The following discussion is intended to assist readers in understanding and evaluating the financial condition, changes in financial condition and the results of operations of the Company, consisting of the parent company and its wholly-owned subsidiaries, the Bank and Trust. This discussion should be read in conjunction with the consolidated financial statements and other financial information contained elsewhere in this report.

Caution About Forward-Looking Statements

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement, that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth 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. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in interest rates, general economic conditions, the quality or composition of the loan or investment portfolios, the level of nonperforming assets and charge-offs, the local real estate market, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, demand for loan products, deposit flows, competition, and accounting principles, policies and guidelines. Monetary and fiscal policies of the U.S. Government could also adversely effect the Company; such policies include the impact of any regulations or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (EESA), the American Recovery and Reinvestment Act of 2009 (ARRA) and other policies of the Office of the Comptroller of the Currency, U.S. Treasury and the Federal Reserve Board.

While the Company has not experienced significant losses during the current economic climate, a continuation of the recent turbulence in significant portions of the global financial markets, particularly if it worsens, could impact the Company's performance, both directly by affecting revenues and the value of the Company's assets and liabilities, and indirectly by affecting the Company's counterparties and the economy generally. Dramatic declines in the housing market in the past year have resulted in significant write-downs of asset values by financial institutions in the United States. Concerns about the stability of the U.S. financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility. It is not clear at this time what impact the EESA, the ARRA or other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been announced or any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to affect the U.S. banking industry and the broader U.S. and global economies, which would have an effect on all financial institutions, including the Company.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made. In addition, past results of operations are not necessarily indicative of future results.

Executive Overview

Description of Operations

Headquartered in Hampton, Virginia, the Company is the parent company of Trust and the Bank. Trust is a wealth management services provider. The Bank offers a complete line of consumer, mortgage and business banking services, including loan, deposit, and cash management services to individual and business customers. The Bank is an independent community bank. In January of 2008, the Bank opened the Hilltop office in Virginia Beach. With this opening, the Bank has 20 branches throughout the Hampton Roads localities of Chesapeake, Hampton, Isle of Wight County, Newport News, Norfolk, Virginia Beach, Williamsburg/James City County and York County.

Primary Financial Data for 2008

The Company earned $6.8 million in 2008, a 14.79% decrease in net income from 2007. Net interest income for 2008 increased by $1.8 million as compared to net interest income for 2007. Due to the economy and trends in nonaccruals and past due loans, the Company increased its provision for loan losses to $2.4 million in 2008 as compared to $1.0 million in 2007. While noninterest income for 2008 rose slightly as compared to noninterest income for 2007, noninterest expense was $2.4 million higher. While the Company has not been immune to the recession, its continued profitability illustrates its long tradition of strength and consistency.

Significant Factors Affecting Earnings in 2008

Major factors in the decrease in 2008 income as compared to 2007 were an increase in the provision for loan losses and a one-time write-off consisting of $165 thousand for an undeveloped branch site as well as the establishment of a $263 thousand valuation reserve for OREO. In addition, the Bank opened a branch office in the Hilltop section of Virginia Beach in January 2008. The opening of the Hilltop branch negatively impacted 2008 earnings due to pre-opening expenses that have not been completely offset by the new branch's earnings. Over the long term, the Hilltop branch is expected to be accretive to earnings.

On September 10, 2007, the Bank entered into a joint venture agreement with Tidewater Mortgage Services, Inc. to provide mortgage origination services. Under the terms of the agreement, the joint venture is called Old Point Mortgage, LLC and is headquartered in Hampton. The Bank owns 49% of Old Point Mortgage, LLC. Tidewater Mortgage Services, Inc. owns 51% of Old Point Mortgage, LLC and is the managing member. Earnings from this joint venture were minimal in 2008 but are expected to increase in 2009 as Old Point Mortgage, LLC has been approved to originate Federal Housing Administration (FHA) loans.

Critical Accounting Estimates

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on three basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies," which requires that losses be accrued when they are probable of occurring and estimable, (ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance and (iii) U.S. Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues," which requires adequate documentation to support the allowance for loan losses estimate.

The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either SFAS No. 5 or SFAS No. 114. Management's estimate of each SFAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

The Company adopted SFAS No. 114, which has been amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as amended, requires that the impairment of loans that have been separately identified for evaluation be measured based on the present value of

expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. SFAS No. 114, as amended, also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans.

Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on management's evaluation and "risk grading" of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using estimated loss factors applied to the total outstanding loan balance of each loan category. Specific reserves are determined on a loan-by-loan basis based on management's evaluation of the Company's exposure for each credit, given the current payment status of the loan and the net market value of any underlying collateral.

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

Income Taxes

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

Earnings Summary

Net income was $6.8 million, or $1.38 diluted earnings per share in 2008 compared to $8.0 million, or $1.59 diluted earnings per share in 2007 and $7.0 million, or $1.39 diluted earnings per share in 2006. Management was able to improve the net interest margin during 2008. During 2008, proceeds from maturing lower yielding investments were used to fund loan growth and retire higher cost Federal Home Loan Bank (FHLB) advances.

Return on average assets was 0.82% in 2008, 0.97% in 2007 and 0.88% in 2006. Return on average equity was 8.26% in 2008, 10.29% in 2007 and 9.68% in 2006.

Net Interest Income

The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The net interest margin is calculated by dividing tax equivalent net interest income by average earning assets. Net interest income, on a fully tax equivalent basis, was $28.0 million in 2008, up $1.7 million from 2007 and up $2.6 million from 2006. The net interest margin was 3.61% in 2008 as compared to 3.42% in 2007 and 3.42% in 2006.

Tax equivalent interest income decreased $2.7 million, or 5.41%, in 2008. Average earning assets grew $4.0 million, or 0.51%. Total average loans increased $35.2 million, or 6.00%, while average investment securities decreased $28.7 million, or 17.51%. The yield on earning assets decreased in 2008 by 38 basis points primarily due to decreasing yields in the loan portfolio.

Interest expense decreased $4.3 million, or 18.60% in 2008, while average interest-bearing liabilities decreased $5.8 million, or 0.90% in 2008. The cost of interest-bearing liabilities decreased 64 basis points due to lower interest rates.

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

                                                                                            TABLE I
                                                                    AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*
Years ended December 31,                              2008                                    2007                                    2006
                                                      Interest                                Interest                                Interest
                                        Average        Income/     Yield/       Average        Income/     Yield/       Average        Income/     Yield/
                                        Balance        Expense      Rate        Balance        Expense      Rate        Balance        Expense      Rate
                                                                                         (in thousands)
ASSETS

Loans                                  $ 622,883      $  40,941      6.57 %    $ 587,645      $  41,964      7.14 %    $ 543,136      $  37,520      6.91 %
Investment securities:
Taxable                                  115,687          4,318      3.73 %      136,937          4,893      3.57 %      160,108          5,533      3.46 %
Tax-exempt                                19,481          1,402      7.20 %       26,914          1,890      7.02 %       31,113          2,189      7.04 %


Total investment securities              135,168          5,720      4.23 %      163,851          6,783      4.14 %      191,221          7,722      4.04 %
Federal funds sold                        17,653            387      2.19 %       20,255            994      4.91 %        9,198            467      5.08 %


Total earning assets                     775,704         47,048      6.07 %      771,751         49,741      6.45 %      743,555         45,709      6.15 %
Reserve for loan losses                   (5,269 )                                (5,092 )                                (4,588 )

                                         770,435                                 766,659                                 738,967

Cash and due from banks                   12,715                                  13,531                                  14,695
Bank premises and equipment, net          29,331                                  26,686                                  23,322
Other assets                              20,052                                  17,851                                  17,383


Total assets                           $ 832,533                               $ 824,727                               $ 794,367

LIABILITIES AND STOCKHOLDERS'
EQUITY

Time and savings deposits:
Interest-bearing transaction
accounts                               $  10,271      $      14      0.14 %    $  10,658      $      27      0.25 %    $   9,210      $      24      0.26 %
Money market deposit accounts            139,109            977      0.70 %      149,518          2,279      1.52 %      150,950          2,063      1.37 %
Savings accounts                          37,832            103      0.27 %       38,698            196      0.51 %       40,612            203      0.50 %
Time deposits, $100,000 or more          122,666          4,766      3.89 %      111,650          5,481      4.91 %      106,227          4,071      3.83 %
Other time deposits                      203,208          8,242      4.06 %      187,198          8,468      4.52 %      157,133          6,932      4.41 %


Total time and savings deposits          513,086         14,102      2.75 %      497,722         16,451      3.31 %      464,132         13,293      2.86 %
Federal funds purchased, repurchase
agreements and other borrowings           50,749            877      1.73 %       51,882          1,970      3.80 %       51,167          1,913      3.74 %
Federal Home Loan Bank advances           78,038          4,027      5.16 %       98,085          4,928      5.02 %      105,386          5,070      4.81 %


Total interest-bearing liabilities       641,873         19,006      2.96 %      647,689         23,349      3.60 %      620,685         20,276      3.27 %

Demand deposits                          104,954                                  96,475                                  98,622
Other liabilities                          3,511                                   3,084                                   2,520


Total liabilities                        750,338                                 747,248                                 721,827
Stockholders' equity                      82,195                                  77,479                                  72,540


Total liabilities and stockholders'
equity                                 $ 832,533                               $ 824,727                               $ 794,367


Net interest margin                                   $  28,042      3.61 %                   $  26,392      3.42 %                   $  25,433      3.42 %

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

The following table summarizes changes in net interest income attributable to changes in the volume of interest- bearing assets and liabilities and changes in interest rates.

                                                                                      TABLE II
                                                                             VOLUME AND RATE ANALYSIS*
                                                                                   (in thousands)
                                              2008 vs. 2007                         2007 vs. 2006                        2006 vs. 2005
                                           Increase (Decrease)                   Increase (Decrease)                  Increase (Decrease)
                                            Due to Changes in:                    Due to Changes in:                   Due to Changes in:
                                     Volume        Rate        Total        Volume       Rate        Total      Volume        Rate        Total
EARNING ASSETS:
Loans                               $  2,517     $ (3,540 )   $ (1,023 )   $  3,075     $ 1,369     $ 4,444     $ 6,006     $  2,473     $ 8,479
Investment Securities:
Taxable                                 (759 )        184         (575 )       (801 )       161        (640 )      (142 )        139          (3 )
Tax-exempt                              (522 )         34         (488 )       (295 )        (4 )      (299 )      (357 )        (38 )      (395 )

Total investment securities           (1,281 )        218       (1,063 )     (1,096 )       157        (939 )      (499 )        101        (398 )

Federal funds sold                      (128 )       (479 )       (607 )        561         (34 )       527          27          170         197

Total earning assets                   1,108       (3,801 )     (2,693 )      2,540       1,492       4,032       5,534        2,744       8,278

INTEREST-BEARING LIABILITIES:
Interest-bearing transaction
accounts                                  (1 )        (12 )        (13 )          4          (1 )         3           2           (0 )         2
Money market deposit accounts           (159 )     (1,143 )     (1,302 )        (20 )       236         216          52          815         867
Savings accounts                          (4 )        (89 )        (93 )        (10 )         3          (7 )       (10 )         (0 )       (10 )
Time deposits, $100,000 or more          441       (1,156 )       (715 )        208       1,202       1,410         803          901       1,704
Other time deposits                      624         (850 )       (226 )      1,326         210       1,536         509        1,803       2,312

Total time and savings deposits          901       (3,250 )     (2,349 )      1,508       1,650       3,158       1,356        3,519       4,875
Federal funds purchased,
repurchase agreements and other
borrowings                               (43 )     (1,050 )     (1,093 )         27          30          57           1          752         753
Federal Home Loan Bank advances       (1,007 )        106         (901 )       (351 )       209        (142 )     1,823          504       2,327

Total interest-bearing
liabilities                             (149 )     (4,194 )     (4,343 )      1,184       1,889       3,073       3,180        4,775       7,955

Change in net interest income       $  1,257     $    393     $  1,650     $  1,356     $  (397 )   $   959     $ 2,354     $ (2,031 )   $   323

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

Interest Sensitivity

An important element of earnings performance and the maintenance of sufficient liquidity is proper management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. This gap can be managed by repricing assets or liabilities, which are variable rate instruments, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact of rising or falling interest rates on net interest income.

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generating 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. The Company uses computer simulations to measure the effect of various interest rate scenarios on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

Based on scheduled maturities only, the Company was liability sensitive at the one-year timeframe as of December 31, 2008. It should be noted, however, that non-maturing deposit liabilities, which consist of interest checking, money market and savings accounts, are less interest sensitive than other market driven deposits. On December 31, 2008 non-maturing deposit liabilities totaled $187.1 million, or 29.89%, of total interest-bearing liabilities. In a rising rate environment these deposit rates have historically lagged behind the changes in earning asset rates, thus mitigating the impact from the liability sensitivity position. The asset/liability model allows the Company to reflect the fact that non-maturing deposits are less rate sensitive than other deposits by using a decay rate. The decay rate is a type of artificial maturity that simulates maturities for non-maturing deposits over the number of months that more closely reflects historic data. Using the decay rate, the model reveals that the Company is asset sensitive.

When the Company is liability sensitive, net interest income should decrease if interest rates rise since liabilities will reprice faster than assets. Conversely, if interest rates fall, net interest income should increase, depending on the optionality (prepayment speeds) of the assets. When the Company is asset sensitive, net interest income should rise if rates rise and should fall if rates fall.

The most likely scenario represents the rate environment as management forecasts it to occur. Management uses a "static" test to measure the effects of changes in interest rates on net interest income. This test assumes that management takes no steps to adjust the balance sheet to respond to the shock by repricing assets/liabilities, as discussed in the first paragraph of this section.

Under the rate environment forecasted by management, rate shocks in 50 to 100 basis point increments are applied to see the impact on the Company's earnings. The rate shock model reveals that a 50 basis point decrease in rates would cause an approximate 1.87% annual decrease in net income. The rate shock model reveals that a 100 basis point rise in rates would cause an approximate 3.11% annual increase in net income and that a 200 basis point rise in rates would cause an approximate 5.86% annual increase in net income.

                                   TABLE III

                         INTEREST SENSITIVITY ANALYSIS



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