 thousand. Net interest income particularly on the loan portfolio; reduced interest expense; an increasedafter provision for loan losses as a resultloss for the first six months of loan growth and higher levels2018 increased $2.2 million relative to the first six months of nonperforming assets; higher noninterest income, primarily in connection with the Old Point Mortgage acquisition in the second quarter of 2017; and higher noninterest expense, driven primarily by increases in salaries and employee benefits.2017.

Highlights are as follows:

·Net interest income after provision for loan losses for the three and six months ended June 30, 2018 increased 22.9% and 17.1%, respectively, from the same periods of 2017.

·Return on average assets for the second quarter of 2018 was 0.39% compared to 0.50% for the second quarter of 2017. Return on average assets for the six months ended June 30, 2018 was 0.38% compared to 0.46% for the first six months of 2017.

·The net interest margin for the second quarter of 2018 was 3.65% compared to 3.64% for the same period of 2017. The net interest margin for the six months ended June 30, 2018 was 3.56% compared to 3.67% during the first six months of 2017.

·Non-performing assets as a percentage of total assets declined to 1.59% at June 30, 2018 from 1.64% at December 31, 2017.

·Total assets increased to $1.0 billion, representing growth of $50.3 million, or 5.1%, from December 31, 2017 and $79.6 million, or 8.4%, from June 30, 2017, reflecting the acquisition of Citizens.
In the second quarter of 2017, net income35 was $1.2 million, or increased $609 thousand when compared to the second quarter of 2016. This increase in quarterly income was driven by many of the same factors that impacted year-to-date income, with the exception of the provision for loan losses. In the second quarter of 2017, the provision for loan losses was $250 thousand lower than the provision in the second quarter of 2016. In the second quarter of 2016, the provision was elevated due to a charge-off on a single loan relationship. While loan growth in the second quarter of 2017 did affect the provision, the Company's largest charge-off during the quarter was on a loan for which it had already provided a specific reserve.  Accordingly, the Company determined the $1.0 million addition to the provision for the second quarter of 2017 was appropriate to provide for the loan growth during the quarter.

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

For the six months ended June 30, 2017second quarter of 2018, net interest income was $14.5$8.4 million, an increase of $1.0 million or 14.0% from the second quarter of 2017. Net interest income, on a fully tax-equivalent basis, for the second quarter of 2018, was $8.5 million, an increase of 11.6% from the second quarter of 2017. Both increases were primarily due to higher interest and fees on loans resulting from growth in average loan balances. Average loans increased $118.1 million, or 17.9%, from the second quarter of 2017. The increase was due to both the acquisition of Citizens and organic growth. The average loan yield for the quarter increased by 14 basis points compared to the same period of 2017. The average tax-equivalent yield on earning assets for the second quarter of 2018 was 4.15% compared to 3.96% for the second quarter of 2017. The average rate on interest-bearing liabilities for the quarter ended June 30, 2018 was 0.68%, up from 0.45% for the same period of 2017. Higher deposit and borrowing rates as well as increases in average time deposit and FHLB advance balances relative to lower cost deposits are responsible for this increase. The tax-equivalent net interest margin for the second quarter of 2018 was 3.65%, up slightly from 3.64% in the second quarter of 2017.

For the six months ended June 30, 2018, net interest income was $16.2 million, an increase of $1.6 million or 11.3%compared to the prior year period, primarily due to increased interest and fees on loans associated with loan growth and lower interest expense on FHLB advances.  For the second quarter of 2017, net interest income was $7.3 million, an increase of $251 thousand from the first quarter of 2017.  The increases in net interest income were driven by higher earning asset balances. 

period. Net interest income, on a fully tax-equivalent basis, was $16.4 million for the six months ended June 30, 2018, compared to $15.0 million for the six months ended June 30, 2017, comparedan increase of 9.0%. As in the quarterly comparison, the increases were driven principally by higher average loan balances primarily due to $14.0 millionorganic growth. Average outstanding loans for the six months ended June 30, 2016, an increase of 7.66%. For2018 increased $123.5 million, or 19.4%, compared to the second quarter of 2017, tax-equivalent net interest income was $7.6 million, an increase of 7.88% from the second quarter of 2016.

Year-to-Date Review
Unless otherwise noted, all comparisons in this section are between thefirst six months ended June 30, 2017 and the six months ended June 30, 2016.

Average loans increased $62.5 million, with this increase inof 2017. The average balances offsetting a decline in loan yields of 16 basis points and increasing interest income on loans by $915 thousand. In contrast, while average investment securities declined $2.1 million, a 15-basis-point increase in the tax-equivalent yield on the portfolio provided an additional $100 thousand in tax-equivalent interest income. During the second half of 2016 andincreased to 4.05% compared to 3.97% for the first half of 2017, management closely monitored the investment portfolio2017. Higher rates on deposits and was ableborrowings as well as an increased reliance on borrowings relative to strategically buy and sell securitieslast year lead to improve the yield on the portfolio.

Average earning assets increased $60.3 million, while the average yield declined 5an increase of 23 basis points. Although the yield on earning assets declined, the growth in loan volume helped to offset the effect. With a higher percent of the Company's average assets in loans--the highest yielding category on the Company's balance sheet--tax-equivalent interest income increased $1.0 million.
- 36 -

The growthpoints in the average balance sheet was funded primarily through increases in deposits, with average deposits growing $51.9 million. Low-cost deposits in particular grew $54.8 million, with higher-cost time deposits decreasing $3.0 million. Whilerate on interest-bearing liabilities when comparing the costfirst six months of time deposits increased 2 basis points, the shift in the deposit mix toward less costly sources of funding resulted in a 1 basis point overall decrease in the cost of total time and savings deposits. This change in the deposit mix also helped reduce the effect of deposit growth on interest expense, with interest expense on deposits increasing only $33 thousand. Management expects that the Company's solid base of low-cost deposits will continue2018 to beneficially impact the2017. The tax-equivalent net interest margin infor the first half of 2018 was 3.56% compared to 3.67% for the same period of 2017.

In addition to the change in the deposit mix, the mix of all interest-bearing liabilities also shifted toward lower-cost funding. The weighted-average cost of total interest-bearing liabilities decreased from 0.47% to 0.43%, primarily due to the payoff of an FHLB advance in February 2016. As can be seen in the following table, this paid off advance bore a rate significantly higher than other available funding sources in the current rate environment. Average FHLB advances increased $6.1 million as the Company took out new short-term advances to fund temporary shortfalls in liquidity. The lower cost on interest-bearing liabilities offset the reduced yield on earning assets, keeping the Company's net interest margin at 3.67%.

Management expects that the Company's loan yields will continue to decline, due to intense competition for quality loans and rate reductions on loans currently held in the portfolio. Management also expects that the reduction in loan yields will likely continue throughout 2017, depending on monetary policy actions taken by the Federal Open Market Committee (FOMC). The FOMC raised the target range for the federal funds rate in March 2017 and June 2017, and management currently expects one additional increase in the remainder of the year. If the FOMC does continue to raise its target range, then management expects that the decline in loan yields will eventually slow as new loans are booked at current market rates. To partially offset the anticipated decline, management has placed an increased focus on managing the Company's mix of liabilities in order to increase low cost funds and reduce high cost funds where possible.

Second Quarter Review
Unless otherwise noted, all comparisons in this section are between the second quarter of 2017 and the second quarter of 2016.

Comparisons between the second quarters of 2017 and 2016 are substantially the same as those for the six months ended June 30, 2017 and 2016. Growth in average loans of $78.6 million offset a 21-basis-point decline in loan yields for a net increase in tax-equivalent loan interest income of $549 thousand. A small decline in average investment securities was offset by improvements in the yield, resulting in $88 thousand of additional tax-equivalent interest income. Average earning assets increased $79.3 million, while the yield decreased 7 basis points. With the increase in earning assets concentrated in higher-yielding loans, average interest income increased $649 thousand.

The increase in loans was funded primarily by growth in low-cost deposits ($53.8 million), with the remainder provided by short-term FHLB advances ($23.6 million). As market rates have increased, the rate on FHLB advances has also increased, with the cost increasing from 0.44% in the second quarter of 2016 to 1.09% in the second quarter of 2017. Although the Company's overall cost on time deposits is lower than the cost of FHLB advances, much of the balance in time deposits is from accounts opened in lower rate environments. The current market rates on time deposits in the Company's market area remain generally higher than the rates on short-term FHLB advances.
- 37 -36
The following table shows an analysistables show analyses of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.

AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* 
  For the quarter ended June 30, 
  2017  2016 
     Interest        Interest    
  Average  Income/  Yield/  Average  Income/  Yield/ 
  Balance  Expense  Rate**  Balance  Expense  Rate** 
  (dollars in thousands) 
ASSETS                  
Loans* $659,926  $7,142   4.33% $581,281  $6,593   4.54%
Investment securities:                        
Taxable  103,485   491   1.90%  109,300   471   1.72%
Tax-exempt*  70,805   636   3.59%  65,432   568   3.47%
Total investment securities  174,290   1,127   2.59%  174,732   1,039   2.38%
Interest-bearing due from banks  1,316   3   0.91%  1,097   1   0.36%
Federal funds sold  1,248   2   0.64%  1,415   1   0.28%
Other investments  2,098   35   6.67%  1,086   26   9.58%
Total earning assets  838,878  $8,309   3.96%  759,611  $7,660   4.03%
Allowance for loan losses  (9,025)          (7,794)        
Other non-earning assets  102,655           107,155         
Total assets $932,508          $858,972         
                         
LIABILITIES AND STOCKHOLDERS' EQUITY 
Time and savings deposits:                        
Interest-bearing transaction accounts $28,438  $2   0.03% $14,150  $1   0.03%
Money market deposit accounts  235,539   60   0.10%  223,561   43   0.08%
Savings accounts  82,217   11   0.05%  77,903   10   0.05%
Time deposits  203,819   520   1.02%  207,908   517   0.99%
Total time and savings deposits  550,013   593   0.43%  523,522   571   0.44%
Federal funds purchased, repurchase agreements and other borrowings  26,302   8   0.12%  26,582   8   0.12%
Federal Home Loan Bank advances  26,374   72   1.09%  2,747   3   0.44%
Total interest-bearing liabilities  602,689   673   0.45%  552,851   582   0.42%
Demand deposits  227,880           204,623         
Other liabilities  5,586           6,603         
Stockholders' equity  96,353           94,895         
Total liabilities and stockholders' equity $932,508          $858,972         
Net interest margin     $7,636   3.64%     $7,078   3.73%
                         
*Computed on a fully tax-equivalent basis using a 34% rate; the tax-equivalent adjustment to interest income was $248 thousand 
**Annualized                 

AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES 
  For the quarter ended June 30, 
  2018  2017 
     Interest        Interest    
  Average  Income/  Yield/  Average  Income/  Yield/ 
  Balance  Expense  Rate**  Balance  Expense  Rate** 
  (dollars in thousands) 
ASSETS                  
Loans* $778,033  $8,702   4.47% $659,926  $7,142   4.33%
Investment securities:                        
Taxable  95,657   499   2.09%  103,485   491   1.90%
Tax-exempt*  49,879   382   3.06%  70,805   636   3.59%
Total investment securities  145,536   881   2.42%  174,290   1,127   2.59%
Interest-bearing due from banks  4,656   22   1.89%  1,316   3   0.91%
Federal funds sold  2,079   8   1.54%  1,248   2   0.64%
Other investments  4,314   75   6.95%  2,098   35   6.67%
Total earning assets  934,618  $9,688   4.15%  838,878  $8,309   3.96%
Allowance for loan losses  (10,125)          (9,025)        
Other non-earning assets  100,098           102,655         
Total assets $1,024,591          $932,508         
                         
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Time and savings deposits:                        
Interest-bearing transaction accounts $28,875  $3   0.04% $28,438  $2   0.03%
Money market deposit accounts  240,832   117   0.19%  235,539   60   0.10%
Savings accounts  88,904   21   0.09%  82,217   11   0.05%
Time deposits  236,396   698   1.18%  203,819   520   1.02%
Total time and savings deposits  595,007   839   0.56%  550,013   593   0.43%
Federal funds purchased, repurchase agreements and other borrowings  30,125   42   0.56%  26,302   8   0.12%
Federal Home Loan Bank advances  64,560   287   1.78%  26,374   72   1.09%
Total interest-bearing liabilities  689,692   1,168   0.68%  602,689   673   0.45%
Demand deposits  233,931           227,880         
Other liabilities  2,897           5,586         
Stockholders' equity  98,071           96,353         
Total liabilities and stockholders' equity $1,024,591          $932,508         
Net interest margin     $8,520   3.65%     $7,636   3.64%
                         
*Computed on a fully tax-equivalent basis using a 21% rate for 2018 and a 34% rate for 2017; the tax-equivalent adjustment to interest income was $94 thousand and $248 thousand for the three months ended June 30, 2018 and 2017, respectively. 
**Annualized                 
- 38 -37

AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES* 
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATESAVERAGE BALANCE SHEETS, NET INTEREST INCOME AND RATES 
 For the six months ended June 30,  For the six months ended June 30, 
 2017  2016  2018  2017 
    Interest        Interest        Interest        Interest    
 Average  Income/  Yield/  Average  Income/  Yield/  Average  Income/  Yield/  Average  Income/  Yield/ 
 Balance  Expense  Rate**  Balance  Expense  Rate**  Balance  Expense  Rate**  Balance  Expense  Rate** 
 (dollars in thousands)  (dollars in thousands) 
ASSETS                                    
Loans* $638,262  $13,953   4.37% $575,812  $13,038   4.53% $761,795  $16,612   4.36% $638,262  $13,953   4.37%
Investment securities:                                                
Taxable  105,303   987   1.87%  112,804   1,019   1.81%  95,025   993   2.09%  105,303   987   1.87%
Tax-exempt*  71,618   1,283   3.58%  66,228   1,151   3.48%  53,881   818   3.04%  71,618   1,283   3.58%
Total investment securities  176,921   2,270   2.57%  179,032   2,170   2.42%  148,906   1,811   2.43%  176,921   2,270   2.57%
Interest-bearing due from banks  1,710   8   0.94%  1,901   5   0.53%  2,913   26   1.79%  1,710   8   0.94%
Federal funds sold  1,422   5   0.70%  1,526   2   0.26%  1,271   10   1.57%  1,422   5   0.70%
Other investments  1,537   49   6.38%  1,266   41   6.48%  4,365   135   6.19%  1,537   49   6.38%
Total earning assets  819,852  $16,285   3.97%  759,537  $15,256   4.02%  919,250  $18,594   4.05%  819,852  $16,285   3.97%
Allowance for loan losses  (8,710)          (7,815)          (9,985)          (8,710)        
Other non-earning assets  105,422           109,521           96,763           105,422         
Total assets $916,564          $861,243          $1,006,028          $916,564         
                                                
LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITY                        
Time and savings deposits:                                                
Interest-bearing transaction accounts $28,332  $5   0.04% $12,583  $2   0.03% $28,239  $5   0.04% $28,332  $5   0.04%
Money market deposit accounts  235,798   112   0.09%  223,097   88   0.08%  235,961   208   0.18%  235,798   112   0.09%
Savings accounts  81,114   20   0.05%  77,545   19   0.05%  87,214   32   0.07%  81,114   20   0.05%
Time deposits  205,469   1,039   1.01%  208,439   1,034   0.99%  224,088   1,314   1.17%  205,469   1,039   1.01%
Total time and savings deposits  550,713   1,176   0.43%  521,664   1,143   0.44%  575,502   1,559   0.54%  550,713   1,176   0.43%
Federal funds purchased, repurchase agreements and other borrowings  23,482   13   0.11%  25,972   14   0.11%  29,243   52   0.36%  23,482   13   0.11%
Federal Home Loan Bank advances  13,260   72   1.09%  7,143   144   4.03%  72,403   611   1.69%  13,260   72   1.09%
Total interest-bearing liabilities  587,455   1,261   0.43%  554,779   1,301   0.47%  677,148   2,222   0.66%  587,455   1,261   0.43%
Demand deposits  227,971           205,167           228,524           227,971         
Other liabilities  5,715           6,615           3,172           5,715         
Stockholders' equity  95,423           94,682           97,184           95,423         
Total liabilities and stockholders' equity $916,564          $861,243          $1,006,028          $916,564         
Net interest margin     $15,024   3.67%     $13,955   3.67%     $16,372   3.56%     $15,024   3.67%
                                                
*Computed on a fully tax-equivalent basis using a 34% rate; the tax-equivalent adjustment to interest income was $499 thousand 
*Computed on a fully tax-equivalent basis using a 21% rate for 2018 and a 34% rate for 2017; the tax-equivalent adjustment to interest income was $201 thousand and $499 thousand for the six months ended June 30, 2018 and 2017, respectively.*Computed on a fully tax-equivalent basis using a 21% rate for 2018 and a 34% rate for 2017; the tax-equivalent adjustment to interest income was $201 thousand and $499 thousand for the six months ended June 30, 2018 and 2017, respectively. 
**Annualized**Annualized                 **Annualized                 

38
Provision for Loan Losses
The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the portfolio. This expense is based on management's estimate of probable credit losses inherent to the loan portfolio. Management's evaluation included credit quality trends, collateral values, discounted cash flow analysis, loan volumes, geographic, borrower and industry concentrations, the findings of internal credit quality assessments and results from external regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions, were used in developing estimated loss factors for determining the loan loss provision. Based on its analysis of the adequacy of the allowance for loan losses, management concluded that the provision was appropriate.

The provision for loan losses was $1.1 million in the first six months of 2018, compared to $1.7 million in the first six months of 2017. For the three months ended June 30, the Company added $575 thousand in 2018 and $1.0 million in 2017.

The decline in the provision for loan losses for the three and six months ended June 30, 2018 versus the same periods in 2017 was largely due to slower net loan growth, exclusive of the loans acquired in the Citizens acquisition. The loans acquired from Citizens were recorded at fair value at the acquisition date without carrying over the associated allowance for loan losses previously established by Citizens.

Net loans charged off as a percent of average loans on an annualized basis were 0.18% for the first six months of 2018, or $1.4 million, compared to $1.40.35%, or $1.2 million, in the first six months of 2016. For2017. In the second quarter, the Company added $1.0 million in 2017 and $1.3 million in 2016.
- 39 -

Approximately $500 thousand of the provision for loan losses in the sixthree months ended June 30, 2018 and 2017, was due to growth in loans, which required the Company to set aside additional funds. The remainder of the increase was primarily due to the deteriorating condition of a long-standing borrowing relationship. Based on changes in the collateral for this relationship, management charged off $787 thousand in the second quarter of 2017.  Because this charge-off was on a loan for which it had already provided a specific reserve, the Company determined the $1.0 million addition to the provision for the second quarter of 2017 was appropriate.

Netnet loans charged off as a percent of total loans on an annualized basis were 0.35% for the first six months of 2017, or $1.2 million, compared to 0.40%0.24% and 0.49%, or $1.2 million, in the first six months of 2016.respectively.

Noninterest Income
Noninterest income was $4.1$3.6 million and $7.3$7.0 million, respectively, in the three and six months ended June 30, 2017, an increase2018, a decrease of $805$444 thousand or 24.50%10.9% from the second quarter of 20162017 and an increase of $303a decrease $252 thousand or 4.36%3.5% from the six months ended June 30, 2016.2017. The changes in comparisonsdeclines between 2016the 2017 and 2017 result2018 periods resulted primarily from (1) the initial implementation in the first quartera nonrecurring gain of 2016 of a new strategy for the investment portfolio, resulting in increased activity within the investment portfolio that was not repeated in 2017, and (2)$550 thousand associated with the acquisition in the second quarter of 2017 of the outstanding interest in Old Point Mortgage, LLC, which is now included in the Company's consolidated financial statements.LLC.

In the fourth quarter of 2016, the Company entered into a marketing agreement that will provide an avenue for employees of the Company to make referrals for insurance products. The Company will also assist with marketing and will receive a commission basedService charges on referrals, while the operational aspects will be handled by the other party to the marketing agreement. Management expects this agreement to increase noninterest income beginning indeposit accounts increased $162 thousand, or 17.7%, when comparing the second halfquarters of 2017.

Year-to-Date Review
Unless otherwise noted, all comparisons in this section are between2018 and 2017 and increased $105 thousand, or 5.7%. when comparing the six months ended June 30, 2018 and 2017. Other service charges, commission, and fees increased $89 thousand, or 8.3%, when comparing the second quarters of 2018 and 2017 and 2016.

increased $140 thousand, or 6.7%, when comparing the first six months of 2018 and 2017, which was partially offset by lower fiduciary and asset management fees. Gains on sales of available-for-sale securities decreased $428 thousand.  While management continued to monitor the investment portfoliowere $40 thousand and make changes congruent with the strategy$120 thousand, respectively, for the investment portfolio, purchasesthree and sales in the first halfsix months ended June 30, 2018, representing a decrease of 2017 were fewer than in the first quarter of 2016, with correspondingly smaller gains.

As a result of the purchase of the outstanding ownership interest in OPM in the second quarter of 2017, the Bank became the sole member of OPM. In accordance with GAAP, the Company recorded income of $550 thousand related to the fair value of its previously-held equity interest in OPM, reflected as gain on acquisition of Old Point Mortgage in the Consolidated Statements of Income.

Income from mortgage banking activities increased $201 thousand. The Company's consolidated financial statements now include OPM, with its income reported in noninterest income as income from mortgage banking activities. In 2016, the Bank owned only 49% of OPM and accounted for its investment under the equity method. Under this method, the Bank recorded its proportionate share of OPM's net income (all income net of all expenses, including income tax). With the completion of the full acquisition of OPM, the Bank now receives 100% of OPM's income. The Bank's investment in OPM is also now accounted for on a consolidated basis, and as a result, OPM's gross revenues are reported in noninterest income and its expenses are reported in individual categories of noninterest expense, rather than as a net figure in noninterest income. The increase from a 49% to 100% ownership interest and the conversion from equity to consolidation accounting led to the significant increase in this category.

Other significant changes in noninterest income were in income from fiduciary activities (increased $139 thousand or 7.82%) and service charges on deposit accounts (decreased $153 thousand or 7.67%). Income from fiduciary activities is heavily impacted by the market value of assets under management, and improvements in the stock market during the fourth quarter of 2016 and first quarter of 2017 increased income in this category. Service charges on deposit accounts decreased primarily due to lower overdraft fee income and lower service charges on both personal and business accounts. Increased regulation of overdraft fee income has reduced the Company's income in this category in prior years, a decline that continued in the first half of 2017.
Second Quarter Review
Unless otherwise noted, all comparisons in this section are between the second quarter of 2017 and the second quarter of 2016.

Income from mortgage banking activities increased $204$47 thousand and the Company recorded incomean increase of $550$33 thousand, relatedrespectively, compared to its previously-held equity interestcomparable periods in OPM due to the purchase of OPM and subsequent conversion to consolidation accounting discussed above. Income from fiduciary activities increased $74 thousand or 8.44%, while service charges on deposit accounts decreased $105 thousand or 10.28%. Both changes were for the reasons discussed in the "Year-to-Date Review" section above.2017.
- 40 -


Noninterest Expense
Noninterest expense increased $785 thousand$2.1 million or 9.25%,11.6% when comparing the six months ended June 30, 20172018 to the same period in 20162017 and increased $400 thousand$1.2 million or 2.28%12.6% when comparing the second quarters of 20172018 and 2016.2017. Both the linked quarter and year ago quarter increases were mostly due to higher salaries and employee benefits associated with normal market driven adjustments, but also included the addition of salaries and related severance payments associated with the acquisitions of Citizens and OPM, non-recurring merger expenses, and losses on OREO.

Year-to-Date ReviewMerger costs totaled $391 thousand for the second quarter of 2018 and $596 thousand for the first six months of 2018. There were no merger expenses in the first half of 2017. Additionally, as mentioned above, included in salaries and benefits expense for the second quarter of 2018 were $111 thousand in nonrecurring severance payments associated with the Citizens acquisition.
Unless otherwise noted, all comparisons
Total salaries and benefits costs increased $486 thousand, or 8.9%, when comparing the second quarters of 2018 and 2017 and increased $866 thousand, or 8.2%, when comparing the first six months of 2018 and 2017. Data processing expenses increased $155 thousand, or 35.1%, in this section are betweenthe second quarter of 2018 relative to the second quarter of 2017 and increased $257 thousand, or 30.1%, in the six months ended June 30, 20172018 compared to the same period in 2017. Several factors lead to these increases including the Citizens acquisition and 2016.

Noninterestincreased processing expenses for debit cards and electronic banking services. FDIC insurance expense was also significantly elevated for the three and six months ended June 30, 2018, increasing $88 thousand, or 89.8%, and $183 thousand, or 94.3%, respectively. Trailing twelve month earnings are a significant factor in 2016 was impactedthe insurance premium calculation, so the substantial net loss recorded by the Company's early payoff of an FHLB advanceCompany in the firstfourth quarter of that year, which required2017 resulting from the Company to pay a feetermination of $391 thousand. The lack of such a fee in 2017, along with decreases in certain categories of noninterest expense, reduces the impact of increases in other categories of noninterest expense, as discussed below.
Salaries and employee benefits (increased $502 thousand or 5.00%): In the second quarter of 2017, the Company accrued for the compensation package provided to its retiring Chief Financial Officer. In addition to this accrual, the consolidation of OPM increased salary and commission expenses, as did the hiring of additional lending staff to support the Company's strategic plan.
Occupancy and equipment (increased $155 thousand or 5.64%): The Company continues to improve its disaster recovery plan, building on the more sophisticated disaster recovery plan initially begun in the third quarter of 2015. New service contracts and purchases of depreciable equipment both contributed to the increase in occupancy and equipment.
FDIC insurance (decreased $127 thousand or 39.56%): Beginning in the third quarter of 2016, the FDIC made changes to the way that insurance premiums are calculated. Management expects the lower levels of expense to continue into the foreseeable future.
Legal and audit expenses (decreased $109 thousand or 21.93%): The Company's 2016 proxy statement included numerous proposals, including changes to the Company's articles of incorporation, the addition of an employee stock purchase plan, and the addition of a new stock incentive plan, all of which required extensive review by outside legal counsel. The implementation of stockholder-approved proposals following the 2016 Annual Meeting of Stockholders also increased legal and audit expense during 2016, while there were no equivalent expenses in 2017.
Other outside service fees (increased $144 thousand or 39.89%): Due to the large increase in the Bank's auto dealer loan portfolio, costs to process and service these loans also increased.
Employee professional development (increased $128 thousand or 39.14%): Prior to the retirement of the Company's CFO in the second quarter of 2017, the Company retained a recruitment firm specializing in executive searches. Expenses for this firm are included in this category of noninterest expense.
ATM and other losses (increased $162 thousand or 95.29%): Branch robberies and fraud losses increased this expense in the first half of 2017. The Company has implemented improvements to its fraud detection process and continues to monitor new frauds to determine if additional changes are necessary.
Loss (gain) on other real estate owned (decreased $126 thousand or 116.67%): 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 loss in the first half of 2016.
pension plan and the deferred tax asset write-down precipitated by the Tax Cuts and Jobs Act increased the premium considerably.

The Company's income tax expense for the second quarter and first six months of 2018 increased $149$17 thousand and $19 thousand, respectively, when compared to the same periods in 2017. The increases were due to both highernon-deductible merger expenses and lower income before taxes andfrom tax-exempt sources outweighing the benefit of a higher effectivelower statutory federal income tax rate. The Company's effective tax rate remains low due to its investments in tax-exempt securities and bank-owned life insurance and its receipt of federal income tax credits for its investment in certain housing projects. AsThe effective federal income tax rates for the Company's income was higher in 2017 than in 2016 whilethree and six months ended June 30, 2018 were 6.15% and 3.44%, respectively; the amount of credits received in each year is similar, the Company's effective tax rate increased from a net tax benefit to an effective tax rate ofrates for the three and six months ended June 30, 2017 were 3.97% and 2.32%., respectively.

Second Quarter Review
Unless otherwise noted, all comparisons in this section are between the second quarter of 2017 and the second quarter of 2016.

The most significant changes in quarterly noninterest expense were in four line items: salaries and employee benefits (increased $559 thousand or 11.43%); FDIC insurance (decreased $58 thousand or 37.18%); legal and audit expenses (decreased $81 thousand or 27.46%); other outside service fees (increased $128 thousand or 71.91%); and ATM and other losses (increased $72 thousand or 86.75%). All of these categories were affected by the same factors as discussed above for the year-to-date periods.

Income tax expense for the quarter was up from the comparable period last year, due to higher net income before taxes and a higher effective tax rate. The Company's effective tax rate was higher as taxable income increased more than both tax-exempt income and the Company's tax credits. As in the year-to-date periods discussed above, the Company's investments in tax-exempt securities and low-income housing projects have generally helped to keep its effective tax rate low, which management expects will continue.
- 41 -39

Balance Sheet Review
Unless otherwise noted, all comparisons in this section are between balances at December 31, 20162017 and June 30, 2017.2018.

AssetsTotal assets as of June 30, 20172018 were $952.5 million,$1.0 billion, an increase of $49.6$50.3 million or 5.49%, with net5.1%. The acquisition of Citizens is responsible for substantially all of the year-to-date growth. The fair value of assets acquired was $50.4 million as of the date of acquisition. Net loans growing $76.9 million. Duringheld for investment increased $37.3 million, or 5.1%. Excluding the $42.8 million fair value of acquired loans at the date of acquisition loans held for investment declined modestly. The Company sold an $8.8 million pool of consumer automobile loans during the first half of 2017, loan growth was primarily funded by increasesquarter and has experienced accelerated payoffs in low-cost deposits. However, deposit balancesrecent months. Cash and cash equivalents increased $22.9 million, or 158.7%, and securities available-for-sale declined during June, with the Company relying on net cash flows from the securities portfolio ($30.8 million) and additional FHLB advances ($50.0 million) to fund the shortfall. $14.1 million, or 9.0%.

Total deposits declined $7.3increased $56.7 million, or 0.93%7.2%, from $784.5 million at December 31, 2016 to $777.2$840.3 million at June 30, 2017. Despite2018. This includes the overall decline inaddition of deposits low-costfrom the acquisition of Citizens, the fair value of which was $44.0 million at the date of acquisition. Noninterest-bearing deposits were essentially flat, with almost all of the decrease in higher-costincreased $19.4 million, or 8.6%, savings deposits increased $15.4 million, or 4.5%, and time deposits. Management monitors available liquidity closely and adjusts deposit rates according to the Company's needs. The declines in deposits were offset by increases in overnight repurchase agreements and the portion of FHLB advances not used to fund loan growth.

The majority of the Company's loan growth was in the consumer loans category and was driven by indirect dealer lending. In September 2016, the Company re-opened its dealer lending department. The consumer auto loan portfolio grew $58.8increased $22.0 million, in the first half of 2017, which management expects will contribute positively to interest income in the future. 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.

Consumer loans were also increased by the purchase of $7.6or 10.3%. Total borrowings decreased $9.3 million, in consumer installment loans. The Company maintains a dedicated reserve account funded by the seller of the consumer installment loans. The balance in the reserve account averages 10 - 12% of the outstanding principal balance of these purchased consumer loans. Any loan losses in this portfolio are covered first by the reserve account; loans are charged against the allowance for loan losses only if the funds available in the reserve account are not sufficient.or 9.5%.

Average assets for the first six months of 20172018 were $916.6 million$1.0 billion compared to $861.2$916.6 million for the first six months of 2016,2017, an increase of 6.42%9.8%. Comparing the first six months of 20172018 to the first six months of 2016,2017, average loan growth of $62.5 million was funded by average deposit growth of $51.9loans grew $123.5 million, and a $6.1average investment securities declined $28.0 million. Total average deposits increased $25.3 million, increase inand average FHLB advances.borrowings increased $64.9 million.

The Company's holdings of "Alt-A" type mortgage loans such as adjustable rate and nontraditional type loans were inconsequential, amounting to less than 1.00%1.0% of the Company's loan portfolio as of June 30, 2017.2018.

The Company does not have a formal program for subprime lending. The Company is required by law to comply with the requirements of the Community Reinvestment Act (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 local market area. The following table details the Company's loans with subprime characteristics that were secured by 1-4 family first mortgages, 1-4 family open-end loans (i.e., equity lines of credit) and 1-4 family junior lien loans (e.g., 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 June 30, 2017 
(dollars in thousands) 
       
  
Amount
  
Percent
 
Subprime $22,097   13.41%
Non-subprime  142,628   86.59%
  $164,725   100.00%
         
Total loans $679,789     
         
Percentage of Real Estate-Secured Subprime Loans to Total Loans   3.25%
- 42 -

In addition to the subprime loans secured by real estate discussed above, as of June 30, 2017, the Company had an additional $10.4 million in subprime consumer loans that were not government guaranteed, were unsecured, or were secured by collateral other than real estate. Together with the subprime loans secured by real estate, the Company's total subprime loans as of June 30, 2017 were $32.5 million, amounting to 4.78% of the Company's total loans at June 30, 2017.

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

Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. The Company's internal sources of such liquidity are deposits, loan and investment repayments and securities available-for-sale. As of June 30, 2017,2018, the Bank's unpledged, available-for-sale securities totaled $91.9$70.2 million. The Company's primary external source of liquidity is advances from the FHLB.

A major source of the Company's liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB. As of the end of the second quarter of 2017,2018, the Company had $130.9$87.0 million in additional FHLB borrowing availability based on loans and securities currently available for pledging, less advances currently outstanding. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks. As of the end of the second quarter of 2017,2018, the Company had $55.0 million available in federal funds lines to address any short-term borrowing needs.

As disclosed in the Company's consolidated statements of cash flows, net cash provided by operating activities was $3.7$4.3 million, net cash used inprovided by investing activities was $45.7$16.2 million and net cash provided by financing activities was $46.5$2.4 million for the six months ended June 30, 2017.2018. Combined, this contributed to a $4.5$22.9 million increase in cash and cash equivalents for the six months ended June 30, 2017.2018.

Management is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on the liquidity, capital resources or operations of the Company. Nor is management aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations.

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

Notwithstanding the foregoing, the Company's ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company's markets. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company's operations.

40
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans that are accruing interest and not performing according to their modified terms, and OREO. See Note 34 of the Notes to the Consolidated Financial Statements included in this quarterly report on Form 10-Q for an explanation of the loan categories. OREO consists of real estate from foreclosuresa foreclosure on loan collateral and one former Bank building.collateral.

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

In the case of TDRs, the restructuring may be to modify to an unsecured loan (e.g., a short sale) that the borrower can afford to repay. In these circumstances, the entire balance of the loan would be specifically allocated for, unless the present value of expected future cash flows was more than the current balance on the loan. It would not be charged off if the loan documentation supports the borrower's ability to repay the modified loan.
- 43 -
The following table presents information on nonperforming assets, as of the dates indicated:

NONPERFORMING ASSETSNONPERFORMING ASSETS NONPERFORMING ASSETS 
 June 30,  December 31,  Increase  June 30,  December 31,  Increase 
 2017  2016  (Decrease)  2018  2017  (Decrease) 
 (in thousands)  (in thousands) 
Nonaccrual loans                  
Commercial $1,610  $231  $1,379  $319  $836  
$ 
(517)
Consumer loans  81   81   0 
Real estate-construction  722   722   - 
Real estate-mortgage (1)  9,865   6,847   3,018   12,850   11,324   1,526 
Total nonaccrual loans $11,556  $7,159  $4,397  $13,891  $12,882  $1,009 
                        
Loans past due 90 days or more and accruing interest                         
Commercial $-  $471  $(471)
Real estate-mortgage (1) $544  $276  $268   314   306   8 
Consumer loans (2)  2,823   2,603   220   1,975   2,401   (426)
Other  3   5   (2)  6   4   2 
Total loans past due 90 days or more and accruing interest $3,370  $2,884  $486  $2,295  $3,182  
$ 
(887)
                        
Restructured loans                         
Commercial $103  $144  $ (41) $83  $98  
$ 
(15)
Real estate-construction  93   96   (3)  94   92   2 
Real estate-mortgage (1)  13,996   11,616   2,380   12,423   14,781   (2,358)
Total restructured loans  $14,192  $11,856  $2,336  $12,600  $14,971  
$ 
(2,371)
Less nonaccrual restructured loans (included above)  8,553   2,838   5,715   8,349   8,561   (212)
Less restructured loans currently in compliance (3)  5,639   9,018   (3,379)  4,251   6,410   (2,159)
Net nonperforming, accruing restructured loans $0  $0  $0  $-  $-  $- 
                        
Nonperforming loans $14,926  $10,043  $4,883  $16,186  $16,064  $122 
                        
Other real estate owned                        
Construction, land development, and other land $0  $940  $ (940)
Former bank building  0   127   (127)
Real estate-construction $133  $-  $133 
Nonfarm nonresidential properties  118   -   118 
Total other real estate owned $0  $1,067  $ (1,067) $251  $-  $251 
                        
Total nonperforming assets $14,926  $11,110  $3,816  $16,437  $16,064  $373 
            
(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit.(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit. 
(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $1.9 million at June 30, 2018 and $2.3 million at December 31, 2017.(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government. The portion of these guaranteed loans that is past due 90 days or more totaled $1.9 million at June 30, 2018 and $2.3 million at December 31, 2017. 
(3) As of June 30, 2018 and December 31, 2017, all of the Company's restructured accruing loans were performing in compliance with their modified terms.(3) As of June 30, 2018 and December 31, 2017, all of the Company's restructured accruing loans were performing in compliance with their modified terms. 

(1) The real estate-mortgage segment includes residential 1 – 4 family, commercial real estate, second mortgages and equity lines of credit. 
(2) Amounts listed include student loans with principal and interest amounts that are 97 - 98% guaranteed by the federal government.  The portion of these guaranteed loans that is past due 90 days or more totaled $2.8 million at June 30, 2017 and $2.6 million at December 31, 2016.
(3) As of June 30, 2017 and December 31, 2016, all of the Company's restructured accruing loans were performing in compliance with their modified terms.

41
Nonperforming assets as of June 30, 20172018 were $14.9$16.4 million, $3.8 million$373 thousand higher than nonperforming assets as of December 31, 2016.2017. Nonaccrual loans increased $4.4$1.0 million when comparing the balances as of June 30, 20172018 to December 31, 2016. Two long-standing loan relationships were placed on nonaccrual status in the first quarter of 2017, based on declines in the borrowers' performance and changes in the status2017. See Note 4 of the loans' collateral;Notes to the outstanding balancesConsolidated Financial Statements included in this quarterly report on these relationships totaled $2.9 million as of June 30, 2017. TwoForm 10-Q for additional relationships were placed on nonaccrual duringinformation about the second quarter of 2017, with balances of $1.5 million as of June 30, 2017. Together, these four relationships make up the majority of the increasechange in nonaccrual loans between December 31, 2016 and June 30, 2017, with increases partially offset by the payoff and/or charge-off of other loans that were on nonaccrual status at December 31, 2016.loans. Management has set aside specific allocations on those loans where it is deemed appropriate based on the information available to management at this time regarding the cash flow, anticipated financial performance, and collateral securing these loans. Management believes that the collateral and/or discounted cash flow on these loans will be sufficient to cover balances for which it has no specific allocation.
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The majority of the balance of nonaccrual loans at June 30, 20172018 was related to a few large credit relationships. Of the $11.6$13.9 million of nonaccrual loans at June 30, 2017, $8.02018, $9.3 million, or approximately 69.23%66.7%, was comprised of threefour credit relationships of $3.7 million, $2.17 million, and $2.16 million.. 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.collateral and charged off any balance that management does not expect to collect.

Loans past due 90 days or more and accruing interest increased $486decreased $887 thousand. As of June 30, 2017, $2.82018, $1.9 million of the $3.4$2.3 million of loans past due 90 days or more and accruing interest were student loans on which the Company expects to experience minimal losses. Because the federal government has provided guarantees of repayment of these student loans in an amount ranging from 97% to 98% of the total principal and interest of the loans, management does not expect even significant increases in past due student loans to have a material effect on the Company. Net of past due government-guaranteed student loans, loans past due 90 days or more and accruing interest increased $251 thousand due to the maturity of a single real estate mortgage loan; management expects the renewal of this loan to be completed in the third quarter of 2017.

Total restructured loans increaseddecreased by $2.3$2.4 million from December 31, 20162017 to June 30, 20172018 primarily due to paydowns and charge-offs on restructured loans, partially offset by the restructuring of one additional loan.charge-offs. All accruing TDRs are performing in accordance with their modified terms.terms and have been evaluated for impairment, with any necessary reserves recorded as needed.

The Company'sCompany acquired one OREO property in the first quarter of 2018 through a real estate foreclosure and two remaining OREO properties were sold in the second quarter of 2017, and no additional properties were added.

The majority of2018 through the loans that make up the nonaccrual balance have been written down to their net realizable value. 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. As shown in the table above, the majority of nonaccrual loans at June 30, 2017 and December 31, 2016 were collateralized by real estate.Citizens acquisition.

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

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

The majority of the Company's TDRs and nonperforming loans are collateralized by real estate. When reviewing loans for impairment, the Company obtains current appraisals when applicable. If the Company is waiting on an appraisal to determine the collateral's value or is in negotiations with the borrower or other parties that may affect the value of the collateral, any loan balance that is in excess of the estimated appraised value is allocated in the allowance. As of June 30, 20172018 and December 31, 2016,2017, the impaired loan component of the allowance for loan losses was essentially unchanged, amounting to $660$320 thousand and $800$95 thousand, respectively.

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 June 30, 20172018 calculation, the qualitative factors whichfactor that had the most significant impact on the allowance were those affectedwas the one impacted by changes in past due loans and changes in collateral-dependent loans, with increases applied todelinquency or nonaccrual status, which decreased the allowance in both cases.allowance.

Historical loss is the final component of the allowance for loan losses and is calculated based on the migration of loans from performing to charge-off over a period of time that management deems appropriate to provide a reasonable estimate of losses inherent in the loan portfolio. WithFor the December 31, 2016 andlast four quarterly calculations including the June 30, 20172018 calculation, the historical loss was based on foureight migration periods of twelve quarters each.
- 45 -42

Both the historical loss and qualitative factor components of the allowance are applied to loans evaluated collectively for impairment. The portfolio is segmented based on the loan classifications set by the Federal Financial Institutions Examination Council in the instructions for the call report applicable to the Bank. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on whether the loan's payments are current (including loans 1 – 29 days past due), or are 30 – 59 days past due, 60 – 89 days past due, or 90 days or more past due. All other loans, including loans to consumers that are secured by real estate, are segmented by the Company's internally assigned risk grades: substandard, other assets especially mentioned (rated(OAEM, rated just above substandard), and pass (all other loans).

During the first half of 2017, the Company saw a decrease of $3.4 million in loans rated as other assets especially mentioned (OAEM) and a decrease of $417 thousand in loans rated substandard when comparing December 31, 2016 to June 30, 2017, based on internally assigned risk grades. The Company may also assign loans to the risk grades of doubtful or loss, but as of June 30, 2017 and December 31, 2016, the Company had no loans in these categories.

On a combined basis, the historical loss and qualitative factor components amounted to $8.1 million and $7.4$9.6 million as of June 30, 20172018 and $9.4 million at December 31, 2016, respectively, with the increase primarily attributable to growth in the loan portfolio.2017.

The allowance for loan losses was 1.28%1.27% of total loans on June 30, 20172018 and 1.37% of total loans1.28% on December 31, 2016.2017. As of June 30, 2017,2018, the allowance for loan losses was 58.35%61.00% of nonperforming loans and 60.07% of nonperforming assets; this compares to 58.81% of both nonperforming assetsloans and nonperforming loans, compared to 74.21% and 82.10%, respectively,assets as of December 31, 2016. The decrease2017. Management believes it has provided an adequate reserve for nonperforming loans at June 30, 2018.

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

Acquired impaired loans reflect credit quality deterioration since origination, as it is probable at acquisition that the Company will not be able to collect all contractually required payments. These acquired impaired loans are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. The acquired impaired loans are segregated into pools based on loan type and credit risk. Loan type is determined based on collateral type, purpose, and lien position. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure. Acquired impaired loans are written down at acquisition to fair value using an estimate of cash flows deemed to be collectible.

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

Quarterly, management will evaluate acquired impaired loans based on updated future expected cash flows. The excess of the cash flows expected to be collected over a pool's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to declines in loans rated OAEM and substandard, as well as improvementschanges in the financial conditiontiming and amounts of certainexpected cash flows; these changes are disclosed in Note 4 "Loans and Allowance for Loan Losses."
The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference, which represents the estimate of credit losses expected to occur and was considered in determining the fair value of loan at the acquisition date. Any subsequent increases in expected cash flows over those expected at the acquisition date in excess of fair value are adjusted through an increase in the accretable yield on a prospective basis; any decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses.
The Company's policy is to remove an individual loan from a pool based on comparing the amount received from its resolution with its contractual amount. Any difference between these amounts is absorbed by the nonaccretable difference for the entire pool. This removal method assumes that the amount received from resolution approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by the quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full, there is no release of the nonaccretable difference for which the Companypool because there is no difference between the amount received at resolution and the contractual amount of the loan.
The acquired impaired loans are and will continue to be subject to the Company's internal and external credit review and monitoring. If further credit deterioration is experienced, such deterioration will be measured and the provision for loan losses will be increased.
Acquired performing loans are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the acquired performing loan has a specific allocation.revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used.

43
Capital Resources
Total stockholders' equity as of June 30, 20172018 was $96.9$99.3 million, an increase of $2.9 million or 3.10%3.0% from $94.0$96.4 million at December 31, 2016.2017. The increase was the result of the issuance of common stock related to the Citizens acquisition and increased retained earnings offsetting an increase in the net unrealized loss on available-for-sale securities, a component of accumulated other comprehensive loss on the consolidated balance sheets. The increase in the unrealized loss position was driven by increases in market rates during the quarter.

For purposes
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis.  The Company's principal goals related to the Basel III Final Rules (i) common equitymaintenance of capital are to provide adequate capital to support the Company's risk profile consistent with the board approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders.  Risk-based capital ratios, which include CET1 capital, Tier 1 capital (CET1) consists principallyand Total capital are calculated based on regulatory guidance related to the measurement of common stock (including surplus)capital 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 qualifying subordinated debt and preferred stock, and limited amounts of the allowance for loan losses. Total Capital is Tier 1 plus Tier 2 capital. 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 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. The Basel III Final Rules are discussed in detail in the Company's 2016 annual report on Form 10-K.risk-weighted assets.

The following is a summary of the Company's capital ratios at June 30, 2018 and December 31, 2017. As shown below, these ratios were all well above the regulatory minimum levels and demonstrate that the Company's capital position remains strong.levels.

  
2017
Regulatory
Minimums
  June 30, 2017 
Common Equity Tier 1 Capital  4.500%  12.25%
Tier 1 Capital  6.000%  12.25%
Tier 1 Leverage  4.000%  10.63%
Total Capital  8.000%  13.33%
Capital Conservation Buffer  1.250%  5.33%
  
2018
Regulatory
Minimums
  June 30, 2018  
2017
Regulatory Minimums
  December 31, 2017 
Common Equity Tier 1 Capital to Risk-Weighted Assets  4.50%  11.08%  4.50%  11.18%
Tier 1 Capital to Risk-Weighted Assets  6.00%  11.08%  6.00%  11.18%
Tier 1 Leverage to Average Assets  4.00%  9.78%  4.00%  9.98%
Total Capital to Risk-Weighted Assets  8.00%  12.18%  8.00%  12.28%
Capital Conservation Buffer  1.88%  4.18%  1.25%  4.28%
Risk-Weighted Assets (in thousands)     $904,055      $863,187 

Book value per share was $19.21 at June 30, 2018 as compared to $19.44 at June 30, 2017 as compared to $19.35 at June 30, 2016.2017. Cash dividends were $1.1 million or $0.22 per share in the first six months of 20172018 and $992 thousand$1.1 million or $0.20$0.22 per share in the first six months of 2016.2017.

Contractual Obligations
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require cash outflows.

AsThe Company obtained a loan maturing on April 1, 2023 from a correspondent bank during the second quarter of 2018 to provide partial funding for the Citizens acquisition. The terms of the loan include a LIBOR based interest rate that adjusts monthly and quarterly principal curtailments. At June 30, 2018 the outstanding balance was $2.9 million, and the then-current interest rate was 4.48%.

The loan agreement with the lender contains financial covenants including minimum return on average asset ratio and Bank capital leverage ratio, maintenance of a well-capitalized position as defined by regulatory guidance and a maximum level of non-performing assets as a percentage of capital plus the allowance for loan losses. The Company was in compliance with each covenant at June 30, 2018.

Other than the loan discussed immediately above, as of June 30, 2017,2018, there have been no material changes outside the ordinary course of business in the Company's contractual obligations disclosed in the Company's 2016 annual report2017 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements
As of June 30, 2017,2018, there were no material changes in the Company's off-balance sheet arrangements disclosed in the Company's 2016 annual report2017 Annual Report on Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About 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 limitationlimited 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.

Under the rate shock simulation utilized by management, rate changes in 50 to 100 basis point increments are applied to assess the impact on the Company's earnings at June 30, 2017. The rate change model assumes that these changes will occur gradually over the course of a year. The model reveals thatearnings simulation results for the June 30, 2018 calculation indicate a 50 basis point ramped decrease in rates would cause an approximate annual decrease of 0.35% in net interest income.moderately asset-sensitive position. The model reveals that a 50 basis point ramped rise in rates would cause an approximate annual decrease of 0.27% inresults for the June 30, 2017 calculation are seemingly incongruous, as net interest income was projected to decrease with both rising and thatfalling rates. This was a 100 basis point ramped rise in rates would cause an approximate annual decreaseresult of 0.55% in net interest income. This seemingly incongruous result is due to the persistent low-rate environment. CertainRates on certain deposits and other funding liabilities cannotcould not realistically re-price lower,decrease materially, so they arewere more sensitive to rising rates than falling rates.

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

  Change In Net Interest Income 
  As of June 30, 
  2018  2017 
Change in interest Rates %     $%  $  
+300 basis points  1.28%  455   (1.82)%  (564)
+200 basis points  0.70%  248   (1.19)%  (370)
+100 basis points  0.42%  150   (0.55)%  (171)
Unchanged  0.00%  -   0.00%  - 
-50 basis points  (0.19)%  (68)  (0.35)%  (109)
-100 basis points  (0.83)%  (295)  (0.91)%  (282)

45
Item 4. Controls and Procedures.

Disclosure Controls and Procedures. Management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the Company's internal control over financial reporting occurred during the fiscal quarter ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes in the risk factors faced by the Company from those disclosed in the Company's 2016 annual2017 Annual Report on Form 10-K and quarterly report on Form 10-K.From 10-Q for the period ended March 31, 2018.

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

Pursuant to the Company's equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company's common stock that the participants already own. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the three months ended June 30, 2017,2018, the Company repurchased 830did not repurchase any shares related to the exercise of awards.

During the three months ended June 30, 2017,2018, the Company did not repurchase any shares pursuant to the Company's stock repurchase program.

The following table summarizes repurchases of the Company's common stock that occurred during the three months ended June 30, 2017 in connection with the exercise of stock options. 

Period 
Total Number of Shares Purchased (1)
  Average Price Paid Per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 
April 1, 2017-April 30, 2017  830   $30.17   n/a   n/a 
May 1, 2017-May 31, 2017  0   0.00   n/a   n/a 
June 1, 2017-June 30, 2017  0   0.00   n/a   n/a 
                 
Total  830  $30.17         

(1) These shares were repurchased in connection with payment of the exercise price upon the exercise of stock options. Accordingly, these shares are not included in the calculation of the 248,063 shares that may yet be purchased under the Company's stock repurchase program. The Company is authorized to repurchase, during any given calendar year, up to an aggregate of 5 percent of the shares of the Company's common stock outstanding as of January 1 of that calendar year.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.
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Item 5. Other Information.

The Company has made no changes to the process by which security holders may recommend nominees to its board of directors, which is discussed in the Company's Proxy Statement for the Company's 20172018 Annual Meeting of Stockholders.
46

Item 6. Exhibits.

Exhibit No. Description
2.1
Agreement and Plan of Reorganization, dated as of October 27, 2017, by and among Old Point Financial Corporation, The Old Point National Bank of Phoebus, and Citizens National Bank (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 2, 2017)
3.1 
Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009)
   
3.1.1 
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016)
   
3.2 
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016)
10.6Base Salaries of Executive Officers of the Registrant (incorporated by reference to Exhibit 10.6 to Form 10-K filed March 15, 2017)
10.18Additional 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)
10.19Time-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)
   
31.1 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101 The following materials from Old Point Financial Corporation's quarterly report on Form 10-Q for the quarter ended June 30, 2017,2018, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited for June 30, 2017)2018), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Changes in Stockholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  OLD POINT FINANCIAL CORPORATION
    
August 8, 20179, 2018 /s/Robert F. Shuford, Sr. 
  Robert F. Shuford, Sr. 
  Chairman, President & Chief Executive Officer 
  (Principal Executive Officer) 
    
August 8, 20179, 2018 /s/Jeffrey W. Farrar 
  Jeffrey W. Farrar 
  Chief Financial Officer & Senior Vice President/Finance 
  (Principal Financial & Accounting Officer) 

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