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. The Company consists of the parent company and its wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N. A. (Trust), collectively referred to as the Company. 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. Forward-looking statements can also be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in interest rates, general economic and business 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 affect 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 U.S. 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.

General

The Company is the parent company of the Bank and Trust. The Bank is a locally managed community bank serving the Hampton Roads localities of Hampton, Newport News, Norfolk, Virginia Beach, Chesapeake, Williamsburg/James City County, York County and Isle of Wight County. The Bank currently has 20 branch offices. Trust is a wealth management services provider.

Critical Accounting Policies and Estimates

As of March 31, 2009, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in the Company's 2008 annual report on Form 10-K. That disclosure included a discussion of the accounting policy that requires management's most difficult, subjective or complex judgments: the allowance for loan losses.

Earnings Summary

Net income for the first quarter of 2009 was $770 thousand as compared with $1.97 million earned in the first quarter of 2008, a decrease of 60.93%. Over half of this difference was due to the Company increasing its provision for loan losses to $1.00 million in the first quarter of 2009 as compared to $300 thousand in the first quarter 2008. This increase was made to ensure that the Company has adequately provided for loan losses caused by the downturn in the economy and a decline in real estate values. Basic and diluted earnings per share for the first quarter 2009 were $0.16. Basic and diluted earnings per share for the first quarter 2008 were $0.40. Annualized return on average assets (ROA) for the first quarter of 2009 was 0.36% and 0.96% for the comparable period in 2008. Annualized return on equity (ROE) was 3.70% for the first quarter of 2009 compared with 9.75% for the same period in 2008.

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 $6.58 million in the first quarter of 2009, a decrease of $69 thousand from the first quarter of 2008. The net interest margin was 3.35% in the first quarter of 2009 and 3.46% in the first quarter of 2008.

Tax equivalent interest income decreased $1.54 million, or 12.79%, in the first quarter of 2009 compared to the same period of 2008. Average earning assets grew $18.09 million, or 2.35% compared to the first quarter of 2008. The average yield on earning assets decreased in the first quarter of 2009 by 92 basis points as compared to the first quarter of 2008. Interest expense decreased $1.47 million, or 27.30%, and average interest-bearing liabilities increased by $71 thousand, or 0.01% in the first quarter of 2009 compared to the same period of 2008. The cost of funding interest-bearing liabilities decreased 91 basis points in the first quarter of 2009 compared to the first quarter of 2008.

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

            AVERAGE BALANCE SHEETS, NET INTEREST INCOME* AND RATES*



                                                            For the quarter ended March 31,
                                                       2009                                 2008
                                                       Interest                             Interest
                                          Average       Income/    Yield/      Average       Income/    Yield/
                                          Balance       Expense    Rate**      Balance       Expense    Rate**
                                                                    (in thousands)
                                                                      (unaudited)
Loans                                    $ 634,835     $   9,433     5.94 %   $ 603,833     $  10,271     6.80 %
Investment securities:
Taxable                                     91,563           660     2.88 %     101,124           993     3.93 %
Tax-exempt                                  13,901           241     6.93 %      23,934           417     6.96 %

Total investment securities                105,464           901     3.42 %     125,058         1,410     4.51 %
Federal funds sold                          22,869            13     0.23 %      27,473           217     3.16 %
Other investments                           23,331           147     2.52 %      12,048           135     4.48 %

Total earning assets                       786,499     $  10,494     5.34 %     768,412     $  12,033     6.26 %
Allowance for loan losses                   (6,458 )                             (5,127 )
Other nonearning assets                     64,446                               59,755

Total assets                             $ 844,487                            $ 823,040


Time and savings deposits:
Interest-bearing transaction accounts    $   9,308     $       2     0.09 %   $  10,079     $       5     0.20 %
Money market deposit accounts              131,124            79     0.24 %     140,556           372     1.06 %
Savings accounts                            39,403            14     0.14 %      36,825            34     0.37 %
Time deposits, $100,000 or more            136,219         1,051     3.09 %     121,674         1,354     4.45 %
Other time deposits                        203,879         1,777     3.49 %     200,652         2,259     4.50 %

Total time and savings deposits            519,933         2,923     2.25 %     509,786         4,024     3.16 %
Federal funds purchased, repurchase
agreements and other borrowings             54,590            97     0.71 %      54,666           336     2.46 %
Federal Home Loan Bank advances             70,000           895     5.11 %      80,000         1,025     5.13 %

Total interest-bearing liabilities         644,523         3,915     2.43 %     644,452         5,385     3.34 %
Demand deposits                            113,729                               94,810
Other liabilities                            3,118                                2,972
Stockholders' equity                        83,117                               80,806

Total liabilities and stockholders'
equity                                   $ 844,487                            $ 823,040

Net interest income/yield                              $   6,579     3.35 %                 $   6,648     3.46 %

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

** Annualized

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.

The provision for loan losses was $1.00 million for the first three months of 2009, and $300 thousand in the comparable period in 2008. Loans charged off (net of recoveries) in the first three months of 2009 were $392 thousand as compared to $413 thousand in the first three months of 2008. On an annualized basis, net loan charge-offs were 0.25% of total loans for the first three months of 2009 compared with 0.27% for the same period in 2008.

Although net loan charge-offs were lower in the first quarter 2009 as compared to the same period in 2008, management increased the loan loss provision by $700 thousand in the first three months of 2009 as compared to the first three months of 2008. This additional expense was based on management's estimate of credit losses that may be sustained in the loan portfolio. Management's evaluation included credit quality trends, collateral values, the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as identified impaired loans, historical losses and current economic and business conditions were used in developing estimated loss factors for determining the loan loss provision.

On March 31, 2009, nonperforming assets totaled $17.09 million compared with $3.66 million on March 31, 2008. The March 2009 total consisted of $2.81 million in loans still accruing interest but past due 90 days or more, $9.53 million in nonaccrual loans, $689 thousand in restructured debt and $4.06 million in other real estate. The $4.06 million in other real estate is from foreclosures of collateral of loans and consisted of the following:

                            Other Real Estate Owned

                                 (in thousands)



             Construction, land development, and other land   $ 1,243
             1-4 family residential properties                  1,466
             Nonfarm nonresidential properties                  1,350

             Total                                            $ 4,059

The March 2008 nonperforming assets total consisted of $747 thousand in loans still accruing interest but past due 90 days or more, $1.79 million in nonaccrual loans and $165 thousand in a former branch site listed for sale and $955 thousand in foreclosed property.

Nonperforming assets increased dramatically when comparing the first quarter of 2009 to the first quarter of 2008. Again, this is due to the economic downturn and rapid decline in real estate values. The Company has excellent credit quality review processes in place to identify problem loans quickly. Management will work with customers that are having difficulties meeting their loan payments. The last resort is foreclosure.

The allowance for loan losses on March 31, 2009 was $7.01 million, compared with $5.02 million on March 31, 2008. As of March 31, 2009, the allowance for loan losses represented a multiple of .41 times nonperforming assets and .54 times nonperforming loans. Nonperforming loans includes nonaccrual loans, loans still accruing interest but past due 90 days or more and restructured debt. The allowance for loan losses was 1.11% of total loans on March 31, 2009 and .82% of total loans on March 31, 2008.

Noninterest Income

For the first quarter of 2009, noninterest income decreased $259 thousand, or a decrease of 8.03%, from the same period in 2008. This decrease is due to several factors, with one of them being an $83 thousand decrease in fiduciary activities. The fee structure of Trust is generally based upon the market value of accounts under administration. Most of these accounts are invested in equities of publicly traded companies and debt obligations of both government agencies and publicly traded companies. As such, fluctuations in the equity and debt markets in general have had a direct impact upon the earnings of Trust.

The $91 thousand decrease in service charges on deposits is attributed to lower income from non-sufficient funds and overdraft fees. The decrease in other service charges, commissions and fees is attributed to the redemption of shares of Visa, Inc. in connection with its planned initial offering in which the Company received $110 thousand in the first quarter of 2008.

Noninterest Expense

For the first quarter of 2009, noninterest expense increased $743 thousand, or 11.15%, over the first quarter of 2008. Over half of the first quarter 2009 increase is attributed to salaries and employee benefits, which increased by $429 thousand, or 10.63%, over the first quarter of 2008. The majority of the increase in salaries and employee benefits is due to the addition of 16 full time equivalent positions since the first quarter of 2008. $93 thousand of the increase in noninterest expense is attributed to higher occupancy and equipment expenses.

In addition, the Company expensed $67 thousand on write-downs and sales of other real estate owned in the first quarter of 2009. The Company's FDIC insurance costs increased $85 thousand during the first quarter of 2009 as compared to the same period in 2008. The remaining causes of the noninterest expense increase are higher costs related to foreclosed property expense and loan fees related to force placed insurance, valuation costs and attorney charges.

In this economic downturn, management is very aware of the need to improve net income. During the first quarter 2009, management has implemented several cost cutting measures that are expected to lower annual expenses by approximately $650 thousand.

Balance Sheet Review

At March 31, 2009, the Company had total assets of $880.84 million, an increase of 5.49% from $834.96 million at December 31, 2008. Net loans as of March 31, 2009 were $622.73 million, a decrease of 1.32% from $631.05 million at December 31, 2008.

Average assets for the first three months of 2009 were $844.49 million compared to $823.04 million for the first three months of 2008. The growth in average assets in 2009 was due primarily to the growth in average loans, which increased 5.13% as compared to the same period in 2008.

Total securities available-for-sale and held-to-maturity securities at March 31, 2009 were $139.81 million, an increase of 39.74% from $100.05 million at December 31, 2008. The Company's goal is to provide maximum return on the investment portfolio within the framework of its asset/liability objectives. The objectives include managing interest sensitivity, liquidity and pledging requirements.

At March 31, 2009, total deposits decreased slightly by $1.15 million or 0.18% from $646.52 million at December 31, 2008. Although total deposits decreased, the Company experienced strong growth in its repurchase agreements. Repurchase agreements and other borrowings increased $46.40 million during the first quarter of 2009. $14.51 million of this increase is from one customer that has placed the funds in an escrow agreement that will pay out over the next 18 months.

Capital Resources

Under applicable banking regulations, Total Capital is comprised of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders' equity and retained earnings less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the allowance for loan losses. The following is a summary of the Company's capital ratios at March 31, 2009. As shown below, these ratios were all well above the regulatory minimum levels.

                                          2009
                                       Regulatory     March 31,
                                        Minimums        2009
                     Tier 1                  4.00 %       12.40 %
                     Total Capital           8.00 %       13.44 %
                     Tier 1 Leverage         4.00 %        9.86 %

First quarter-end book value per share was $16.83 in 2009 and $16.51 in 2008. Cash dividends were $834 thousand or $0.17 per share in the three months ended March 31, 2009 and $785 thousand or $0.16 per share for the three months ended March 31, 2008. The common stock of the Company has not been extensively traded.

Liquidity

Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year.

In addition, secondary sources are available through the use of borrowed funds if the need should arise. The Company's sources of funds include a large stable deposit base and secured advances from the Federal Home Loan Bank of Atlanta (FHLB). As of the end of the first quarter of 2009, the Company had $193.14 million in FHLB borrowing availability. The Company has available short-term unsecured borrowed funds in the form of federal funds with correspondent banks. As of the end of the first quarter of 2009, the Company had $40.00 million available in federal funds to handle any short-term borrowing needs.

Management is aware of the current market and institutional trends, events and uncertainties, including recent market disruptions and significant restrictions on availability of capital in the U.S. and global economies. However, management does not expect the trends, events and uncertainties to have a material

effect on the liquidity, capital resources or operations of the Company. Management is not aware of any current recommendations by regulatory authorities that would have a material effect on liquidity, capital resources or operations. The Company's internal sources of such liquidity are deposits, loan and investment repayments and securities available for sale. The Company's primary external source of liquidity is advances from the FHLB.

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

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.

The Company purchased property for a future branch site in 2006. This property was purchased outright, not financed. The Company intends to open the branch in 2009.

As of March 31, 2009, there have been no material changes outside the ordinary course of business in the Company's contractual obligations disclosed in the Company's 2008 annual report on Form 10-K.

Off-Balance Sheet Arrangements

As of March 31, 2009, there were no material changes in the Company's off-balance sheet arrangements disclosed in the Company's 2008 annual report on Form 10-K.