Executive Summary / Key Takeaways

• Old Point Financial (NASDAQ:OPOF) delivered a strong first quarter in 2025, marked by significant year-over-year growth in net income and an expansion in net interest margin, signaling operational improvements.
• Strategic expense reduction initiatives undertaken in 2024 contributed to improved efficiency, as evidenced by a lower adjusted efficiency ratio.
• The proposed merger with TowneBank (TOWN), unanimously approved by both boards, represents a major catalyst aimed at enhancing scale, operational efficiencies, and shareholder value, though it carries inherent risks related to completion and integration.
• While asset quality metrics showed some deterioration in Q1 2025, particularly in commercial real estate, management has implemented enhanced credit administration and believes collateral values are adequate for identified problem loans.
• The company maintains robust liquidity and capital levels, well exceeding regulatory minimums, providing a solid foundation despite potential market uncertainties and the pending merger.

Setting the Scene: A Community Bank's Evolution Amidst Industry Shifts

Founded in 1922, Old Point Financial Corporation has established itself as a community-focused financial institution primarily serving the Hampton Roads and Richmond regions of Virginia. Operating through its core banking subsidiary, The Old Point National Bank of Phoebus, and its wealth management arm, Old Point Trust Financial Services, the company offers a comprehensive suite of financial products and services to individuals and businesses. This dual-pronged approach, combining traditional banking with wealth management expertise, forms the bedrock of its business model.

Old Point's strategic focus centers on maximizing earnings through strong asset quality and profitable growth initiatives designed to enhance long-term stockholder value. The company's history reflects a commitment to its local markets, building relationships and tailoring services to community needs. This localized approach is a key differentiator in a competitive landscape dominated by larger regional and national players.

The banking industry landscape in Virginia and the southeastern U.S. is characterized by intense competition from a mix of large national banks, super-regional institutions, smaller community banks, and increasingly, non-bank financial technology (fintech) firms. Larger competitors like Truist Financial (TFC) and TowneBank benefit from greater scale, broader geographic reach, and often more advanced technological infrastructure. Regional players like Atlantic Union Bankshares (AUB) compete directly in overlapping markets, vying for similar customer segments.

While specific proprietary technology developed by Old Point is not detailed, its operational capabilities are supported by standard banking technologies for processing transactions, managing loans, and delivering digital services. The competitive analysis indicates that larger peers like Truist and TowneBank have invested more heavily in digital transformation, leading to faster processing speeds and potentially lower operating costs per unit. Old Point's strength lies more in the human element of community banking and localized service delivery, which fosters customer loyalty, rather than a distinct technological moat. However, the company does utilize standard industry systems for its banking and wealth management operations, including participation in the IntraFi Cash Sweep product to enhance deposit insurance offerings for customers.

Broad industry trends, such as rising interest rates, inflationary pressures, and evolving economic conditions, significantly impact the banking sector. These trends influence loan demand, deposit costs, asset quality, and the fair value of investment portfolios. The recent volatility in the financial services industry, including bank failures, has also heightened scrutiny on liquidity and capital adequacy across the sector. Old Point, like its peers, must navigate these macroeconomic and industry-specific dynamics to maintain performance and stability.

Financial Performance: Operational Strength and Strategic Gains

Old Point Financial demonstrated notable financial improvement in the first quarter of 2025 compared to the same period in the prior year. Net income rose by 25.7% to $2.2 million, resulting in diluted earnings per common share of $0.42, up from $0.34 in Q1 2024. Adjusted operating earnings, which exclude nonrecurring items like merger-related costs and a gain on debt extinguishment, also saw a healthy increase, climbing to $0.39 per share from $0.34.

A key driver of this performance was the expansion in net interest income, which grew by 4.1% year-over-year to $12.0 million. This increase was primarily attributable to higher average balances of interest-bearing liabilities and a decrease in their average cost, which dropped by 15 basis points. The net interest margin (NIM) consequently improved to 3.63% in Q1 2025 from 3.45% in Q1 2024, reflecting the company's ability to manage funding costs effectively in the prevailing interest rate environment.

Noninterest income also saw a significant boost, increasing by $625 thousand compared to Q1 2024. This was largely driven by a $656 thousand gain on the repurchase and retirement of subordinated notes and higher fiduciary and asset management fees from the Wealth segment. These gains were partially offset by losses incurred on the sale of available-for-sale securities and repossessed assets.

Operational efficiency improved as noninterest expense decreased by 2.0% year-over-year to $12.4 million. This reduction was primarily a result of lower salaries and employee benefit expenses, stemming from noninterest expense reduction initiatives implemented in 2024 that included approximately a 12% reduction in employee headcount. Despite the inclusion of $261 thousand in merger-related costs in Q1 2025, the adjusted efficiency ratio, a key measure of cost control relative to revenue, improved significantly to 78.3% from 85.8% in Q1 2024.

Profitability metrics reflected these positive trends. Return on average assets (ROA) increased to 0.61% (0.56% adjusted) in Q1 2025, up from 0.48% in the prior year quarter. Similarly, return on average equity (ROE) improved to 7.50% (6.90% adjusted) from 6.44%. These figures indicate enhanced profitability and efficient use of assets and equity compared to the prior year, although they still lag the higher ROE and operating margins typically seen at larger, more efficient peers like TowneBank and Truist.

Balance Sheet Dynamics and Credit Quality Headwinds

As of March 31, 2025, Old Point's total assets stood at $1.5 billion, showing a slight increase of $418 thousand from December 31, 2024. The loan portfolio, net of allowance, increased by $2.3 million, or 0.2%, to $1.00 billion. This modest growth was driven by increases in consumer automobile loans, commercial owner-occupied real estate loans, equity lines of credit, and construction and land development loans, partially offset by decreases in commercial and industrial and commercial non-owner occupied real estate loans. Average loan balances for the first quarter, however, were down 5.9% year-over-year, reflecting a challenging lending environment, although average loan yields increased by 18 basis points to 5.60% due to the higher interest rate environment.

The securities portfolio, primarily held as available-for-sale, increased by $2.8 million to $220.9 million at fair value. The portfolio's strategy is focused on managing interest rate risk and providing liquidity, with adjustments made for pledging requirements and tax exposure. The portfolio held $19.8 million in gross unrealized losses at March 31, 2025, primarily due to increases in market interest rates since acquisition. Management does not expect these unrealized losses to impact earnings or regulatory capital, as the company intends to hold these securities to maturity and is not likely to be required to sell them before recovery.

Total deposits increased by $2.6 million, or 0.2%, to $1.3 billion at March 31, 2025. This increase was primarily fueled by growth in lower-cost noninterest-bearing and savings deposits from large commercial and municipal customers, which rose by $15.7 million and $29.9 million respectively. This growth helped offset a significant decrease of $43.0 million in higher-cost time deposits, aligning with the company's strategy to manage funding costs. The average cost of interest-bearing deposits decreased by 8 basis points year-over-year, contributing to the improved NIM.

While operational and funding metrics showed strength, asset quality presented some headwinds in Q1 2025. Non-performing assets (NPAs) increased sharply to $4.2 million, or 0.29% of total assets, compared to $2.7 million, or 0.19% of total assets, at December 31, 2024. This increase was primarily driven by a $1.2 million real estate construction relationship moving to the category of loans past due 90 days or more and still accruing interest. Repossessed assets also increased, reflecting recovery efforts on previously past due loans.

The Allowance for Credit Losses (ACL) increased to $12.0 million at March 31, 2025, including an Allowance for Credit Losses on Loans (ACLL) of $11.8 million. The provision for credit losses for the quarter was $717 thousand, a significant increase from $80 thousand in Q1 2024. This higher provision was mainly due to an increase in the specific reserve for one commercial real estate relationship, the impact of net charge-offs on historical loss rates, and continued uncertainty in the economic outlook for certain portfolios. Management has initiated enhanced credit administration efforts for two specific office building loans classified as Substandard, noting that court-appointed receiverships are now managing these properties and making debt service payments, and believes the net cash flow from these properties is adequate for repayment.

Liquidity, Capital Strength, and the TowneBank Merger Catalyst

Old Point maintains a robust liquidity position, defined as cash and cash equivalents, unpledged securities, and available secured borrowing capacity. As of March 31, 2025, total liquidity amounted to $456.5 million, representing 31.5% of total assets. The company has significant borrowing capacity available from the Federal Home Loan Bank (FHLB), with $400.5 million remaining availability out of a total of $440.5 million. Additionally, it holds $115.0 million in federal funds lines of credit and $1.2 million available on an unsecured line of credit. Management believes this level of liquidity is sufficient to meet operational requirements and future borrowing needs, while actively monitoring market conditions and potential impacts on liquidity sources.

The company's capital position also remains strong, with the Bank's regulatory capital ratios well above the recommended minimum levels. As of March 31, 2025, the Bank's Common Equity Tier 1 Capital to Risk-Weighted Assets ratio was 13.04%, Tier 1 Capital to Risk-Weighted Assets was 13.04%, Total Capital to Risk-Weighted Assets was 14.08%, and Tier 1 Leverage to Average Assets was 10.45%. These ratios significantly exceed the minimum requirements, including the capital conservation buffer, indicating a solid capital foundation to support anticipated asset growth and absorb potential losses. Total stockholders' equity increased by $3.2 million in Q1 2025, driven by net income and an improvement in the unrealized loss position on available-for-sale securities, net of tax.

A pivotal development shaping Old Point's future is the proposed merger with TowneBank, announced on April 2, 2025. Under the terms of the agreement, Old Point and its banking subsidiary will merge into TowneBank. This transaction, unanimously approved by both boards, is anticipated to create a stronger, more competitive regional bank. Management views the merger as a significant milestone that will enhance growth opportunities and shareholder value by combining the strengths of both institutions.

The merger is subject to customary closing conditions, including approval from Old Point's shareholders and various regulatory bodies, including the FDIC and the Virginia Bureau of Financial Institutions. The transaction structure involves a mix of cash and stock consideration for Old Point shareholders, subject to proration. While the merger holds the promise of increased scale, operational efficiencies, and a broader market presence, it also introduces risks. These include the potential for delays or failure to obtain necessary approvals, challenges in integrating operations and systems, potential loss of key personnel or customers, and the possibility that the anticipated benefits may not be fully realized. The agreement also includes provisions that could discourage alternative acquisition proposals and a potential termination fee payable by Old Point under certain circumstances.

Competitive Landscape and Strategic Positioning

Old Point operates in a competitive banking market where scale and technological capabilities are increasingly important. Compared to larger competitors like Truist and TowneBank, Old Point has a smaller asset base and branch network. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Old Point holds an estimated 1-2% market share in Virginia's regional banking sector. Its growth trajectory has historically lagged the broader market and larger rivals.

Financially, Old Point's profitability metrics, such as ROE (7.50% in Q1 2025) and operating margins, are generally lower than those of more efficient, larger peers like TowneBank (ROE around 8-10%) and Truist (ROE around 9-11%). This difference is partly attributable to scale, which allows larger institutions to spread fixed costs over a larger revenue base, and potentially greater investment in efficiency-enhancing technology. For example, analysis suggests TowneBank benefits from greater efficiency, with operating costs per unit estimated 15-20% lower than Old Point's, partly due to more advanced digital platforms enabling faster processing.

Old Point's competitive advantages lie primarily in its deep-rooted community brand and strong local customer relationships. This focus can translate into higher customer retention and potentially some pricing power in niche local markets, offering a counterpoint to the scale advantages of larger banks. Its established regulatory licenses in Virginia also provide a barrier to entry for new players and enable potentially lower compliance costs compared to national institutions.

However, Old Point faces vulnerabilities due to its limited scale, which results in higher operating costs per unit compared to larger rivals. Furthermore, while the company utilizes standard banking technology, it appears to lag behind competitors like Truist and TowneBank in terms of investment in digital innovation and processing speed. This technological gap could make it more vulnerable to customer attrition as clients increasingly demand seamless digital banking experiences offered by more technologically advanced competitors and fintech firms. The proposed merger with TowneBank is a strategic response to these competitive pressures, aiming to leverage TowneBank's larger scale and resources to enhance competitiveness.

Conclusion

Old Point Financial's first quarter 2025 results demonstrate solid operational execution, marked by improved profitability driven by net interest margin expansion and effective expense control initiatives. The company's focus on managing funding costs and reducing noninterest expenses has yielded tangible benefits, contributing to higher returns on assets and equity compared to the prior year.

While the increase in non-performing assets and the need for higher credit loss provisions highlight ongoing challenges in asset quality, particularly within certain commercial real estate segments, management appears to be proactively addressing these issues through enhanced credit administration. The company's strong liquidity and capital positions provide a stable foundation to navigate potential economic uncertainties and support future activities.

The proposed merger with TowneBank represents a significant strategic pivot, offering the potential for enhanced scale, efficiency, and market reach. This transaction, if completed, could fundamentally alter Old Point's competitive standing and growth trajectory. Investors should weigh the operational improvements and strategic potential of the merger against the inherent risks associated with its completion and the integration process. The company's ability to successfully execute the merger and integrate operations will be critical in determining its long-term value proposition in a competitive regional banking landscape.