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 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, Federal Deposit Insurance Corporation (FDIC) premiums and/or assessments, 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.

The Company has experienced losses due to the current economic climate. Dramatic declines in the residential and commercial real estate market in the past year have resulted in significant write-downs of asset values by the Company as well as by other 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.

On May 22, 2009, the FDIC approved a final rule to impose a special assessment of 5 basis points on each bank's total assets minus Tier 1 capital in order to replenish the Deposit Insurance Fund. This special assessment plus higher quarterly assessments have impacted and will continue to impact the Company's performance by directly affecting expenses.

It is not clear what other impacts the EESA, the ARRA or other liquidity and funding initiatives of the U.S. Treasury and other bank regulatory agencies 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 September 30, 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 third quarter of 2009 was $1.16 million as compared with net income of $1.98 million earned in the third quarter of 2008, a decrease of $820 thousand or 41.47%. During the third quarter of 2009, the Company increased its loan loss provision to $1.00 million compared to $800 thousand in the third quarter of 2008. The increase to the loan loss provision 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. In addition, the cost of FDIC insurance increased by $226 thousand over the third quarter of 2008. Basic and diluted earnings per share for the third quarter of 2009 were $0.24. Basic and diluted earnings per share for the third quarter of 2008 were $0.40. For the nine months ended September 30, 2009, basic and diluted earnings per share were $0.27 and $0.26, respectively. For the nine months ended September 30, 2008, basic and diluted earnings per share were $1.20 and $1.19, respectively.

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 yield is calculated by dividing tax equivalent net interest income by average earning assets. Net interest income, on a fully tax equivalent basis, was $7.13 million in the third quarter of 2009, a decrease of $171 thousand from the third quarter of 2008. The net interest yield was 3.58% in the third quarter of 2009 and 3.78% in the third quarter of 2008. The net interest yield was lower in the third quarter of 2009 as compared to the third quarter of 2008, because the yield on average earning assets decreased 84 basis points while the cost of average interest-bearing liabilities only decreased 80 basis points and average non-earning assets increased by $8.97 million.

Tax equivalent interest income decreased $1.30 million, or 10.95%, in the third quarter of 2009 compared to the same period of 2008. Average earning assets grew $23.87 million, or 3.09%, compared to the third quarter of 2008. Interest expense decreased $1.13 million, or 24.74%, and average interest-bearing liabilities increased by $27.98 million, or 4.37% in the third quarter of 2009 compared to the same period of 2008.

The average yield on earning assets and cost of interest-bearing liabilities both decreased because the Company lowered its rates on loans, interest-bearing deposits and repurchase agreements in response to the action of the Federal Open Market Committee (FOMC) lowering the Federal Funds Target Rate during 2008 from 4.25% to a range of 0.00% to 0.25%. The FOMC has kept the Federal Funds Target Rate unchanged during 2009. As higher yielding earning assets and higher cost interest-bearing liabilities that were booked prior to 2008 mature, they are being replaced with lower yielding earning assets and lower cost interest-bearing liabilities.

Net interest income, on a fully tax equivalent basis, was $20.49 million for the nine months ended September 30, 2009, a decrease of $405 thousand or 1.94% compared to the same period of 2008. When comparing the first nine months of 2009 to the first nine months of 2008, the decrease in net interest income is due to the Company's response to the actions of the FOMC, which caused the yield on average earning assets to decrease more than the cost of average interest-bearing liabilities.

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 September 30,
                                             2009                                           2008
                                        Interest                                          Interest
                          Average       Income/            Yield/           Average       Income/         Yield/
                          Balance       Expense            Rate**           Balance       Expense         Rate**
                                                       (in thousands)
                                                        (unaudited)
Loans*                   $ 628,833     $    9,666                 6.15 %   $ 636,653     $   10,468           6.58 %
Investment securities:
Taxable                    120,045            584                 1.95 %      77,196            742           3.84 %
Tax-exempt*                 10,051            183                 7.28 %      17,703            332           7.49 %
Total investment
securities                 130,096            767                 2.36 %      94,900          1,074           4.53 %
Federal funds sold          21,368             11                 0.21 %       5,815             27           1.86 %
Other investments           15,532            107                 2.76 %      34,595            279           3.23 %
Total earning assets       795,829     $   10,551                 5.30 %     771,963     $   11,848           6.14 %
Allowance for loan
losses                      (7,400 )                                          (5,172 )
Other nonearning
assets                      73,261                                            62,062
Total assets             $ 861,690                                         $ 828,853

Time and savings
deposits:
Interest-bearing
transaction accounts     $   9,569     $        1                 0.04 %   $  10,518     $        4           0.15 %
Money market deposit
accounts                   138,209             74                 0.21 %     137,323            222           0.65 %
Savings accounts            41,623             11                 0.11 %      37,901             23           0.24 %
Time deposits,
$100,000 or more           167,406            827                 1.98 %     122,604          1,087           3.55 %
Other time deposits        160,691          1,514                 3.77 %     199,309          1,973           3.96 %
Total time and savings
deposits                   517,498          2,427                 1.88 %     507,655          3,309           2.61 %
Federal funds
purchased, repurchase
agreements and other
borrowings                  85,156            151                 0.71 %      52,019            207           1.59 %
Federal Home Loan Bank
advances                    65,000            848                 5.22 %      80,000          1,036           5.18 %
Total interest-bearing
liabilities                667,654          3,426                 2.05 %     639,674          4,552           2.85 %
Demand deposits            108,994                                           102,881
Other liabilities            2,780                                             3,489
Stockholders' equity        82,262                                            82,809
Total liabilities and
stockholders' equity     $ 861,690                                         $ 828,853
Net interest
income/yield                           $    7,125                 3.58 %                 $    7,296           3.78 %



                                                  For the nine months ended September 30,
                                             2009                                           2008
                                        Interest                                          Interest
                          Average       Income/            Yield/           Average       Income/         Yield/
                          Balance       Expense            Rate**           Balance       Expense         Rate**
                                                       (in thousands)
                                                        (unaudited)
Loans*                   $ 632,636     $   28,516                 6.01 %   $ 618,319     $   30,850           6.65 %
Investment securities:
Taxable                    111,693          1,953                 2.33 %      87,644          2,600           3.96 %
Tax-exempt*                 12,152            658                 7.22 %      20,662          1,120           7.23 %
Total investment
securities                 123,845          2,611                 2.81 %     108,306          3,720           4.58 %
Federal funds sold          20,214             33                 0.22 %      18,499            357           2.57 %
Other investments           19,334            374                 2.58 %      31,197            754           3.22 %
Total earning assets       796,029     $   31,534                 5.28 %     776,321     $   35,681           6.13 %
Allowance for loan
losses                      (6,947 )                                          (5,117 )
Other nonearning
assets                      68,189                                            59,681
Total assets             $ 857,271                                         $ 830,886

Time and savings
deposits:
Interest-bearing
transaction accounts     $   9,571     $        5                 0.07 %   $  10,457     $       12           0.15 %
Money market deposit
accounts                   135,051            232                 0.23 %     139,284            829           0.79 %
Savings accounts            40,961             42                 0.14 %      37,541             81           0.29 %
Time deposits,
$100,000 or more           152,428          2,859                 2.50 %     122,620          3,704           4.03 %
Other time deposits        182,948          4,917                 3.58 %     201,649          6,318           4.18 %
Total time and savings
deposits                   520,959          8,055                 2.06 %     511,551         10,944           2.85 %
Federal funds
purchased, repurchase
agreements and other
borrowings                  71,057            392                 0.74 %      52,657            757           1.92 %
Federal Home Loan Bank
advances                    67,037          2,597                 5.17 %      80,000          3,085           5.14 %
Total interest-bearing
liabilities                659,053         11,044                 2.23 %     644,208         14,786           3.06 %
Demand deposits            112,432                                           101,386
Other liabilities            3,031                                             3,537
Stockholders' equity        82,755                                            81,755
Total liabilities and
stockholders' equity     $ 857,271                                         $ 830,886
Net interest
income/yield                           $   20,490                 3.43 %                 $   20,895           3.59 %

*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 in the third quarter of 2009, as compared to $800 thousand in the third quarter of 2008. Net loans charged off were $521 thousand for the third quarter of 2009 as compared to $332 thousand for the third quarter of 2008.

The provision for loan losses was $5.00 million for the first nine months of 2009, and $1.40 million in the comparable period in 2008. Net loans charged off in the first nine months of 2009 were $3.65 million as compared to $949 thousand in the first nine months of 2008. On an annualized basis, net loan charge-offs were 0.77% of total loans for the first nine months of 2009 compared with 0.20% for the same period in 2008. Net loan charge-offs have increased as the recession continues, and borrowers begin to struggle to make their payments. Management believes this is more than likely to continue until the economy is well into recovery.

Management contributed $5.00 million to the loan loss provision or $1.35 million more than net charge-offs in the first nine months of 2009. 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.

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and accruing interest, restructured loans, and other real estate owned. Restructured loans are loans with terms that were modified in a troubled debt restructuring for borrowers experiencing financial difficulties. As of September 30, 2009, the Company had one restructured loan that was still accruing interest. This loan was for the construction of a speculation house and is rated substandard. The loan was restructured to interest only payments to provide the borrower some cash flow relief. The property has been listed for sale and the borrower has reduced the asking price but there is still no interest. The house is rented for $2,100 per month, which is less than the interest only payment. The borrower continues to be behind in payments, as only partial payments can be made each month. The restructured loan matured on September 30, 2009. Other real estate owned is real estate from foreclosures of collateral of loans. $2.73 million of the Company's nonperforming loans consist of loans 90 days past due but still accruing interest, with $2.48 million of such loans secured by real estate. The majority of the loans 90 days past due but still accruing interest are classified as substandard. As noted below, substandard loans are a component of the allowance for loan losses. When a loan changes from "90 days past due but still accruing interest" to "nonaccrual" status, the loan is reviewed for impairment. 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, management allocates funds to cover the deficiency to the allowance for loan losses based on information available to management at the time.

The following table presents information concerning nonperforming assets as of September 30, 2009 and December 31, 2008:

                              NONPERFORMING ASSETS

                                                                September 30,       December 31,
                                                                    2009                2008
                                                                 (unaudited)
                                                                         (in thousands)
Nonaccrual loans
Commercial                                                     $           389     $          219
Real estate-construction                                                   118                370
Real estate-mortgage                                                     4,723                337
Installment loans to individuals                                            79                119
Total nonaccrual loans                                         $         5,309     $        1,045
Loans past due 90 days or more and accruing interest
Commercial                                                     $             7     $           66
Real estate-construction                                                   264                375
Real estate-mortgage                                                     2,215              2,744
Installment loans to individuals                                           239                335
Other                                                                        4                  9
Total loans past due 90 days or more and accruing interest     $         2,729     $        3,529
Restructured loans (accrual)
Real estate-construction                                       $             -     $        6,594
Real estate-mortgage                                                       689                  -
Total restructured loans (accrual)                             $           689     $        6,594
Other real estate owned
Real estate-construction                                       $         5,820     $        1,795
Real estate-mortgage                                                     2,666              1,956
Total other real estate owned                                  $         8,486     $        3,751
Total nonperforming assets                                     $        17,213     $       14,919

Nonperforming assets as of September 30, 2009 were $2.29 million higher than at December 31, 2008. As shown in the table above, the nonaccrual loan category increased by $4.26 million, the 90-day past due and still accruing interest category decreased by $800 thousand, the restructured loan category decreased by $5.91 million and the other real estate owned category increased by $4.74 million. The majority of the balance of nonaccrual loans is related to a few large credit relationships. Of the $5.31 million of nonaccrual loans at September 30, 2009, $5.02 million or 94.54% was comprised of five credit relationships of $3.90 million, $467 thousand, $275 thousand, $200 thousand and $175 thousand. The increase in other real estate owned was primarily due to one lending relationship of $6.59 million in the real estate-construction portfolio that was classified as restructured loans as of December 31, 2008. During the first quarter of 2009 this relationship was moved to nonaccrual status and in the second quarter of 2009, $1.40 million was charged off, and the remaining balance was moved to other real estate owned.

Management believes that the increase in nonperforming assets could continue to have a negative effect on the Company's condition if current economic conditions do not improve. As was seen in the quarter ended September 30, 2009, the effect would be lower earnings caused by larger contributions to the loan loss provision arising from a larger impairment in the loan portfolio and a higher level of loan charge-offs. Management believes 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.

As reflected in the $2.29 million increase in nonperforming assets during the first nine months of 2009, the quality of the Company's loan portfolio declined. Due to this decline, management has increased the allowance for loan losses to $7.75 million as of September 30, 2009 as compared to a balance of $6.41 million as of December 31, 2008. As of September 30, 2009, the allowance for loan losses was 45.05% of nonperforming assets and 88.85% of nonperforming loans. The definition of nonperforming loans is nonperforming assets less other real estate owned. The allowance for loan losses was 1.22% of total loans on September 30, 2009 and 1.00% of total loans on December 31, 2008.

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

1. Doubtful-specific identification

2. Substandard-specific identification

3. Pool-substandard

4. Pool-other assets especially mentioned (rated just above substandard)

5. Pool-pass loans (all other rated loans)

Historical loss rates, adjusted for the current environment, are applied to the above five pools of loans, except for doubtful and substandard loans which have losses specifically calculated on an individual loan basis. Historical loss is one of the components of the allowance. The historical loss is based on the past four years. The historical loss component of the allowance amounted to $1.94 million as of September 30, 2009.

In addition, nonperforming loans are analyzed for impairment under U.S. GAAP and are allocated based on this analysis. Increases in nonperforming loans affect this portion of the adequacy review. Also, management increases its additional qualitative factor component of the allowance for loan losses due to economic factors affecting the loan portfolio.

The Company's nonperforming loans fall in the doubtful pool with specific identification, the substandard pool with specific identification or the pool-substandard pool of loans. Therefore, changes in nonperforming loans affect the dollar amount of the allowance. Unless the nonperforming loan is not impaired, increases in nonperforming loans are reflected as an increase in the allowance for loan losses.

The majority of the Company's nonperforming loans are collateralized by real estate. When reviewing loans for impairment or when the Company takes loan collateral due to loan default, it obtains current appraisals. Any loan balance that is in excess of the appraised value is allocated in the allowance. In the current real estate market, appraisers are having difficulty finding comparable sales, which is causing some appraisals to be very low and in some cases involving construction the properties cannot be completed for the amount at which they are being appraised. As a result, the Company is being conservative in its valuation of collateral which results in higher than normal charged off loans and higher than normal increases to the Company's allowance for loan losses. As of September 30, 2009, the impaired loan component of the allowance amounted to $1.02 million and is reflected as a valuation allowance related to impaired loans in Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-Q.

The final component of the allowance consists of qualitative factors and includes items such as the economy, growth trends, concentrations, and legal and . . .